Threat: Any of fees earned, cash receipts, and uncollectible accounts expense could be either understated or overstated because of undetected differences between the subsidiary ledger and the general ledger. Also, fees earned and cash receipts or accounts receivable could be understated because of failure to record billings, cash receipts, and write-offs accurately. Control: Periodic reconciliation of the subsidiary accounts receivable ledger to the general ledger control account for accounts receivable. Figure 12-18 depicts the activities performed in the revenue cycle by the 12.9 Newton Hardware Company. (CPA Examination, adapted) a. Identify at 7 weaknesses in Newton Hardware’s revenue cycle. Explain the resulting threat and suggest methods to correct the weakness. Weakness Threat/Problem Recommendation Credit approval by bookkeeper Uncollectible Credit approval must prior A has no effect on shipping. to shipping merchandise to customers. Warehouse (who has Failure to prepare Inventory posting should be physical access to the shipping advice would done by the sales clerk once inventory) initiates posting to result in inaccurate sales are approved. inventory records by preparing inventory records; could shipping advice. release goods to friends with no invoice. Warehouse clerk does not Cannot easily identify Use a 4-copy shipping advice retain copy of the shipping loss if the carrier has and retain one copy in the advice. accident. warehouse. Bookkeeper A authorizes Sales to friends that Credit manager should approve customer credit and prepares exceed credit limit. all credit. source documents for posting to customer accounts. Bookkeeper A prepares Billing mistakes. Prepare invoice only invoices without notification receipt of a copy of the shipping about what was shipped and advice indicating the quantities when. shipped and the date. Bookkeeper A authorizes Can approve to Someone else should authorize write-offs of customer friends and later write the write-off of customer accounts and approves credit. them off. accounts.
Threat: Any of fees earned, cash receipts, and uncollectible accounts expense could be either understated or overstated because of undetected differences between the subsidiary ledger and the general ledger. Also, fees earned and cash receipts or accounts receivable could be understated because of failure to record billings, cash receipts, and write-offs accurately. Control: Periodic reconciliation of the subsidiary accounts receivable ledger to the general ledger control account for accounts receivable. 12.9 Figure 12-18 depicts the activities performed in the revenue cycle by the Newton Hardware Company. (CPA Examination, adapted) a. Identify at 7 weaknesses in Newton Hardware’s revenue cycle. Explain the resulting threat and suggest methods to correct the weakness. Weakness Threat/Problem Recommendation Credit approval by bookkeeper A has no effect on shipping. Uncollectible Credit approval must prior to shipping merchandise to customers. Warehouse (who has physical access to the inventory) initiates posting to inventory records by preparing shipping advice. Failure to prepare shipping advice would result in inaccurate inventory records; could release goods to friends with no invoice. Inventory posting should be done by the sales clerk once sales are approved. Warehouse clerk does not retain copy of the shipping advice. Cannot easily identify loss if the carrier has accident. Use a 4-copy shipping advice and retain one copy in the warehouse. Bookkeeper A authorizes customer credit and prepares source documents for posting to customer accounts. Sales to friends that exceed credit limit. Credit manager should approve all credit. Bookkeeper A prepares invoices without notification about what was shipped and when. Billing mistakes. Prepare invoice only receipt of a copy of the shipping advice indicating the quantities shipped and the date. Bookkeeper A authorizes write-offs of customer accounts and approves credit. Can approve to friends and later write them off. Someone else should authorize the write-off of customer accounts.
rais12_Sm_CH12.docx