Sometimes, however, the physician who is to perform the respective services approves credit based on an interview. When credit is approved, the physician files a memo with one of the clerks to set up the receivable using data the physician generates. The servicing physician prepares a charge slip that is to one of the clerks for pricing and preparation of the patient’s bill. At the end of the day, one of the clerks uses the bills to prepare a revenue summary and, in cases of credit sales, to update the accounts receivable subsidiary ledger. The front office clerks receive cash and checks directly from patients and give each patient a prenumbered receipt. The clerks take turns opening the mail. The clerk who opens that day’s mail immediately stamps all checks “for deposit only.” Each day, just before lunch, one of the clerks prepares a list of all cash and checks to be deposited in Parktown’s bank account. The office is closed from 12 noon until 2:00 p.m. for lunch. During that time, the office manager takes the daily deposit to the bank. During the lunch hour, the clerk who opened the mail that day uses the list of cash receipts and checks to update patient accounts. The clerks take preparing and mailing monthly statements to patients with unpaid balances. One of the clerks writes off uncollectible accounts only after the physician who performed the respective services believes the account will not pay and communicates that belief to the office manager. The office manager then issues a credit memo to write off the account, which the clerk processes. The office manager supervises the clerks, issues write-off memos, schedules appointments for the doctors, makes bank deposits, reconciles bank statements, and performs general correspondence duties. Additional services are performed monthly by a local accountant who posts summaries prepared by the clerks to the general ledger, prepares income statements, and files the appropriate payroll forms and tax returns. Identify at least three control weaknesses at Parktown. Describe the potential threat and exposure associated with each weakness, and recommend how to best correct them. (CPA Examination, adapted) 1. Weakness: The employees who perform services are permitted to approve credit without an external credit check. Threat: Sales could be made that turn out to be uncollectible.
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.
The files both on-site and off-site should be password protected and encrypted to guard against alteration and unauthorized disclosure. The backup files should be kept locked in a secure place. 12.11 Match the threats in the first column to the appropriate control procedures in the second column (more than one control may address the same threat). Threat Applicable Control Procedures _a,p__ Uncollectible sales Restrict access to master data. _g,i__ Mistakes in shipping orders to customers. Encrypt customer information while in storage. __o_ Crediting customer payments to the wrong account. Backup and disaster recovery procedures. _f,m,o__ Theft of customer payments. Digital signatures. _e,j,k__ Theft of inventory by employees. Physical access controls on inventory __l_ Excess inventory. Segregation of duties of handling cash and maintaining accounts receivable. _a__ Reduced prices for sales to friends. Reconciliation of packing lists with sales orders. _d__ Orders repudiated by customers who deny placing them. Reconciliation of invoices with packing lists and sales orders. _h,q__ Failure to bill customers. Use of bar-codes or RFID tags. _h__ Errors in customer invoices Periodic physical counts of inventory _m,n_ Cash flow problems Perpetual inventory system. _c__ Loss of accounts receivable data Use of either EOQ, MRP, or JIT inventory control system. __a,b_ Unauthorized disclosure of customer personal information. Lockboxes or electronic lockboxes. _g,r__ Failure to ship orders to customers. Cash flow budget Mail monthly statements to customers. Credit approval by someone not involved in
Segregation of duties of shipping and billing. Periodic reconciliation of prenumbered orders with prenumbered shipping documents. 12.12 Excel problem Use regression tools to analyze and forecast future sales. (Hint: The article “Forecasting with Excel,” by James A. Weisel in the February 2009 issue of the Journal of Accountancy (available at ) explains how to perform the following tasks using either Excel 2003 or Excel 2007). a. Create a spreadsheet with the following data about targeted emails, click ads, and unit sales: Emails Clicks Unit Sales 150000 100 12000 155000 105 12500 125000 75 10000 130000 150 14000 135000 125 12500 120000 100 10000 125000 125 130000 135 11500 130000 110 12500 120000 95 10500 100000 75 10750 110000 100 10000 100000 80 9500 140000 130 13500 120000 110 11500 130000 125 13000 100000 85 12000 110000 100 9000 120000 135 10000 130000 140 13500 140000 125 13400 130000 115 12750 120000 105 12750 100000 95 10000 130000 145 9000 150000 150 15000 140000 120 125000 100 13500 110000 95 11000 130000 140 13500