After finishing your Master of Professional Accounting, you started your accounting consultancy in Gold Coast, Queensland, Australia. You got a high distinction in HI5019 Strategic Information System and preferred to analyse the business processes, risks and internal controls. XYZ is one of your clients, and the CEO of XYZ is delighted with your services.1 [Please read this footnote carefully].

The head of the accounting department is concerned about the business processes and internal controls of XYZ. Therefore, he has recently contacted you to evaluate their revenue cycle focusing on the business processes and internal controls of XYZ. During the initial meeting, you elaborate him that conceptually, the revenue cycle is a recurring set of business activities and related data processing operations associated with providing goods and services to customers and collecting their cash payments. This definition reveals that the revenue cycle can be categorised into (1) sales order processing procedures, and (2) cash receipts procedures. Considering the spcial nature of XYZs business, we categorized the revenue cycle of XYZ as:

• Sales Order Procedures (SOP), and

• Cash Receipts Procedures (CRP).

  You requested the head of the accounting department to describe the SOP and the CRP of XYZ Limited separately. This description is given below.

1. SOP of XYZ Limited

The revenue process activities of XYZ is initiated when a customer places an order either online, by mail or through a telephone representative. At department level, these orders are generally cateogorised into two types, including online orders and offline orders. In terms of

1 XYZ is an online company that supplies a range of architectural products to building contractors and private individuals. Their product line includes such items as gable vents, shutters, vinyl sidings, and decorative trim in various materials. The company employs a combination of manual procedures and a networked accounting system with distributed terminals in several departments. After years of satisfactory performance, however, XYZ Limited is now experiencing operational inefficiencies and accounting errors.

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accounting theory, there is a significant difference between these two types of orders. Therefore, the processes of these orders are elaborated separately in sub-section 1.1 and 1.2.

1.1 ProcessingofOnlineSalesOrders

1.2 ProcessingofOfflineSalesOrders

The offline sale orders are received via mail or through a telephone representative. In most of the cases, these orders are the unstandardised sales [we have discussed the unstandardised orders in details in our interactive tutorials]. The sales clerk first converts the unstandardised sales order into the standardised sales order. For this purpose, the sales representative requests the missing information, if any. When the order is received, the sales clerk checks the customers creditworthiness of the customer from his computer terminal. Three years ago, the sales clerk requested the accounting department to provide him with a list of customers whose account receivables are written off. The sales clerk is still using this information to check the creditworthiness of the customers. The sales clerk is using the same procedure to check the creditworthiness of the new customers. The customers order is rejected if the customers credit is not verified. The sales order processing is started after the credit verification. In particular, the sales clerk records the approved standardised sales order in the sales order system through his computer terminal.

Online orders are entered automatically by the system, mail and phone orders are manually entered. When the customer order is entered, the system automatically performs an online credit check. If credit is approved, the sales process continues. If credit is denied, the process is terminated and the customer is notified of the automatic rejection.

For both types of approved orders (online sales orders and offline sales orders), the clerk manually prepares four hard copies of each sales order. The clerk then enters the sale into the digital sales journal from his terminal and files one copy of the sales order in the sales department. A second copy is sent to the billing department, where it is further processed. A third copy is sent to the warehouse. A final copy is sent to the customer as a receipt stating that the order has been received and processed.

It might be important to note that the warehouse clerk uses the sales order as a stock release document to pick up the requested items from the shelves. The clerk then manually prepares

a bill of lading and packing slip, which accompany the goods to the carrier. The warehouse clerk then accesses the computer terminal and creates a digital shipping notice for the billing department. Finally the clerk files the stock release hard copy in the warehouse. The billing department clerk reconciles the hardcopy sales order and the digital shipping notice which is displayed on his or her terminal. He or she then prints two hard copies of an invoice. One copy is sent to the customer as a bill and the other is sent to the accounts receivable department. The clerk then files the sales order copy in the department.

Upon receipt of the hard copy invoice, the accounts receivable clerk creates a digital record in the accounts receivable subsidiary ledger from his terminal. The clerk then files the invoice copy in the department.

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2. CRP of XYZ Limited

The case receipt processes of XYZ Limited can be broadly categorized into four types:

• First, customer payments and remittance advices come into the mail room. A clerk separates the documents and sends the remittance advices to accounts receivable and the checks to the cash receipts department.

• Second, upon receipt of the remittance advices, the accounts receivable clerk accesses the customer's account in the accounts receivable subsidiary ledger from a terminal and adjusts the balance accordingly. The clerk files the remittance advices in the department.

• Third, the cash receipts clerk receives the checks and posts them to the cash receipts journal from his or her terminal. The clerk then manually prepares a hard-copy deposit slip and sends it with the cash to the bank.

• Finally, at the end of each day, the system prepares batch totals of all sales and cash receipts transactions and posts them automatically to the control accounts in the digital general ledger.

Required

Based on the above information, prepare a report for the chief financial officer of XYZ Limited to evaluate their revenue cycle. In your report, you need to include the following items:

1. Processing of Online Sales Order (section 1.1) and Processing of Offline Sales Order (section 1.2) have different accounting implications. Discuss this statement in the light of existing revenue cycle of XYZ Limited.

2. In the light of our discussion during interactive tutorials, describe potential internal control weaknesses in the sales order procedures and cash receipts procedures of XYZ Limited.

3. In the light of our discussion during interactive tutorials, discuss the potential risks associated with the internal control weaknesses identified in the requirement number two above.

4. Based on the requirement number three above, what types of frauds are possible. Hint: we have discussed different types of frauds in the interactive tutorial and lectures. Your discussion should be based on these contents.