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2. What relevant control identified would address the risk that goods are shipped to customers but no invoice is generated and recorded? To obtain an understanding of the flow of transactions in ABC's revenue process, the engagement team has obtained a revenue process narrative and revenue process flow diagram from the Company (see Handout 1) Process flow diagrams are a tool we can use to depict the process to initiate, authorize, process, record, and report transactions, the points within the process at which misstatements could occur, and control activities that are designed to prevent or detect such misstatements, including providing greater transparency to segregation of duties. These diagrams also depict the relevant systems and information produced by the entity Below is an excerpt from ABC's revenue process narrative and process flow diagram. For this excerpt, only two of the five sub-processes are included: (1) order processing and (2) shipping and invoicing (sales returns, payment processing, and monitoring of accounts receivables have been excluded). Revenue Order Processing Orders are received via fax, mail, e-mail, or phone. Customer service associates (CSAs) are responsible for monitoring incoming orders that arrive at the business center. All faxes and postal mail are electronically converted by CSAs and input into the system Telephone orders are directed to a central call number and an available CSA takes the order information. All orders must be created with reference to a customer account that is established in the customer master file within Great Plains, the Company's information technology system If an order is received for a nonexisting account, the new account procedure is followed whereby a credit analyst reviews the credit worthiness of the customer on the basis of a Dun & Bradstreet credit report. When credit is denied, the order process ends and the customer is notified of the credit decision. If credit is extended, a credit analyst creates a new customer account in the customer master file and requests that a CSA process the order When an order is entered in Great Plains, "sold to" and "ship to" fields must be populated with a valid customer number that matches the established customer number in the customer master file. Fields for sales and payment terms are automatically populated with the information contained in the customer master file in Great Plains. All line items on the sales order are systematically populated based on the information in the master pricing file Sales orders are configured with the following mandatory fields: sales order type (e.g, a rush order or a stock order), order source (e.g., fax, mail, e-mail, phone), sales organization, so purchase order number. the customer master file or pricing master file records. Sales to custo ld-to and ship-to account numbers, item quantities, material nur The balance of the information is automatically extracted from mbers, and Page 3 ard payment or shipping terms are automatically flagged in Great Plains; the nomsare used in the shipping and invoicing process to generate exception reports for ment review. Pricing for each customer may differ on the basis of negotiated ontracts, which are configured against the master pricing file with customer-specific discounts applied When orders are placed on hold because of an account or credit hold, the credit department is notified. A credit analyst will review the hold and determine whether the hold can be resolved. If the hold cannot be resolved, the credit analyst will notify the customer of the order cancellation, thus ending the order entry process. If after an investigation the hold can be resolved, the credit analyst will release the hold and submit the order to a customer service manager for review. All processed orders must be reviewed and approved by a customer service manager before they are submitted for shipping and invoicing. If errors are discovered, they are resolved by the CSAs and the order is resubmitted through the process. After a sales order is approved, it is released and updated in Great Plains. Shipping and Invoicing After a sales order is approved, the data is transferred automatically from the order entry system to the shipping and invoicing modules in Great Plains. Outgoing inventory lists are printed by the stockroom personnel. Outgoing inventory list quantities are populated systematically based on information defined in the approved sales orders. The product ordered is pulled from information defined on the outgoing inventory lists. The shipping personnel will verify the warehouse b the information, such as item and quantity, and package the item for shipment. After the order is prepared for shipment, the shipping personnel prepares a bill of lading including the carrier information, using a prenumbered bill of lading form. The bills of lading are on carbon paper which contain multiple copies of the bill of lading. Shipments of goods to customers are logged, this is completed by using carbon copies of the prenumbered bill of lading documents and manually entering information from the bill of ing clerks. The spreadsheet is referred to as the "orders shipped log." Another copy is forwarded to shipping data nnel who confirm the order as shipped, thus completing the shipping process within the system. Once an order is marked as shipped, line items in the sales order will chanse automa the line items to be invoiced. Only the lines on the sales order that ship will be invoiced tically in the system, which will result in closing the shipped lines and staging of Ope n lines are back-ordered and will remain open until those items are shipped. The only on an order is to reject the line, which requires approval by a other way to close a line customer service manager. Page 5 Revenue is recognized at the time of invoicing because the Company's standard sales terms are defined as "free on board" (FOB) shipping point. At the end of the month, an Accounting Manager reviews all daily nonstandard transaction reports that were generated during the month; any nonstandard sales terms (e.g, FOB destination) are reviewed in detail to ensure sales are classified properly under U.S. GAAP. If correcions are necessary, the Accounting Manager makes manual adjustments to reflect proper GAAP classification of the transaction. The Assistant Controller reviews and approves necessary adjustments to record according to U.S. GAAP. After nonstandard terms are reviewed, the Assistant Controller samples 50 sales transactions to evaluate the coding. supporting documentation, and journal entries made to the general ledger for all sales that are booked; any nonstandard coding is reviewed in detail and resolved to ensure sales are classified properly under U.S. GAAP. If corrections are necessary, the Accounting Manager makes appropriate manual adjustments to reflect proper U.S. GAAP classification of the transaction Handout 1. Start Customer Service Associate receives Customer Service Sales and Payment Terms generated Master File?Asociate enters order data ieto SAPT ptem SAP Credit Analyst SAP prices order ystematikally based Fle credit based on D&I credit report SAP Credit Analya Credit Approved? Credit Analynt reviews the customer account Hold issue account or credit hold? cont acts oustomer End to ieform them of order cancellation, No End Yes Customer Service Manager reviews and orders for validity and accuracy Order Credit Analyst Customer Master Sales order is released and Fle in SA SHipping & SAP ls order comect? updated in SAP SAP Shipping and Invoicing End of Month-Sales Classification Review Process propery under CAP SAP AecountingManger nventory, and trander to shipging to record Shipping penonnel End of Quarter-Sales Disclosure Footnote Review hippling pensonnel Financia Statement are The Controler performs a review of compled on quarterly basis on Bill o Lading Foctnate Disciosures data into a dally log SAP record Shipping personnel data and finale the n SAP Warehoue Director reconclles Orders Shipped Log and Dailly Open Ievoice tages ine litems on sales arden to be nvokced in batch SAP SAP way match of sales order, bil of ladng and invoice data Warehoune Director SAP atch for processing n SAP
