CASE STUDIES CASE A: Fred’s Electrical, Inc. (Cash Receipts Process) Fred’s Elec...

CASE STUDIES

CASE A: Fred’s Electrical, Inc. (Cash Receipts Process)

Fred’s Electrical, Inc. sells electrical parts to electrical contractors in the northwestern United States. Fred’s customers mail their payments—attached to the stub (i.e., remittance advice [RA]) from their monthly statement—to Fred’s accounts receivable (AR) office. An AR clerk confirms that the check amount agrees with the amount on the RA and sends the checks to the cashier. The AR clerk prepares batch totals of the customer numbers, invoice numbers, and amount paid. The AR clerk then enters the batch totals and RAs into the computer, where the AR master data is updated to record the payment. The computer reconciles the batch totals, confirms job completion, and reports discrepancies, if any, to the AR clerk.

CASE B: Bondstreet Company (Billing and Cash Receipts Processes)

The Bondstreet Company sells medical supplies to hospitals, clinics, and doctors’ offices. Bondstreet uses an ERP system for all of its business processes.

The billing process begins each morning when a clerk in the billing section of the accounts receivable department requests that the ERP system display the billing due list on their computer screen. These are the shipments made the previous day from the warehouse at Bondstreet’s customer fulfillment center. At the bottom of the list, the computer displays the total number of records in the billing due list, the total number of items that were shipped, and a hash total of the customer numbers. The clerk records these onto a batch total sheet.

The clerk then requests that the ERP system execute the billing program. This program prepares invoice records by accessing the customer data to get the routing information for the electronic invoice and the payment terms to be given to the customer. The program also obtains the prices from the inventory data. Finally, the program examines the sales order data to determine how the shipment was routed so that shipping costs can be added to the invoice. At the end of this process, the computer calculates and displays a total of the number of invoices, the total items being billed, and a hash total of the customer numbers in the batch of invoices.

The billing clerk reconciles the invoice totals with those obtained from the billing due list. If the totals agree, the clerk accepts the batch of invoices. In response, the ERP system updates the sales order to show that the shipment has been billed, closes the billing due list, creates an accounts receivable record, updates the general ledger for the sale, sends an electronic invoice to the customer, and displays a job completed notice on the billing clerk’s screen.

The cash receipts process begins each morning when the lockbox at Bondstreet’s bank sends a file of remittance data processed the previous day. Bondstreet’s ERP system automatically saves this file. For each payment, this file contains a customer number, invoice number, and amount paid. Totals in this file include hash totals for customer number and invoice number and the total payments. The bank also sends an e-mail containing these same totals. A clerk in the cash applications section of the accounts receivable department requests that the ERP system display the totals in the remittance file and manually compares those totals to those in the e-mail.

If the totals agree, the clerk requests that the ERP system apply the payments to the accounts receivable data. The computer examines the terms on the invoice record, calculates the amount that should be paid, and records the payment (again, assuming that the amounts are all correct). The computer displays the totals recorded to accounts receivable and discounts, and the total amount paid. The clerk compares these totals to those obtained from the e-mail and remittance file. If these agree, the clerk requests that the ERP system update the general ledger (cash, accounts receivable, discounts) for this batch.

CASE C: Fairfield Novelties, Inc. (Billing Process) Fairfield Novelties manufactures and sells novelty items to retail stores. Completed orders (goods and attached sales order) are received in the shipping department from the factory floor. The shipping clerk keys the sales order number into the computer in the shipping department. The computer accesses the sales order on the sales order master data and displays the open sales order. After determining that the correct sales order has been displayed, the shipping clerk keys in the items and quantities being shipped. The clerk reviews the shipment data and, if correct, accepts the input. (Note: The remainder of the shipment process is beyond the scope of this case narrative.)

After the shipment data has been accepted, the computer updates the sales order master data to reflect the shipment, creates and records an invoice on the accounts receivable master data, and prints an invoice, in three parts, on the printer in the billing office. A billing clerk signs the invoice, mails copies 1 and 2 to the customer, and files copy 3 by customer name.

CASE D: Fairfield Novelties, Inc. (Cash Receipts Process)

Before starting this case, review the facts in Case B. Assume that customers have been billed and have sent in a payment with copy 3 of the invoice, on which they have filled in the amount remitted. The cash receipts clerk compares the check to the amount written on the invoice and, in a space reserved, enters the amount received so that it can be computer scanned.

Checks and these invoice copies are batched. The invoice copies are sent to the IT department. The deposit slip is prepared, in triplicate, and the checks are deposited. Copies of the batch totals and deposit slip copy 2 are filed separately by date. Copy 3 of the deposit slip is sent to the treasurer’s office.

The IT department uses an optical scanner to process the invoice copies. This run occurs each evening at 10 p.m. Customers’ accounts are posted, and a cash receipts listing is produced and sent to cash receipts each morning, where it is checked against and filed with the related batch totals. A copy of the cash receipts listing is sent to the treasurer’s office.

The following is a list of 12 control plans from Chapter 8.

Control Plans from Chapter 8

A. Access control software (i.e., assignment of access rights to employees)

B. Selection, hiring, and supervision of billing clerks to ensure that they can and do carry out their assigned responsibilities

C. Physical controls for perimeter, building, and computer facilities to prevent loss or destruction of the computer resources

D. Preventive maintenance of computer hardware to ensure reliability and availability

E. Systems development life cycle (SDLC), including testing and approval before implementation of new or revised programs

F. Segregate marketing (i.e., authorization of prices) from billing (i.e., authorization of changes to the billing process and programs)

G. Segregate payment applications clerks from AR clerks who resolve customer complaints

H. Segregate cashier who processes cash receipts from the treasurer

I. Segregate controller functions (recordkeeping for AR) from treasurer functions (custody of cash)

J. Continuous data protection (CDP) to ensure availability of sales order and AR master data

K. Controls for physical and logical access to sales order master data to prevent, for example, unauthorized deletion of open sales orders

L. Controls for physical and logical access to accounts receivable master data to prevent, for example, unauthorized deletion of open invoices

The following is a list of 10 B/AR/CR business process controls or deficiencies.

B/AR/CR Business Process Control Plans or Deficiencies

1. Each day, the computer reviews the open sales orders to identify those that have been shipped but not yet billed. This list is presented to the billing clerk for action. Occasionally, the billing clerk does not bother to follow up on open sales orders, and invoices are not sent out in a timely manner.

2. Periodically, the billing program reviews open sales orders (shipped not billed) and prepares and sends invoices. To prevent some invoices from being sent, someone in the organization has changed some sales orders to indicate that they are closed.

3. When an invoice is prepared, the computer should employ authorized prices, terms, freight, and discounts. Customer complaints include incorrect prices on invoices. Research determines that billing clerks are changing prices prior to billing.

4. Prior to releasing a batch of invoices, the billing clerk agrees the batch totals of the shipments to be billed to the totals prepared by the computer at the end of the invoicing process. The computer totals are often incorrect.

5. Upon receipt in the mailroom, checks are forwarded to the cashier and RAs to the cash applications clerks.

6. The computer prepares an aging of open invoices, and accounts receivable clerks follow up on overdue balances.

7. Turnaround documents (e.g., RAs) are used to record customer payments. The scanner often does not read the remittance data correctly.

8. The treasurer reconciles bank accounts regularly.

9. Monthly statements are printed in the accounts receivable department and mailed to customers.

10. Cash receipts are edited to determine that the customer has taken the appropriate discounts. Exceptions are routed via workflow to the supervisor of AR for electronic approval. Sales clerks have been able to approve the taking of unauthorized discounts.

Match the 10 B/AR/CR business process control plans with a pervasive control plan from Chapter 8 that could prevent the deficiencies noted in the preceding list or have an impact on the successful execution of the business process control. Explain the impact that the pervasive control could have.