CHAPTER 6 – REVENUE SYSTEM
Ordering Despatch & invoicing Recording Cash receipts
1. ORDERING
1.1. Risk and control objectives:
When considering sales orders, a company might recognise all or some of the following
risks:
Orders may be taken from customers who are not able to pay.
Orders may be taken from customers who are unlikely to pay for a long time.
Orders may not be recorded properly and therefore not fulfilled and customers
might be lost
Control objectives:
Goods and services are only supplied to customers with good credit ratings.
Customers are encouraged to pay promptly.
Orders are recorded correctly.
Orders are fulfilled.
1.2. Controls
- Segregation of duties; credit control, invoicing and inventory despatch
- Authorisation of credit terms to customers
+ References/ credit checks obtained
+ Authorisation by senior staff
+ Regular review
- Authorisation for changes in other customer data
+ Change of address supported by letterhead
+ Deletion requests supported by evidence of balances cleared/ customer in
liquidation.
- Orders only accepted from customers who have no credit problems
- Sequential numbering of blank pre-printed order documents and subsequent
checking of sequence for completeness
- Correct prices quoted to customers
- Matching of customer orders with production orders and despatch records and
querying of orders not matched
- Dealing with Customer queries.
2.3. Test of controls
- Check that references are being obtained for all new customers.
- Check that all new accounts on the receivables ledger have been authorised by senior
staff.
- Check that orders are only accepted from customers who are within their credit terms
and credit limits.
- Check that customer orders are being matched with production orders and despatch
records
2. DESPATCH AND INVOICING
2.1. Risks and control objectives
Risks:
- Goods may be despatched but not recorded so they are lost to the business.
- Goods may be despatched but not invoiced for.
- Invoices may be raised in error with resulting customer dissatisfaction.
- Invoices may be wrongly cancelled by credit notes resulting in loss to the business.
Control objective:
- All despatches of goods are recorded.
- All goods and services sold are correctly invoiced.
- All invoices raised relate to goods and services supplied by the business.
- Credit notes are only given for valid reasons.
2.2. Controls
Authorisation of despatch of goods
o Despatch only sales order.
o Despatch only to authorised customers
o Special authorisation of despatches of goods free of charge or on special
terms.
Examnination of goods outwards as to quantity, quality and condition
Recording of all goods outwards on a despatch note
Agreement of despatch notes to customer orders and invoices.
Pre – numbering of despatch notes and regular checks on sequence.
Condition of returns checked.
Recording of goods returned on goods returned notes.
Signature of despatch records by customers
Preparation of invoices and credit notes
o Authorisation of selling prices/use of price lists.
o Authorisation of credit notes
o Checks on prices, quantities, extensions and totals on invoices and credit
notes.
o Sequential numbering of blank invoices/credit notes and regular sequence
checks.
Inventory records updated
Matching of sales invoices with despatch records and sales orders.
Regular review for despatch records not matched by invoices.
2.3. Test of controls
Verify details of trade sales or goods despatch records with sales invoices checking:
o Quantities
o prices charged with official price lists
o trade discounts have been properly dealt with
o calculations and additions
o VAT, where chargeable, has been properly dealt with
o postings to receivables ledger
Verify details of trade sales with entries in inventory records.
Verify non – routine sales (scrap, non – current assets...) with:
o appropriate supporting evidence
o approval by authorised officials
o entries in plant register
Verify credit notes with:
o correspondence or other supporting evidence
o approval by authorised officials
o entries in inventory records
o entries in goods returned records
o calculations and additions
o postings to receivables ledger
Test numerical sequence of despatch records and enquire into missing numbers.
Test numerical sequence of invoices and credit notes, enquire into missing numbers
and inspect copies of those cancelled.
Test numerical sequence of order forms and enquire into missing numbers.
Check that despatches of goods free of charge or on special terms have been
authorised by management.
3. RECORDING
3.1. Risks and control objectives
The following risks arise at this stage:
Invoiced sales might not be properly recorded
Credit notes might not be properly recorded
Sales might be recorded in the wrong customer accounts
Debts might be included on the receivables ledger that are not collectable
These risks lead to the following objectives:
All sales that have been invoiced are recorded in the nominal and receivables ledgers
All credit notes that have been issued are recorded in the nominal and receivables
ledgers
All entries in the receivables ledger are made to the correct receivables ledger
accounts
Cut – off is applied correctly to the receivables ledger
Potential irrecoverable receivables are identified.
3.2. Controls
- Segregation of duties: recording sales, maintaining customer accounts and preparing
statements
- Recording of sales invoices sequence and control over spoilt invoices
- Matching of cash receipts with invoices
- Retention of customer remittance advices
- Separate recording of sales returns, price adjustments etc
- Cut-off procedures to ensure goods despatched and not invoiced (or vice versa) are
- properly dealt with in the correct period
- Regular preparation of trade receivables statements
- Checking of trade receivables statements
- Safeguarding of trade receivables statements so that they cannot be altered before
despatch
- Review and follow-up of overdue accounts
- Authorisation of writing off for irrecoverable receivables
- Analytical review of receivables account and profit margins
3.3. Test of controls
Receivables ledger
- Check entries with invoices and credit notes respectively.
- Check additions and cross casts.
- Check additions and balances carried down.
- Note and enquire into contra entries.
- Scrutinise accounts to see if credit limits have been observed.
- Check that trade receivables statements are prepared and sent out regularly.
- Check that overdue accounts have been followed up.
- Check that all irrecoverable receivables written off have been authorised by
management.