Module code: AIC22B2
Unit number & name: Unit 4 – Revenue and Receipts Cycle
Tutorial: Week of 23 September
Tutorial Question 1
Addis (Pty) Ltd is a company that sells popular sports clothing and sneakers. The company is
a VAT vendor. Addis (Pty) Ltd sells its items online and has one store at Mainlane Mall in
Durban. This store is open to the public and all products bought online are taken from the store
in Mainlane Mall to fulfil the online orders.
Customers can buy Addis products on credit either online or in-store. Customers can apply for
an account to buy on credit online. Customers are required to complete the application form
and do not need to submit any supporting documentation if they tick the following item of the
application form: I declare that the information provided in the application form by me, the
applicant, is correct. I also declare that I have disclosed all relevant and important information
in the application form.
Once the credit application is approved and an order is placed online, the sales clerk manually
calculates the VAT amount in order to determine the selling price of the products ordered. The
sales clerk then proceeds to send the internal sales order form to the accounts department to
record the sale.
The inventory management system that the company uses only updates stock levels at 08:00
each morning.
Required
You are required to answer the following with respect of the Revenue and receipt cycle.
Using the table below
i. Identify the weaknesses in respect of the Revenue and receipt cycle. (4)
ii. Give an explanation for the identified weakness. (4)
iii. Identify the assertions that are affected as a result of each risk identified with respect to
revenue and debtors. (4)
Weakness Explanation Assertion
Tutorial Question 2
You are a Senior Auditor of CrazyTimes (Pty) Ltd, during the audit you observed the
following:
1. Orders are taken over the phone or are received through the post. Sometimes phone orders
are followed up by a written order through the post for the same goods.
2. If an item on the picking slip is not in the box or an order has only been partially filled, the
dispatch clerk writes "not in stock" or "incomplete order" next to the item.
Module code: AIC22B2
Unit number & name: Unit 4 – Revenue and Receipts Cycle
Tutorial: Week of 23 September
3. If the customer collects an order from CrazyTimes (Pty) Ltd dispatch area, the customer
signs both copies of the delivery note and keeps one copy which must be shown to the guard
at the exit to the company’s premises. The second copy goes to Invoice Clerk.
REQUIRED
Identify and explain briefly, the weaknesses evident in the revenue and receipts cycle of
CrazyTimes (Pty) Ltd based on the information given above.
(12)
Module code: AIC22B2
Unit number & name: Unit 4 – Revenue and Receipts Cycle
Tutorial: Week of 23 September
Tutorial Solution 1
Note to marker: Maximum 12 marks, 4 marks for weakness, 4 marks for explanation and 4
Marks for assertion identified.
Weakness Explanation Assertion
1 The inventory The company not using a perpetual inventory Existence of inventory ✓
management system system ✓ is a risk because inventory stock
the company uses shortages won’t be detected ✓ until the
only updates stock morning when the system is updated. This is
levels at 08:00 each more of a risk for online purchases ✓
morning ✓
This is a risk because no back order note will
be issued on time for customers who buy
items online ✓
E: Inventory may be overstated because the
inventory system only updates once a day. ✓
2 Customers can apply This is a risk because:
for credit online and • Credit will be given to customers who Valuation and allocation of
do not need to submit don’t work as they will not need to debtors ✓
any supporting submit any proof of income ✓ or
documentation if they • Credit will be given to people who have
tick a declaration. ✓ inflated their income to get a higher
amount of credit since they do not need
to provide proof of income✓ Existence of debtors✓
• More credit than required may be given
to customers who do not qualify for that
amount of debt if they are not honest in
their application. ✓
• Credit may be issued to customers who
do not exist because no verification
process will be performed using
supporting documentation such as an ID
copy ✓
• V:Trade debtors may be overstated ✓
OR provisions for doubtful debts and
write- off of debtors may be understated
because of the risk of a poor credit
application process ✓
• E:Trade debtors may be raised for
customers who do not exist ✓
3. The sales clerk This is a risk because the sales clerk may Accuracy of revenue: ✓
manually calculated use the incorrect formula or rate of VAT to
the VAT amount in calculate the selling price of the products
order determine the ordered ✓
selling price of the A: Revenue may be recorded at the incorrect
products ordered. ✓ amount because the sales clerk is required to
manually calculate the VAT amount ✓
4. The sales clerk This is a risk because the order placed will be Cut off of revenue: ✓
Module code: AIC22B2
Unit number & name: Unit 4 – Revenue and Receipts Cycle
Tutorial: Week of 23 September
Weakness Explanation Assertion
proceeds to send the recorded as sale and a debtor raised before
internal sales order the items ordered are delivered. ✓
form to the accounts
department to record C: Revenue will be recognised or recorded Occurrence of revenue: ✓
the sale. ✓ earlier than when the sale should be
recorded. ✓ Therefore it may be recorded in
the incorrect accounting period. ✓
O: Revenue will be recognised for orders
made by the sales clerk for items that have
not been delivered ✓ in during the order
department function. This will lead to the
overstatement of revenue ✓
Tutorial Solution 2
1. Receiving Customer Orders/Sales Authorisation Max 5
1. No isolation of responsibility for receiving orders and no formal document on which to
record the order.
Explanation:
1.1 Orders may be lost because they are "informally" taken at a number of sources (whichever
employee receives the call) on non-sequenced documents. A lost order results in a lost sale.
1.2 As there is no formal, well-designed document on which to record the order, incorrect and
incomplete order details may be "jotted" down, resulting in orders which can’t be processed,
incorrect goods being dispatched, etc.
2. No sales authorization takes place.
As discussed above under credit management, fundamental weaknesses in this function make
it impossible for this to take place.
3. The same order may be processed twice (duplicated)
Explanation:
3.1 The business does not appear to check whether phone orders and mailed orders are the same
order.
4. There is no follow up in the order department to establish whether all orders taken have been
processed and invoiced.
Explanation:
Module code: AIC22B2
Unit number & name: Unit 4 – Revenue and Receipts Cycle
Tutorial: Week of 23 September
4.1 Once the single copy picking slip is sent to the warehouse (and the message slips/customer
orders thrown away) there is no record of the order being placed, which makes it impossible to
follow up queries or reconcile orders received to orders processed.
Note: In a manual system such as this, it is frequently not practical for the order clerk to check
stock availability before processing the order. If it can be done it should be. If not, the system
must ensure that the customer is contacted as soon as the "stock shortage" is identified.
2. Picking Max 5
Because the pickers do not note any shortages on the picking slip, the dispatch clerk could
easily remove (steal) an item that has been picked from the box and mark it as a "not in stock"
or "incomplete order". The picker gave the incomplete box to dispactch clerk without noting
on picking slip that some items were not available therefore, makes it easier for dispatch clerk
to steal items and not the additional items as out of stock also.
The fact that the dispatch clerk makes out the delivery note worsens the situation because he
can hide his theft by ensuring that the delivery note agrees with what is actually delivered, and
an explanation of any short deliveries is provided to the customer. In addition the customer was
not made aware of the items that were not in stock therefore they will accept and agree with
what they received – and will not query it.
Because the source documentation is thrown away, it is virtually impossible to identify or
follow up on this type of theft.
There is no timeous notification of stock shortages given to the customer and no system of
recording "back orders" and notifying Margins (Pty) Ltd purchase (buying) department of the
need to purchase the inventory items to fill back orders.
Explanation:
The first time that the customer knows that the order cannot be filled is when he receives the
short, delivered goods.
No documentation to notify the business and the buying department is created at any time. This
is going to result in customer dissatisfaction and lost sales.
3. Collection of Order by Customer from CrazyTimes Max 2
No weakness, proper control in place.
