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Study unit 2 Learning outcomes

After completion of this study unit, you should be able to:

Revenue and receipts cycle (controls) •

•
explain the nature and purpose of the revenue and receipts cycle;
demonstrate an understanding of a typical transaction in the revenue and receipts cycle;
• identify and describe the major general ledger accounts affected by the revenue and receipts cycle;
Ms R van der Merwe • explain the accounting treatment required for the recording of revenue;
• list and describe each of the revenue and receipts cycle's functional areas / functions; with specific reference to the purpose,
GEAR271 main activities, and persons involved;
• demonstrate an understanding of the information system used in the revenue and receipts cycle;
Auditing Notes 13th edition • name and describe the documents and records utilised in the revenue and receipts cycle and the purpose of each;
Chapter 10 (page 10/3 – 10/26, 10/41 – 10/43) • describe the flow of transactions in the revenue and receipts cycle through the information system, including its relation to
source documents and accounting records and its relation to classes of transactions and events, and balances;
• identify and describe the risks affecting the account balances, classes of transactions and events in the financial statements in the
revenue and receipts cycle;
• describe the control objectives for the revenue and receipts cycle;
• demonstrate an understanding of how internal controls may assist in achieving the control objectives in the revenue and receipts
cycle;
• categorise and link business risks to control objectives;
• describe the internal control activities for the revenue and receipts cycle;
• describe and recommend the activities, responsible parties, documents and records, risks and manual
controls applicable to each of the functional areas / functions of the revenue and receipts cycle;
• categorise and link control activities to control objectives;
• analyse internal control systems in order to identify and explain weaknesses in the manual control system
of the revenue and receipts cycle and recommend improvements by describing the required internal controls;
• recommend a manual system of internal controls for the revenue and receipts cycle, that will achieve
the cycle's control objectives; and
• apply any of the above-mentioned in a case study

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Content Typical transaction

Nature and purpose, typical transaction CREDIT CASH

Major general ledger accounts and accounting
Order from customer Customer selects goods
Functions (functional areas)
Pick the goods Receive payment
Information system, documents and records
Deliver the goods Issue receipt
Flow of transactions Invoice the customer Security check

Risk of material misstatement Record sale Cash kept & reconciled

Control objectives, assertions Receive payment Cash is banked

Internal control activities, risks, etc. Issue receipt Record sale & payment

Record payment
Manual system – internal control activities, etc. Auditing Notes page 10/3 – 10/5, 10/41 – 10/43

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Types of control activities Auditing

Approval and authorisation:

Notes page
6/16, 9/43 – Manual system – internal controls
9/48
Levels of authorisation
Segregation of duties:
Receiving customer Sales authorisation
Incompatible duties performed by different employees orders
Isolation of responsibility:
Signatures
Physical controls:
Protecting assets – control / restrict access, safeguarding Warehouse – picking Warehouse – despatch Goods returned by
Comparisons and reconciliation: customer
Identify, investigate, resolve differences
Access controls:
Passwords, user profiles
Invoicing Recording of sales
Custody controls:
Unused / blank documents
Document design:
Accuracy and completeness of information
Recording of receipts Credit
Performance reviews: Receipts / cashier management
Analysis
General and automated application controls:
IT system Auditing Notes page 10/4 – 10/5, 10/7 – 10/26

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Manual system – internal controls Manual system – internal controls

Invoicing Recording of sales

People / responsible party Documents & records People / responsible party Documents & records

Invoice Internal sales Price Clerk Independent Invoice General

clerk order (ISO) list other ledger
nd
2 staff Delivery Independent Sales
member / note (DN) staff member journal
supervisor
Invoice Debtors
ledger

Risks Risks

Despatched but Omitted from Against incorrect

no invoice journal debtor in
debtors’ ledger
Invoice issued, Duplicated in
no deliveries journal
Inaccurate Inaccurately
invoice entered in journal

Auditing Notes page 10/16 – 10/17 Auditing Notes page 10/18 – 10/19

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Manual system – internal controls Manual system – internal controls

Receipts / cashier Recording of receipts

People / responsible party Documents & records People / responsible party Documents & records

Cashier Receipt Clerk Senior financial Receipt General

(remittance advice) employee ledger

Independent Bank deposit Supervisor Financial Cash receipt Bank

supervisor slip accountant journal statement
Management Bank Independent Debtors Bank
statement other ledger reconciliation

Risks Risks

Payments not Deposits not Overstated

banked recorded / recording
timeously (fictitious)

Inaccurate Credited to
recording wrong debtor

https://www.youtube.com/watch?v=zU3Hs36FIrw
Auditing Notes page 10/20 Auditing Notes page 10/21 – 10/22

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Manual system – internal controls Manual system – internal controls

Goods returned by Credit

customer management

People / responsible party Documents & records People / responsible party Documents & records

Receiving Clerk Customer Credit Credit controller Accounting Age Debtors’ list
clerk documentation note department - analysis
(invoice)
department

department
Accounting

debtors
Receiving

Store / Supervisor Goods returned Supporting Senior financial Monthly debtor’s

warehouse voucher documentation manager statement
clerk
Senior financial Returns & Credit manager Journal
manager allowances journal

Risks Risks

Description / Credited to New customers – Debtors don’t pay Debts written off
quantity incorrect wrong debtor not creditworthy / pay late – no authority
accepted
Credit note Prematurely / Debts
but no return inappropriately uncollectable –
Existing
customers – written off not written off
Inaccurate not pay
recording

Auditing Notes page 10/23 – 10/24 Auditing Notes page 10/25 – 10/26

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Weaknesses vs Recommendations vs Risks Weaknesses vs Recommendations vs Risks

Weaknesses are control activities that are not in place or not working as
they should (“no / not”).

If a weakness is written with a “should / must / etc.”, it is incorrect – NO

MARKS WILL BE GIVEN. This represents a control activity and not a
weakness.
Recommendations are things that SHOULD / MUST be implemented
You need to identify the weakness by writing it in a negative format – if (“must / should / is supposed to / etc.”).
you write it in a positive format or a recommendation format – NO MARKS
WILL BE GIVEN. A recommendation is the action the entity SHOULD implement to
overcome / address the weakness AND the reason why it overcomes /
Example: addresses the weakness.
The scenario states:
”The order clerk issued one (1) internal sales order (ISO).” Example:
The scenario states:
• The ISO was not issued in multi-copy / there is only one (1) ISO and not "The order clerk issued one (1) internal sales order (ISO).”
two (2). CORRECT
• The order clerk issued only one (1) ISO / there is only one (1) ISO. • The order clerk should issue more than one (1) copy of the ISO so that
INCORRECT (not provided in the negative format). all of the relevant depoartments will receive an ISO. CORRECT
• The order clerk must issue more than one (1) copy of the ISO.
INCORRECT (this is a recommendation, not a weakness).

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Weaknesses vs Recommendations vs Risks Manual system – internal controls

Explanation means to further explain the weakness by possible risks. Cash sales
These risks are from the business’ point of view – possible consequences
because of a weakness / what would happen if the weakness is there.

What could happen…. Might…

Documents & records Principles
It is not a recommendation / an improvement (which are control
activities).
Record of Reconciliation Physical Transfer –
Example: sale safeguards count, reconcile,
document, signed
The scenario states: Daily summary of Bank deposit Independent
cash sales slip record of sale Cash banked
"The order clerk issued one (1) internal sales order (ISO).” regularly
Record not
alterable
• Orders might not be acted upon at all, resulting in a loss of sales and
Record sequentially
customer goodwill. CORRECT numbered
• The order clerk should issue more than one (1) copy, otherwise orders
might not be acted upon at all. INCORRECT (this is a recommendation, Cash not allowed
to accumulate
and not an explanation).

Auditing Notes page 10/41 – 10/43

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Learning outcomes
After completion of this study unit, you should be able to:
• explain the nature and purpose of the revenue and receipts cycle;
• demonstrate an understanding of a typical transaction in the revenue and receipts cycle;
• identify and describe the major general ledger accounts affected by the revenue and receipts cycle;
•
•
explain the accounting treatment required for the recording of revenue;
list and describe each of the revenue and receipts cycle's functional areas / functions; with specific reference to the purpose,
main activities, and persons involved;
©
• demonstrate an understanding of the information system used in the revenue and receipts cycle; Copyright © 2025 edition.
• name and describe the documents and records utilised in the revenue and receipts cycle and the purpose of each; North-West University, Potchefstroom, South Africa.
• describe the flow of transactions in the revenue and receipts cycle through the information system, including its relation to
source documents and accounting records and its relation to classes of transactions and events, and balances;
• identify and describe the risks affecting the account balances, classes of transactions and events in the financial statements in the
revenue and receipts cycle;
No part of this video, audio, study or any other
• describe the control objectives for the revenue and receipts cycle; material may be reproduced or distributed in
• demonstrate an understanding of how internal controls may assist in achieving the control objectives in the revenue and receipts
cycle; any form or in any way without the written
•
•
categorise and link business risks to control objectives;
describe the internal control activities for the revenue and receipts cycle;
permission of the NWU.
• describe and recommend the activities, responsible parties, documents and records, risks and manual
controls applicable to each of the functional areas / functions of the revenue and receipts cycle;
• categorise and link control activities to control objectives;
• analyse internal control systems in order to identify and explain weaknesses in the manual control system
of the revenue and receipts cycle and recommend improvements by describing the required internal controls;
• recommend a manual system of internal controls for the revenue and receipts cycle, that will achieve
the cycle's control objectives; and
• apply any of the above-mentioned in a case study

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