Now in your notes it mentions that controls have a function of either preventing misstatements
before they occur, most effective, or detecting and correcting misstatements that have already
occurred, which is less expensive to implement, but could be detected too late.
If you detect too late, they end up in the financial statements, which could be a problem.
That's what we're looking at as far as operating cycles.
Now, with the cycles, we're going to look at a couple of different cycles, revenue cycle,
expenditure cycle, and so on.
Let's start out here with the revenue cycle.
The revenue cycle, let's think about ... and for each cycle, what I want you to think about
is what cycle are we in, what documents and what employees exist in that cycle, and then,
basically, what are the strengths or weaknesses, what could go right, what could go wrong.
As we look at this cycle, the first question is what's happening in the revenue cycle?
Let's think about it.
We have a lot of money, money, money, and cash coming in.
Cash is coming in because we're getting revenue because we're making a sale, so sales.
And then when you make a sale, you have an account receivable, and then when you collect
that account receivable that's cash receipts.
Cash, cash, cash, has a lot of what kind of risk?
Inherent risk.
You need a lot of key controls.
So in this cycle, we're going to talk about sales, accounts receivable, cash receipts.
Again, cash, cash, cash has a lot of what kind of risk?
Inherent risk.
Therefore you need a lot of what?
A lot of key controls.
Okay, now, when we look at this cycle, what I want us to think about are what are the
key documents?
If you look in your notes, you'll see it starts out it says, here are the specific employees
that are doing certain things and we'll talk about the sales clerk, the credit manager,
warehouse clerk, shipping clerk, we'll come back to those, but then it talks about some
of the documents.
Now, with all of these documents, the documents should be PPN, and multiple copies.
What does it mean?
PPN means preprinted, pre-numbered, and numerically controlled.
If you look at your checks, on your check, aren't they preprinted?
Mm-hmm.
Aren't they pre-numbered?
Mm-hmm.
Aren't you accounting for them, numerically controlled?
So if you're missing check, actually true story.
Someone broke into my office, and what they did ... They didn't actually break in, someone
left the door open.
It was during working hours.
So all of a sudden, someone had said, "Hey, there was someone in your office, and I went
in and they kind of said, 'Oh, sorry, I was in the wrong place,' "and they left."
They looked around, they said, "I didn't see anything missing."
Then all of a sudden I get a call a couple of days later I get a call from the bank.
Someone was trying to cash a check, and they thought it looked a little strange, so they
called me.
I looked and I had a checkbook in my room that I never use, and in the middle, five
checks were missing.
So what they did is they came in and they stole these five checks.
They were not in numerical sequence, so that kind of raised a flag for the bank.
So you're wondering, how does a bank know this?
They weren't in sequence, the signature didn't match my signature on record, it was cashed
in an area that I never bank in, and so it was kind of weird.
What they did, called me.
They didn't cash it, they put a hold on it, didn't clear, and so on.
That was really cool.
But how do they catch it?
Numerical sequence.
You could have, same thing.
Other documents that are important, like a purchase order.
You want to make sure ... sales orders ... You want to make sure that they're numerical sequence
so if something's missing, something doesn't make sense, then at least you have some kind
of recourse.
So, we talk about preprinted, pre-numbered, numerically controlled, and multiple copies.
A lot of documents have three, four different copies.
As we look at flowcharts later on, as we talk about strengths and weaknesses, you're going
to watch the copies.
One copy goes to this department, one copy goes to that department, and so on.
You're going to want to keep track of where the documents are going.
So, in this place, in this cycle, we're going to make a sale.
The first thing we do is get a customer purchase order.
The customer sends in this purchase order, makes a phone call, whatever, that triggers
this cycle.
It triggers the cycle, it triggers the sale from the customer.
That comes in from the customer.