Efficient Tests of Balances Series--No. 41: Flowchart Documentation of Internal Controls for Revenues
Sales and Collection Cycle Flowchart
Drawing a flowchart is often the most effective and efficient method of documenting an entity’s internal control. A flowchart also facilitates performing a complete systems walk-through procedure of a transactions cycle. Flowcharts may be prepared using manual templates or flowcharting software. The hardcopies, or the electronic copies, may be carried forward with changes reflected in different color pencils or typing fonts. All accounting systems software applications, procedures, documents and data, and all internal controls, should be reflected on the flowcharts. Here are some suggestions from our Flowcharting Guide that will facilitate preparation of a flowchart for sales.
The flowchart should contain documentation of:
- Different types of shipping terms such as F.O.B. shipping point or destination, different shipping locations, different types of carriers, drop ships from suppliers, customer pick up, etc.
- Different types of customers such wholesale, retail, distributor, consumer, and related parties.
- All accounting records, documents, data and procedures.
Consider the entity’s key controls and activity-level controls when preparing flowchart documentation. These questions can facilitate the identification of accounting and internal control procedures:
- Can goods be shipped without invoices being prepared?
- Can sales be invoiced but not recorded?
- Can sales be made and recorded without inventory being relieved?
- Can customer invoice errors be made and go undetected?
My illustrative Flowcharting Guide and illustrative flowcharts for the major transactions cycles can be obtained free of charge by clicking on the "Contact Us" tab on my website, www.cpafirmsupport.com, and emailing your request. Live and on-demand presentations of my webcast, Designing Internal Control Systems for Small and Medium Size Entities, can be obtained by clicking on the applicable box on the left side of my home page.
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.