A key aspect of nearly all process cycles in the accounting department is that the activities associated with them cross over multiple departmental boundaries. Whenever this happens, there is a potential loss of data that can affect the completion of the transactions. Possible failures in the overall process cycles can occur as information moves between departments. The best way to avoid these problems is for the senior financial and accounting staff to perform monthly journal entry review. If  such erroneous and problems still occur in the high frequency, it is a strong sign for the controller to take over the review of process cycles by regularly examining the points in the cycles where errors are likely to occur.

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This post describes a number of procedures that are commonly used to spot problems in the transfer of information between departments for major process cycles. They are: Compare billings to the shipping log, Review rush freight, Review suppliers with no activity, Delete old purchase orders, Review suppliers with early payment discounts, Review blanket purchase orders, Review customers with no activity, Review old open orders, Review pricing errors, Review small orders.

 

Compare Billings To The Shipping Log

This procedure is used by the accounts receivable clerk to verify that shipments are matched by the same number of invoices to customers so that no billings are missing or duplicated.

Procedures to perform:

  1. Obtain the Shipping Log – Go to the warehouse and make a copy of the shipping log for the previous week. Alternatively (if available), access this information online through the receiving system and print out the shipping log.
  2. Verify Information – Match the shipments listed on the shipping log to invoices issued during the same period. Note all exceptions in the shipping log for missing billings. Also, note on invoices any incorrect quantities that were billed, as well as “leftover” invoices for which there is no shipping record.
  3. Bill for Missing Invoices – Using the list of shipments for which there are no corresponding invoices, go to the shipping department and obtain bills of lading for the unbilled shipments. If these are not available, determine which freight carrier shipped the items and obtain shipping traces on them. Then create invoices, mail a copy to the customer, and attach the proof of delivery to the company’s copy of the invoice. File the company’s copy in the accounting files.
  4. Issue Credits for Duplicate Invoices – Using the list of invoices for which no corresponding shipment is recorded in the shipping log, go back to the company’s copy of these invoices and see if there is any bill of lading or other proof of delivery attached to the invoice. If not, call the shipping department to verify that no such documentation exists there. If not, issue a credit to eliminate these invoices.
  5. Adjust Incorrect Invoices – Using the list of invoices for which the quantity of product billed is different from the quantity shipped, go back to the company’s copy of the invoice and check the attached bill of lading to determine the actual quantity shipped. If the quantity is different, verify this with the shipping department, and then either issue a credit (if the quantity billed was too high) or an additional invoice (if the quantity billed was too low).

 

 
Review Rush Freight

This procedure is used by the financial analyst to determine the amount and type of any rush freight services used by a company to either receive or send materials.

Procedures to perform:

  1. Access the Freight Account – Go to the freight account in the computer for each department. If the total amount for the month is less than $100, ignore the account. Otherwise, write down the total department freight and go to the next step.
  2. Access Detail Freight Amounts – Go to the accounting software and call up the detail for ea ch freight expenditure. This information should include the date of expenditure, the name of the authorizing person, and the name of the freight carrier.
  3. Summarize Freight Information – Enter this detailed freight information into the FREIGHT.XLS spreadsheet. List all the freight for each department and summarize the dollar amounts. The totals in this spreadsheet should match the freight expense totals for each department, as noted in the general ledger. List all rush freight charges in bold font; these charges are noted in the underlying expense detail as being either from a rush freight company, or designated as rush freight by a standard freight company.
  4. Distribute Freight Information – Distribute the freight report to each department manager, as well as the controller and chief operating officer.
  5. Track Freight Expenses on a Graph – Enter the total freight cost by department on a graph, showing the expense for the last 12 months for each department. The intention in using this chart is to show managers any improvement (or lack thereof ) in their management of this expense. Distribute the graph to all department managers, the controller, and the chief operating officer.

 

 
Review Suppliers With No Activity

This procedure is used by the financial analyst to determine which suppliers are no longer used by the company. The logistics manager uses the resulting list to determine which suppliers can be removed from the company database.

Procedures to perform:

  1. Extract Supplier Usage Information – Go to the accounting software and run an extract file that shows a ll suppliers currently in the database, as well as the last dates on which the company purchased supplies from them. This is the SUPPLIER extract, which dumps into an Excel file of the same name.
  2. Summarize Supplier Usage Information – Enter the Excel program and access the SUPPLIER spreadsheet. Sort the records based on the last date on which purchases were made from a supplier. Delete all suppliers from the spreadsheet for whom there are purchase dates within the last two years. Print the remaining list of suppliers on the spreadsheet. This list constitutes those suppliers with whom the company is no longer doing business.
  3. Issue Supplier Report – Give the supplier spreadsheet report to the purchasing manager, with a request to mark those suppliers who can be deleted from the list, and to return it to the financial analyst.
  4. Delete Suppliers from Database – Upon receipt of the approved list, go into the Suppliers screen in the accounting software. Call up each supplier record that was marked on the supplier report, and delete each of those suppliers. File the report in the “Deleted Suppliers” folder, which is located in the front of the accounts payable records.

 

 Delete Old Purchase Orders

This procedure is used by the financial analyst to determine which purchase orders are still open, but are not going to be filled. The logistics manager uses this information to close down old purchase orders.

Procedures to perform:

  1. Extract Open Purchase Order Information – Go to the accounting software and generate an extract of all open purchase orders in the database. This information dumps into an Excel spreadsheet called PURCHORD and contains each purchase order number, supplier name, date on which it was created, and a flag to indicate if it is a blanket purchase order.
  2. Summarize Purchase Order Information – Enter the Excel program and access the PURCHORD spreadsheet. Sort the records based on the date of each purchase order. Delete from the spreadsheet all purchase orders for which the creation date is within the last six months. Also delete all purchase orders for which there is a blanket purchase order flag (as these may be open and valid for more than a year). Print the remaining list of purchase orders on the spreadsheet, which should thus include all old orders that may be subject to deletion.
  3. Issue Open Purchase Order Report – Forward the open purchase order spreadsheet to the purchasing manager, with a request to mark all purchase orders on the list that should be closed and then to return the list to the financial analyst.
  4. Delete Open Purchase Orders – Upon receipt of the approved list, go into the PURCHASE ORDER screen in the accounting soft ware. Call up each purchase order record that was marked on the report and delete each one. File the report in the “Deleted Purchase Orders” folder, which is located in the front of the accounts payable records.

 

 
Review Suppliers With Early Payment Discounts

This procedure is used by the financial analyst to determine how many suppliers currently allow early payment discounts by the company. The logistics manager uses this information to ask suppliers for new or larger discounts.

Procedures to perform:

  1. Extract Discount Information – Go to the accounting software and select the “Suppliers Extract” option. Select for all suppliers, and extract to an Excel file format.
  2. Sort the Discount Information – Sort the Excel file on the discount field so that the largest discounts are at the top and the smallest at the bottom.
  3. Issue the Discounts Report – Print out the report and issue it to the purchasing manager with a standard request to attempt to obtain discounts from more suppliers, as well as to increase the discount amounts from suppliers that already grant them.
  4. Update Discounts Information – If any changes to discounts are submitted by the purchasing manager, go to the SUPPLIER MASTER screen in the accounting software and update the discount field with the new information for those suppliers needing changes.
  5. Record Discounts Statistics – Go to the Process_Stats Excel file and enter the total number of supplier discounts for the month into the statistics page.

 

 
Review Blanket Purchase Orders

This procedure is used by the financial analyst to determine how many blanket purchase orders are currently open, and with how many suppliers these are used. The resulting information is used by the logistics manager to increase the number of blanket purchase orders.

Procedures to perform:

  1. Extract Blanket Purchase Order Information – Go to the accounting software and select the “Blanket Purchase Orders Extract” option. Select for all purchase orders, and extract to an Excel file format.
  2. Sort the Blanket Purchase Order Information – Access Excel and call up the extract of blanket purchase order information. Format the spreadsheet based on a copy of the last blanket purchase order report that was issued in the previous month. Print the report.
  3. Issue the Blanket Purchase Order Report – Issue the blanket purchase order report to the purchasing manager with a request to add more blanket purchase orders than are currently recorded. The purchasing manager can enter any new blanket purchase orders directly; there is no need for the financial analyst to do so.
  4. Record Blanket Purchase Order Information – Go to the Process_Stats Excel file and enter the total number of blanket purchase orders for the month into the statistics page.

 

Review Customers With No Activity

This procedure is used by the financial analyst to determine which customers have not placed orders with the company. The sales manager uses this information to determine which customers can be removed from the customer database.

Procedures to perform:

  1. Extract Customer Information – Go to the accounting software and select the “Customers Extract” option. Select for all customers, and extract to an Excel file format.
  2. Determine Inactive Customers – Access Excel and call up the EXTRACT spreadsheet. Sort the report based on activity dates so that the oldest dates are at the top of the report. Review the fields in the report that list the last dates on which the company shipped anything to a customer or received payment from one. If the most recent date in either column is less than two years ago, delete the record. This will leave a list of customers with whom the company has had no business in at least two years.
  3. Report on Inactive Customers – Print the spreadsheet and issue it to the sales manager with a request to mark those customers who should be deleted from the accounting database.
  4. Delete Inactive Customers – Once the report is received back from the sales manager, go to the CUSTOMER MASTER screen in the accounting database and delete those customers who have been so marked by the sales manager in the report.
  5. Record Customer Statistics – Go to the Process_Stats Excel file and enter the total number of inactive customers for the month into the statistics page.

 

 
Review Old Open Orders

This procedure is used by the financial analyst to locate those customer orders that are still open but no longer need to be filled, so that they can be closed down.

Procedures to perform:

  1. Extract Open Orders Information – Go to the accounting software and select the “Open Orders Extract” option. Select for all open orders, and extract to an Excel file format.
  2. Locate Old Open Orders – Go to Excel and open the EXTRACT file. Sort it for orders that have been open for at least one month, and delete all but these records.
  3. Report on Old Open Orders – Add headings to the report, as well as a column for the names of the customer service staff who are responsible for each customer. Print the report and issue it to them, with a note to either close the orders or shift their due dates forward into a future time period.
  4. Close Old Open Orders – If the customer service staff cannot do so, assist them in closing the orders or shifting their due dates through the ORDER ENTRY screen in the accounting software.
  5. Record Open Order Statistics – Go to the Process_Stats Excel file and enter the total number of old open orders for the month into the statistics page.

 

 
Review Pricing Errors

This procedure is used by the financial analyst to determine the number of credits issued to customers that are based on pricing problems, and the nature of the pricing errors.

Procedures to perform:

  1. Review Existing Credits – Go to the accounting software and select the “Invoices Extract” option. Select for all invoices in the previous month, and extract to an Excel file format.
  2. Extract Pricing Error Information – Sort the Excel file for invoices with credit balances and delete all other invoices from the file. Then search the description field for each remaining credit for wording regarding a pricing error. Retain these records and delete all others. Print the spreadsheet.
  3. Create Pricing Error Report – Go to the Price_Error Excel spreadsheet and clear out the information in it from the previous month, except for headings and totals. Then enter the new credit information from the extract spreadsheet you just printed. This information includes the credit number, credit amount, customer name, correct price, actual price charged, the differences between the two, the quantity of product to which the incorrect pricing applies, the grand total pricing error, and the initials of the customer service person who made the entry. When finished, print the Price_Error report.
  4. Distribute Report – Distribute the report to the sales manager, controller, president, and chief operating officer.
  5. Record Pricing Error Statistics – Go to the process_Stats Excel file and enter the total number of pricing errors for the month into the statistics page.

 

 
Review Small Orders

The procedure is used by the financial analyst to determine which customers habitually place small orders. This information is useful in determining pricing changes for customers, or whether some customers should be dropped.

Procedures to perform:

  1. Extract Invoice Information – Go to the accounting software and select the “Orders Extract” option. Select for all orders in the previous month, and extract to an Excel file format.
  2. Select Small Order Information – Go to Excel and open the ORDERS EXTRACT file. Sort on the order dollar amount, and delete all records except those that are equal to or less than $500.
  3. Create Report – Sort the Excel file again by customer name so that the number of small orders for each customer can be easily determined. Then print the report. Go to the Small_Order Excel file, which lists the grand total of small orders by customer for the last year in a grid format, and enter the data from the first spreadsheet into this format. Print the report.
  4. Issue The Report – Issue the report to the sales manager, controller, president, and chief operating officer.
  5. Update Small Order Statistics – Go to the Process_Stats Excel file and enter the total number of small orders for the month into the statistics page.

 
It is extremely important to create an environment within the accounting department that results in the consistent processing of all accounting transactions so that resulting financial statements are comparable for all time periods and across all corporate divisions. Another result is error-free transactions that require little ongoing review or correction by the senior accounting staff, which results in a more efficient department. Further, both internal and external auditors will test the accuracy of these transactions from time to time, and will gain a high degree of confidence in the accuracy of company-reported transactions if they are consistently completed.