Revenue Cycle Problems Simulation

| Anderson, Olds, and Watershed |

Memo

To: Darlene Wardlaw

From: Stuart William Binkley-McQuerry

CC: Arnold Anderson

Date: [ 11/12/2012 ]

Re: Revenue Cycle Problems

Revenue Cycle Problems

For our initial look at the revenue cycle, Bradley Crumpler was assigned to sample some sale transactions and review each selected sample for accuracy, completeness, and confirmation that all internal controls were followed.

Of the 120 randomly selected transactions (10 per month), 51 had deviations of varying levels. These were a combination of no credit approval on file, wrong quantity on invoices, arithmetic errors, and missing bills of lading. Even though this is relatively small sample, concerns as to the quality of the internal controls is high enough to warrant further extensive reviews and evidence gathering.

The biggest concern is that more than half of the invoices sampled did not have any credit approval on file. Further investigation is necessary to determine why. It could be possible that the credit approval was misfiled but unlikely. It has been noted that Apollo Shoes has experienced financial difficulties in the fourth quarter of the year so some sales may have been approved without following the internal controls in place to increase turnover figures. With this comes the increased risk of uncollectible receivables so if these sales are genuine, we will need to consider strongly the likelihood of accounts receivable balances being collectible. Of major concern is the collectability of the balance due from Mall-Warts. Based on the samples alone Mall-Warts owe over $17m as at December 31 of which $11.3m is from an invoice dated August 28. It is essential to verify a majority of accounts receivable balances. Positive confirmations (where a reply is mandatory) will be sent to customers with accounts greater than $1,000,000 and negative confirmations (where a reply is only necessary if there is a discrepancy) for all other balances.

The number of...