What are the best controls for monitoring revenue cycle risks?

The revenue cycle is the process of generating, recording, and collecting income from sales or services. It is a critical function for any business, but also one that exposes the organization to various risks, such as fraud, errors, inefficiencies, or non-compliance. To manage these risks, corporate accountants need to implement and monitor effective controls that ensure the accuracy, completeness, and timeliness of revenue transactions and reporting. In this article, we will discuss some of the best practices for designing and evaluating revenue cycle controls.

1 Identify and assess revenue cycle risks

Identifying and assessing the potential risks that could affect the revenue cycle is the first step in developing a robust control system. This includes analyzing the sources, types, and magnitude of revenue, as well as the processes, policies, and systems that support them. Common revenue cycle risks may include recognition errors or misstatements due to complex or changing accounting standards, contracts, or estimates; leakage or loss due to unauthorized discounts, refunds, write-offs, or adjustments; manipulation or fraud due to collusion, override, or falsification of documents, records, or transactions; and delay or disruption due to system failures, data breaches, or external events. To assess the likelihood and impact of these risks, corporate accountants should use various tools and techniques such as risk matrices, flowcharts, questionnaires, interviews, or audits.

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Ahmed Hassan, CMA®

Finance Lead, PDS MEA at JLL | Board Member at IMA Riyadh Chapter
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I think it is important to note that the risks and their potential impact may vary depending on the organization’s size, industry, and complexity of its revenue cycle. Therefore, it is essential to tailor the risk assessment process to the specific needs of the organization

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Chandrakanth Rao

Financial Analyst | Management Accounting Specialist | Startup Advisor | Founder of Open Book Consulting Private Limited
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One of the tools that corporate accountants can use to assess revenue cycle risks is a risk matrix. A risk matrix is a graphical representation of the probability and severity of different types of risks. It can help accountants prioritize the most critical risks and allocate resources accordingly. A risk matrix typically has four quadrants, each representing a different level of risk: low, moderate, high, and extreme. To create a risk matrix, accountants need to identify the potential risks, estimate their likelihood and impact, and assign them to the appropriate quadrant. A risk matrix can also include mitigation strategies, such as preventive, detective, or corrective controls, to reduce the risk exposure.

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2 Implement preventive and detective controls

The next step in managing revenue cycle risks is to implement preventive and detective controls that address the root causes and symptoms of the risks. Preventive controls focus on preventing errors or fraud from occurring, while detective controls detect and correct them after they have occurred. Segregation of duties, authorization and approval, reconciliation and verification, and monitoring and reporting are all examples of preventive and detective controls. Segregation of duties ensures no one person has control over the entire revenue cycle, while authorization and approval ensures only authorized personnel can modify revenue transactions or records. Reconciliation and verification ensures transactions are consistent across different sources and systems, while monitoring and reporting measures revenue performance and compliance.

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Indra Marito Sinaga

Head of Corp. Internal Audit CBI
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Revenue cycle risk monitoring must be carried out from the beginning of the products or services stage. All stock of finished goods is recorded and the sales amount is recorded in detail to make it easier to collect cash or debt from customers. It is also necessary to create a system basis to monitor the aging of receivables from a certain period, then monitor the stock that is ready to be sold with the aim of knowing quickly and accurately the total product, stock and most importantly the total income that has been obtained.

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3 Evaluate and improve revenue cycle controls

The final step in ensuring effective revenue cycle controls is to evaluate and improve them on a continuous basis. This involves testing the design and operation of the controls, as well as measuring their efficiency and effectiveness. To do this, corporate accountants should consider control self-assessment, internal audit, external audit, and key performance indicators (KPIs). Control self-assessment involves asking the staff involved in the revenue cycle to rate and report on the adequacy and performance of the controls they use or encounter. Internal audit involves an independent review of the revenue cycle controls by a qualified team or function that follows a systematic and objective approach. External audit requires an independent verification of the revenue cycle controls by a third-party auditor that follows professional standards and regulations. Lastly, KPIs involve tracking and analyzing quantitative and qualitative measures of revenue cycle outcomes, such as revenue growth, margin, collection, cycle time, or error rate. By following these best practices, corporate accountants can design and implement a comprehensive and effective control system that minimizes revenue cycle risks and maximizes revenue potential.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Siavash Eftekhari

Financial & Economic advisor to Board of Directors at CinnaGen Co.
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To effectively monitor revenue cycle risks, it is crucial to implement a combination of preventive and detective controls. Preventive controls include segregation of duties, authorization and approval processes, and reconciliation and verification procedures. These controls aim to prevent errors and fraud from occurring in the revenue cycle. Detective controls, on the other hand, involve monitoring and reporting, internal and external audits, and ongoing review of processes to identify and correct errors or fraud that have occurred. By implementing both types of controls, organizations can proactively manage revenue cycle risks, protect against financial losses, and improve overall operational efficiency.

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What are the best controls for monitoring revenue cycle risks?

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1 Identify and assess revenue cycle risks

2 Implement preventive and detective controls

3 Evaluate and improve revenue cycle controls

4 Here’s what else to consider

Corporate Accounting

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