Question

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. b. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may lead to an understatement of inventory balances.

Answer 1

Answer: Option C

Explanation: In simple words revenue cycle means the chain of recurring activities of selling goods and services to customers and collecting payment from them.

If the revenue cycle is not operated effectively then cash received from memorandum may be not be recorded in the books properly and can lead to several problems like double entry of amount, or overvaluation of memo amount etc.