Question

9.7. You are auditing a company engaged in the development and sale of games software over the internet. Software is high quality and therefore we point our attention to controls over the sales of their products. The companies systems are fully integrated and sales automatically update the corresponding bank and trade receivable records (depending on payment type) and quantity inventory records. Your firm asks audit staff to classify control risk as low, medium or high. Initial discussions with management have satisifed you that the control environment is good and you have classified control risk as medium.

Required:

a) Explain what the three control risk classifications probably mean in practice.

b) What basic controls would you expect to see to ensure that sales are genuine, accurate and complete, that risk of bad debts is low and that inventory movements resulting from sles are genuine, accurate and complete? Suggest suitable tests of control.

Answer 1

a) The three control risk under which we classify the control environment of any organization are Low risk, Medium risk and High risk environment. These classification means that the company is maintaining complete control on inventory and operation and no space for any loss (called low risk ), if the company is hardly maintaining any control on the operation of the company that could result in losses (called High risk environment).

b) Basic controls tests are:

1. Sales are genuine, accurate and complete : The production inventory and the invoice and delivery of the software are the documents through which genuine and accurate sales are taken place.
2. The risk of bad debts is low : The recovery of the amounts due to Accounts Receivables of the past few months can be tracked to get the assessment of risk of bad debts.
3. Inventory movements of sales are genuine, accurate and complete: The production of products and inventory balances of the products at a point of time and counter-checking with the inventory with the sales and delivery of products will indicate the genuine inventory movements of sales.

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