Risk 2 ZOU s Fencing
Risk#2: Revenue is recorded for orders not shipped or fictitious sales The engagement team’s assessment of the evaluation of the design for the fictitious sales is based on a subjective and incomplete approach. Although, the warehouse director has a sound knowledge of his working process and business in general, and had been in company for long time; however, the length of director’s working period and his history with the company does not necessarily signify that he would not get distracted or motivated for his personal interests. For instance, if his promotion is based on the quota, then chances will be higher that he would get involved in fraudulent transactions and therefore large revenues would be recorded at the end of fiscal year. Thus, auditors must be more cautious on examining supporting documents with professional skepticism and due care. Also, auditors can also compare the trends in cash flow from operations to study about the patterns of revenue. Similarly, analyzing ratios such as account receivable to growth, sales to total assets etc. can be useful for testing the accuracy and occurrence of transactions. None of these perceptions have been considered when designing the test of control.
The team’s Interim and Rollforward planned procedures to test the operating effectiveness of controls were appropriate. However, the additional evidence are required for the rollforward procedure; such as controls tested in prior years, the risk associated, the effectiveness of evidence, any subsequent changes in the internal control over financial reporting since the last audit have been considered in the operating effectiveness testing of the company. Similarly, additional and supporting verifications will be needed for the documents that have been signed by the warehouse director for its validity.
The team’s Interim and Rollforward planned procedures to test the operating effectiveness of controls were appropriate. However, the additional evidence are required for the rollforward procedure; such as controls tested in prior years, the risk associated, the effectiveness of evidence, any subsequent changes in the internal control over financial reporting since the last audit have been considered in the operating effectiveness testing of the company. Similarly, additional and supporting verifications will be needed for the documents that have been signed by the warehouse director for its validity.