You are auditing a company engaged in the development and sale of games software over the Internet. You are satisfied that the software is of high quality and are now directing your attention to the controls over the sale of their products.

You have confirmed that the company’s systems are fully integrated and that sales automatically update bank and trade receivable records (depending on whether the sales are by credit card or on credit)

and quantity inventory records. Your initial discussions with management have satisfied you that the control environment is good and you have classified control risk as medium. (Your firm asks audit staff to classify control risk as high, medium and low.)

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 the risk of bad debts is low and that inventory movements resulting from sales are genuine, accurate and complete?