One year has passed and it is now time to begin the $2016$ audit. TechWear$$s business has continued to expand. Our initial analysis of $2016$ data indicates a much greater risk in accounts receivable $($compared with $2015).$ When the audit team discussed this with company management, we were reminded that last year$$s accounts receivable proved to be fully collectible and we were assured that this year accounts receivable would also prove to be fully collectible as well. Management indicated that, similar to $2015,$ there have been no product returns or accounts written off in $2016.$

The senior has asked you to assist with planning the $2016$ audit, beginning with the order$-$to$-$cash cycle, by focusing on accounts receivable and sales. In particular, she has provided you with the following key audit assertions that need to be addressed:

Accounts Receivable Sales Revenue

Existence Occurrence

Completeness Completeness

Valuation and allocation Accuracy $($PCAOB: Valuation and allocation$)$

Cutoff $($PCAOB: Completeness$)$

Your senior has already interviewed a number of key personnel $($Director of Marketing and Sales, Shipping Supervisor, Business Office Director $($responsible for billing and collections$),$ Accounting Supervisor and the IT Director$)$ and taken notes during these interviews, as follows:

General notes

TechWear has some very aggressive growth goals $($targeting $$38$ million in global sales for calendar year $2016).$

The excitement on social media has been very encouraging, resulting in very positive trends in the number and size of orders from existing customers, as well as some prominent new customers.

Sales personnel are under a significant amount of pressure to meet their monthly targets.

The production department is barely able to keep up with the orders. Some have expressed concern that product quality may be impacted in the future unless changes are made to improve the manufacturing infrastructure.

Management is planning a major renovation in early $2017$ that will greatly expand its production capacity.

One individual involved with R&D expressed concern that the product may not function as designed in some less technologically developed environments with sporadic connectivity and slower transmission speeds.

Like many start$-$up companies, TechWear has operated with a very limited staff, resulting in an inadequate segregation of duties. At least two key employees are related, including the Director of IT and a top sales representative.

Director of Marketing and Sales

The Director oversees a small team of salespeople that market TechWear$$s products to distribution outlets.

An order cannot be entered into the system unless the customer has been set up in the customer master file, which reflects data such as the customer$$s name, identification number $($assigned by TechWear$),$ billing information and credit limits$.$ Historically, the process to set up a new customer involved running an extensive background and credit check, which could take up to $30$ days. However, due to complaints from sales personnel, management decided to create a $$provisional status$$ that would enable immediate order fulfillment while the credit check is in process.

TechWear uses an order$-$entry system that enables sales personnel to generate an order. Once an order is entered, the system automatically generates a shipping order that appears on the shipping department$$s order fulfillment log$.$

Shipping Supervisor

TechWear$$s goal is to fulfill an order within $24$ hours of its receipt. Orders entered near the end of the day $($after the FedEx pickup time$)$ are marked as $$pending$$ and cleared out the following business day.

At the time of shipment, TechWear$$s shipping clerk enters the shipping number into the system and the FedEx identification number $($all shipments for the same day have the same FedEx identification number$),$ which then releases the order, resulting in the sales transaction being posted $($with a transaction number that matches the shipping number$)$ and an invoice being generated. The invoice is sent either electronically or via mail to the customer. At the same time, the cost of inventory relieved for items sold is automatically generated and recorded based on the shipping number. Typically, the cost of sales ranges between $35\%$ and $45\%.$

The ERP system automatically logs the date of shipment.

A listing of unfilled $($pending$)$ orders can be generated from the system based on orders entered that do not list a shipping number, FedEx identification number and shipping weight. One is rarely produced because the company historically has not had a problem with orders being unfulfilled beyond $24$ hours.

The system allows an order entered late one day $($noted as pending$)$ to be overridden and released by the Director of IT as if the order had been fulfilled. The ERP system leaves no trail when this occurs, and simply removes the pending flag.

TechWear strongly believes in its products and has an unlimited $90-$day r