Risk #1 (Sales automatically recorded)

The control states that Sales are automatically recorded and invoices are automatically generated upon the release of the order in the warehouse K-Series System. Orders are not released until the goods have been confirmed for shipping in the system. In this assessment of Recording Sales, this system seems efficient. The company uses automated systems which makes the recording simple. Automated systems tend to be error free. There is more room for errors if processes are done by humans. Also, the IT system which controls the automated sytem has been tested within the IT controls workpaper. The Warehouse K System records revenues when goods are shipped from the warehouse, so no shipped goods go unrecorded in the system. This appropriately addresses the related risk of material misstatement and assertion.

Risk #2 (Revenue is recorded for orders not shipped or fictitious Sales)

The control states Orders shipped & Invoiced Report is reviewed by the warehouse director on a daily basis for unusual items and specifically for invoices recorded that dont have corresponding shipping documents; evidenced by the directors initials on the report, which is maintained. The Warehouse K System is also used for this process. The warehouse director has over 10 years experience with the company, five of which is in his specific role. Auditors should still compare trends in the cashflow. This will help to see patterns of revenue and it will show if there is a large increase at the end of the year. This will be more accurate rather than coming to a decision based on the directors knowledge and experience because it is common for people to force fictitious transactions to meet a certain number if there is an incentive at the end of reaching a certain goal.

For the rollforward , instead of just going by the selections made within the last 2 weeks of December, the auditors should collect enough audit evidence about the operations of the controls by testing transactions after those 2 week periods in December.

Risk #3 Orders shipped are not recorded accurately to actual quantities shipped and prices per invoice do not reflect approved pricing.

If orders are shipped with the wrong quantity or pricing that would cause an overstatement or understatement of both inventory and sales. This could result in material misstatement in the financial statement. Apart from inquiring about the procedures, other procedures should be performed to gather enough audit evidence about how the controls are operating.

During the rollforward procedures , auditors should test a sample of transactions to obtain evidence for their conclusion instead of relying on word-of-mouth from management.

1. What FASB codification can I use to support those answers?