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In 2010, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a report that provides a comprehensive analysis of fraudulent financial reporting cases that were investigated by the US Securities and Exchange Commission (SEC) from 1998 to 2007. The study found that more than 60% of the financial statement fraud instances involved intentionally overstating revenues. The revenue misstatements were primarily due to recording revenues fictitiously or prematurely by employing a variety of techniques that include the following (COSO, 2010):

Fraudulent Reporting Techniques	Descriptions
Sham Sales	To conceal the fraud, company representatives often falsified inventory records, shipping records, and invoices. In some cases, the company recorded sales for goods merely shipped to another company location. In other cases, the company pretended to ship goods to appear as if a sale occurred and then hid the related inventory, which was never shipped to customers from company auditors.
Conditional Sales	These transactions were recorded as revenues even though the sales involved unresolved contingencies or the terms of the sale were amended subsequently by side letter agreements, which often eliminated the customers obligation to keep the merchandise.
Round-tripping or recording loans as sales	Some companies recorded sales by shipping goods to alleged customers and then providing funds to the customers to pay back to the company. In other cases, companies recorded loan proceeds as revenues.
Bill and hold transactions	Several companies improperly recorded sales from bill and hold transactions that did not meet the criteria for revenue recognition.
Premature revenues before all terms of the sale were completed	Generally this involved recording sales after the goods were ordered but before they were shipped to the customer.
Improper cutoff of sales	To increase revenues, the accounting records were held open beyond the balance sheet date to record sales of the subsequent accounting period in the current period.
Improper use of the percentage of completion method	Revenues were overstated by accelerating the estimated percentage of completion for projects in process.
Unauthorized shipments	Revenues were overstated by shipping goods never ordered by the customer or by shipping defective products and recording revenues at full, rather than discounted, prices.
Consignment Sales	Revenues were recorded for consignment shipments of goods for customers to consider on a trial basis.

Please complete the following in your initial post:

• Select ONE (1) of the fraudulent reporting techniques above.
• Design an internal control that could prevent this type of activity. Be sure to discuss the management assertion (occurrence, completeness, authorization, accuracy, cutoff, and classification) put forth, the possible misstatement, the transaction affected and the documents or records necessary for the control to work.
• Design a test of control that an auditor could use to verify that the above control was functioning properly. Be sure to discuss the method of testing that the auditor will use (inquiry, observation, etc.).

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