(last picture is part of risk #3 USING GAAP and AS 2201 5. For each of the three
ID: 2574579 • Letter: #
Question
(last picture is part of risk #3
USING GAAP and AS 2201
5. For each of the three revenue risks identified by the engagement team, address the following:
Was the engagement team’s assessment of the evaluation of the design of each control appropriate (i.e., does the control identified by the team address the specific risk of material misstatement and associated assertion)?
Was the engagement team’s assessment of the risk associated with each control appropriate?
Was the team’s interim planned procedures to test the operating effectiveness of each control appropriate considering the risk associated with the control?
Was the team’s roll-forward planned procedures to test the operating effectiveness of each control appropriate considering the risk associated with the control?
Identification of risk of material misstatement All orders shipped are not recorded as revenue. Relevant assertion Significant risk? Completeness No. Risk of material misstatement because of fraud? No. Control # 1: Sales are automatically recorded and invoices are automatically generated upon the release of the I activity that addresses risk of material order in the Warehouse Dewey, Cheatem and How System. Orders are not released until the goods have been confirmed for shipping in the system (which occurs when the goods are scanned as they are loaded in the shipping area). y on i No. the control (or lUC)? If yes, list relevant accuracY N/P and completeness of information used in the control by testing controls? is the control automated? Yes. evant app information used in the control through tests of tested within the IT controls workpaper controls or the control is automated) 9 Warehouse Dewey, Cheatem and How System, which is subject to IT controls performed by management and On the basis of the following factors, we concluded that the control is appropriately designed to address the stated risk of material misstatement 1. The control is the automation of the invoicing of goods shipped as the system will automatically record revenues when goods are shipped from the warehouse (revenue generating activity), thus resulting in no shipped goods going unrecorded in the system that appropriately addresses the related risk of material misstatement and assertion. 2. Automated control prevents errors from occurring as opposed to identifying them once they have occurred (preventive control). 3. Control operates at the transaction level and, as such, is sufficiently precise to mitigate the risk. 4. Control is performed on a continual basis and thus addresses the risk directly and for the period under audit. S. There are no historical issues with the operation of the control and the control has not been modified in the period under audit. Tests of controls: evaluation of design Risk Associated with the Control Not Higher 1. We will verify the understanding through testing of general IT controls; i.e, program change controls, to assess if there have been any changes to the contral since the previous year 2. In addition, we will perform standard sample testing of any program changes to the control to ensure the control is aperating effectively s of controls: planned operating effectiveness testing Make inquiries of the controller and the IT manger to determine if any events have occurred that might impact the design or operation of the control (e.g., changes, additional risks, operating deficiencies) after our interim testing date. If any significant changes are noted retest controlExplanation / Answer
Risk #1:
Definition of Revenue on sale of goods, as per US GAAP:
“Revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:
· There is persuasive evidence of an arrangement.
· Delivery has occurred (e.g., an exchange has taken place).
· The sales price is fixed or determinable. Collectability is reasonably assured.
1. The control identified by the engagement team is that “Sales are automatically recorded upon the release of order in warehouse. The orders are not released till the goods have been confirmed for shipping.”
This is not appropriate. Sales is said to have been occurred after the goods have been physically shipped (not only based on the confirmation from warehouse for shipping).
2. The engagement team has identified this risk of not recording sale as “No significant risk”, which is not appropriate.
If shipped goods are not recorded as sales, then there would be under reporting of sales, which is significant to the financial statement information, as a whole.
3. The interim test should be aimed at testing the operation of the control that all sales have been duly recorded & control is operating effectively that no valid sale is unrecorded. In this case, the interim tests are done to test the effectiveness of the ITcontrols on automatic recording of sales and changes to the IT program, which Is not appropriate.
In addition, it is required to test on sample basis, whether the goods physically shipped are being recorded as sales.
4. The roll forward procedures should be aimed at;
a. Testing whether the control tested earlier are operating as intended
b. Checking whether there is any significant change in internal control procedures from the interim period evaluation to till date.
It may be noted that only when there is low risk of internal control weakness, based on the evaluation, enquiry alone would be sufficient as a roll-forward procedure.
As in this case, it was observed earlier that it is (under reporting of sales) a significant factor when considering the overall financial statement level, it is advisable to check the transactions on sample basis to determine whether the control is working effectively (in addition to conducting enquires about operation of control.)
Risk # 2:
1. The control weakness identified by the engagement team is that “all unshipped goods are recorded as sales” is appropriate.
2. The engagement team has identified this risk of recording fictitious sale as “Significant risk”, which is appropriate, as it is significant to the financial statement information, as a whole.
3. Although, the operation of control (obtaining the report from the system on “orders shipped & invoiced” & review by warehouse director) is good, it still depends on the judgment of the director to act on the exceptions. Hence, the engagement team in addition to testing the effectiveness of the operation of the program controls, need to test the correctness of the recorded sales based on the supporting documents, on sample basis.
4. For roll forward procedure too, in addition to enquiring about satisfactory performance of the programs, the engagement team should test the transactions, to obtain sufficient and appropriate evidence about operation of the control as intended.
Risk # 3:
1. The identification of the risk is appropriate.
2. Orders shipped are not recorded to their actual quantities and pricing not as per approved price list, is a significant control weakness and is a significant risk.
The engagement team’s evaluation that it is not a significant risk, is incorrect.
3. The interim testing procedures performed by the team is appropriate.
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