Assume that management is gathering evidence as part of its process for assessing the effectiveness of internal control over financial reporting. The company is a manufacturing company with high-dollar specialized machines used in the medical profession. The following table identifies important controls that management is testing regarding accounts related to revenue recognition, accounts receivable, and other sales-related activities. The first column describes the control, and the second column describes the test results. Based on the test results, determine the conclusion that management should make about the deficiency (is it a control deficiency, a significant deficiency, or a material weakness?).

CONTROL TESTING OVER REVENUE

Control Tested

A. All sales over $10,000 require computer check of outstanding balances to see if approved balance is exceeded.

B. The computer is programmed to record a sale only when an item is shipped.

C. All prices are obtained from a standardized price list maintained within the computer and accessible only by the marketing manager.

D. Sales are shipped only upon receiving an authorized purchase order from customer.

Test Results

Tested throughout year with a sample size of 30. Only three failures, all in the last quarter, and all approved by sales manager.

Sampled 10 items during the last month. One indicated that it was recorded before it was shipped. Management was aware of the recording.

Management selected 40 invoices and found 5 instances in which the price was less than the price list. All of the price changes were initiated by salespeople.

Management selects 15 transactions near the end of each quarter. On average, 3–4 are shipped each quarter based on salesperson’s approval and without a customer purchase order.