Your client, Adams Company is a large publicly traded national financing company that has been in business for over 15 years. The client has 37 subsidiary companies operating in more than 25 different states throughout the U.S. Adams began operations in the Phoenix area and grew primarily through acquisitions of smaller financing companies. Importantly, all subsidiaries are required to adopt common operations, procedures, accounting systems and internal controls. Company policy provides that, at the entity level, the corporate-level assistant controller receives a monthly profitability report from each of the entity’s 37 subsidiary companies, and then compares each report to the year-to-date budget. If these numbers vary by more than 25%, the assistant controller will require the local management to reconcile the observed difference and then provide a detailed explanation for the difference, including persuasive documentary evidence to substantiate their explanation. 

Required: 

a. What is the definition of a compensating control? 

b. Would the management review control described above (which compares actual profitability to budgeted profitability) be an example of a compensating control? Why or why not? 

c. If there was an identified control deficiency related to recorded revenue at four different subsidiaries, do you believe that this actual to budgeted profitability control would catch the material misstatement? Why or why not?