ABC is a public company in the United States that files quarterly and annual reports with the SEC. ABC has five manufacturing facilities located in Missouri and produces and provides chain-link to customers throughout the Midwest (Wisconsin, Indiana, Michigan, Ohio, Illinois, and Iowa) via rail car. 

ABC sells chain-link to customers under free on board (FOB) shipping point terms. Therefore, revenue is recorded when goods are shipped from the respective warehouse. ABC currently uses a sophisticated warehouse management system (the Warehouse K-Series System), which allows the Company to (1) record sales upon shipment of goods out of the warehouse, (2) automatically price fence sales on the basis of standard pricing tables, and (3) generate multiple reports for the evaluation of ABC 's operations. 

Engagement Team Note:

Materiality was determined to be $5 million. At year-end, the engagement team evaluated the internal controls related to revenue. This evaluation was done through inquiries of appropriate personnel and consideration of the results of other audit procedures including: (1) updating the risk assessment procedures (including the understanding of internal control) and substantive procedures, (2) considering the result of the entity's monitoring of controls (or our testing of the entity's monitoring of controls), and (3) obtaining an update on the status of the entity's remediation of any significant deficiency or material weakness identified as of the interim date. 

As a result, the engagement team arrived at the conclusion that there have been no significant changes to controls in the period after their interim testing. Furthermore, the engagement team has determined that they will not be using the work of others for testing the operating effectiveness of controls related to revenue.

The engagement team identified three risks of material misstatement relating to the recording of sales. For each risk identified, the team documented in the excerpted worksheet (see Handout 1) the control activity that addresses the risk of misstatement, the evaluation of the design of that control activity, and the planned testing of operating effectiveness.

Required:

1.    What are the key considerations when evaluating the design and testing of the operating effectiveness of internal controls in conjunction with a financial statement audit?  Include considerations in determining what additional audit evidence to obtain about controls that were operating during the rollforward period.

2.    For each of the three revenue risks identified by the engagement team, address the following:

a.    Was the engagement team's assessment of the evaluation of the design of the controls appropriate (i.e., does the control identified by the team address the specific "what could go wrong" for each risk)? Answer "Yes" or "No" and if "No" explain what additional items should have been performed or considered.

Was the team's interim(Sep 30) and rollforward(Oct 1-Dec 31) planned procedures to test the operating effectiveness of controls appropriate? Answer "Yes" or "No" and if "No" explain what additional items should have been performed or considered.

  

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ABC Exercise Evaluation of Revenue Internal Controls HANDOUTS C1.pdf -Adobe Acrobat Reader DC 文件(F) 编辑(E) 视图(V) 签名(S) 窗口(W) 帮助(H) 主页 工具 ABC Exercise Evalu... x □ 2a 2b ☆ 在这里输入你要搜索的内容 Handout 1 Syllabus Adv Adtg ... REVENUE INTERNAL CONTROLS (handout) Identification of risk of misstatement ("what could go wrong") Relevant assertion Significant risk? Risk of material misstatement because of fraud? Control activity that addresses risk of misstatement Does the control rely on information produced by the entity (or IPE)? If yes, list relevant information Will we obtain audit evidence of the accuracy and completeness of information produced by the entity by testing controls or by performing procedures directly on the information? Is the control automated? Relevant application system (if we are testing information produced by the entity through tests of controls and/or the control is automated) Tests of controls: evaluation of design Tests of controls: planned operating effectiveness testing 有道 AUC 300 H Audit Pl.... Risk # 2 Revenue is recorded for orders not shipped or fictitious sales. Existence or occurrence. Yes Yes 2 /3 Control #2: The "Orders Shipped & Invoiced Report" is reviewed by the warehouse director on a daily basis for unusual items and reasonableness; evidenced by the warehouse director's initials on the report, which is maintained. Yes - The "Orders Shipped & Invoiced Report," which details orders that were shipped and invoiced for a given day. The report is automatically generated by the Warehouse K system. Because the operating effectiveness of the control is dependent upon the accuracy and completeness of the IPE, we will test the controls around accuracy and completness. As the IPE is a system generated report, refer to our testing of the company's IT general contols. In addition, we will test the controls around report logic as well as the internal controls around the source data. No. Warehouse K System, which is subject to IT controls and tested within the IT controls workpaper. 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 warehouse director has been with the company for over 10 years and has been acting in this current role for the last five. The warehouse director is in charge of overseeing operations at all five warehouses and directly supervises the warehouse managers. The director is knowledgeable of the business and focuses reviews on activity that seems unusual given the customer and quantities purchased. The review is directed to the identification of unusual trends and thus appropriately addresses the related risk of material misstatement and assertion. 2. Control is performed on a daily basis. 3. Control identifies exceptions after they have occurred (i.e., its a detective control), yet given the frequency of performance, it would identify errors in a timely manner. Page 2 4. Although the control entails the review of daily revenue activity, it is done on a transaction by transaction basis, and as such it is sufficiently precise to mitigate the risk. 5. Control involves the judgment of the warehouse director since there is no specific threshold set. However, since all transactions are evaluated and ZOU Fencing has a cyclical business, the report results are predictable. In addition, the warehouse director has been employed by the company for 10 years. Interim Procedures (tested as of 9/30): 1. Discuss the performance of the control procedure with the warehouse director. 2. Select 15 days out of the year. 3. Obtain the "Orders Shipped & Invoiced Report" reviewed by the warehouse director. 4. Determine whether the reports were signed off by the warehouse director and dated on the day following the report date. Rollforward Procedures: 1. Make inquiries of management and the process owner of the control activity to determine if any events that might impact the design or operation of the control (e.g., changes, additional risks, operating deficiencies) have been identified after our interim testing date. C T ? 登录 22:47 2021/2/8 K Cre {> ± 5 ABC Exercise Evaluation of Revenue Internal Controls HANDOUTS C1.pdf -Adobe Acrobat Reader DC 文件(F) 编辑(E) 视图(V) 签名(S) 窗口(W) 帮助(H) 主页 工具 ABC Exercise Evalu... x □ 2a 2b ☆ 在这里输入你要搜索的内容 Handout 1 Syllabus Adv Adtg ... REVENUE INTERNAL CONTROLS (handout) Identification of risk of misstatement ("what could go wrong") Relevant assertion Significant risk? Risk of material misstatement because of fraud? Control activity that addresses risk of misstatement Does the control rely on information produced by the entity (or IPE)? If yes, list relevant information Will we obtain audit evidence of the accuracy and completeness of information produced by the entity by testing controls or by performing procedures directly on the information? Is the control automated? Relevant application system (if we are testing information produced by the entity through tests of controls and/or the control is automated) Tests of controls: evaluation of design Tests of controls: planned operating effectiveness testing 有道 AUC 300 H Audit Pl.... Risk # 2 Revenue is recorded for orders not shipped or fictitious sales. Existence or occurrence. Yes Yes 2 /3 Control #2: The "Orders Shipped & Invoiced Report" is reviewed by the warehouse director on a daily basis for unusual items and reasonableness; evidenced by the warehouse director's initials on the report, which is maintained. Yes - The "Orders Shipped & Invoiced Report," which details orders that were shipped and invoiced for a given day. The report is automatically generated by the Warehouse K system. Because the operating effectiveness of the control is dependent upon the accuracy and completeness of the IPE, we will test the controls around accuracy and completness. As the IPE is a system generated report, refer to our testing of the company's IT general contols. In addition, we will test the controls around report logic as well as the internal controls around the source data. No. Warehouse K System, which is subject to IT controls and tested within the IT controls workpaper. 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 warehouse director has been with the company for over 10 years and has been acting in this current role for the last five. The warehouse director is in charge of overseeing operations at all five warehouses and directly supervises the warehouse managers. The director is knowledgeable of the business and focuses reviews on activity that seems unusual given the customer and quantities purchased. The review is directed to the identification of unusual trends and thus appropriately addresses the related risk of material misstatement and assertion. 2. Control is performed on a daily basis. 3. Control identifies exceptions after they have occurred (i.e., its a detective control), yet given the frequency of performance, it would identify errors in a timely manner. Page 2 4. Although the control entails the review of daily revenue activity, it is done on a transaction by transaction basis, and as such it is sufficiently precise to mitigate the risk. 5. Control involves the judgment of the warehouse director since there is no specific threshold set. However, since all transactions are evaluated and ZOU Fencing has a cyclical business, the report results are predictable. In addition, the warehouse director has been employed by the company for 10 years. Interim Procedures (tested as of 9/30): 1. Discuss the performance of the control procedure with the warehouse director. 2. Select 15 days out of the year. 3. Obtain the "Orders Shipped & Invoiced Report" reviewed by the warehouse director. 4. Determine whether the reports were signed off by the warehouse director and dated on the day following the report date. Rollforward Procedures: 1. Make inquiries of management and the process owner of the control activity to determine if any events that might impact the design or operation of the control (e.g., changes, additional risks, operating deficiencies) have been identified after our interim testing date. C T ? 登录 22:47 2021/2/8 K Cre {> ± 5

Answer rating: 100% (QA)

Key Considerations when Evaluating Design and Testing Operating Effectiveness of Internal Controls a Design Evaluation Relevance to Risks Ensure that ... View the full answer