Perform the assessment using the COSO framework based on this case (like the TJX case used in the lectures; in other words using the five COSO components, no need to use the 17 principles):

AgriEq is a manufacturer of large equipment and machinery used for farming (tractors, large plows, etc). The company’s typical customers are farmers in Canada and northern United States. Most transactions are on credit, given the size and consequently the high price of the equipment being sold.

Mary Jane Smith, the accounts receivable manager, noticed that at the end of the quarter a very high percentage of customers who purchased equipment on credit and had outstanding balances were not paying. She was very surprised because this was inconsistent with the prior years. Typically, most customers were paying on time and hardly anyone ever defaulted. She noticed that this was primarily due to the fact that new customers were given very large credit limits to the point of being unreasonable. She asked John Doe, a senior auditor, to look into this issue to see what could have contributed to this.

John’s inquiry discovered the following: sales representatives were allowed to set credit limits for all customers. Sales reps were receiving bonuses based on the sales. As such sales reps were giving credit to almost anyone who was interested in buying equipment, because this would allow them to reach the sales goals set by top management. Interestingly, this was the case for many years, but never created a problem before. After all, the company always emphasized behaving ethically and looking out for the best interests of the customer and the community, and not just the bottom line. Sales representatives were always very reasonable in setting credit limits. John investigated why this started this year by discussing this with the sales reps themselves. Turns out that this year company’s senior management significantly increased sales quotas that sales reps had to achieve. This was not only to receive a bonus, but also to keep the job – a number of underperforming sales reps were fired at the beginning of the year. These quotas were extremely high, and this motivated sales reps to give credit to just about anyone in order to sell the equipment.

John also investigated the financial reporting side of this issue. He found out that the controller calculated the allowance for doubtful accounts based on the collection history in the previous years, and this was completely inconsistent with the current year. As such the allowance for doubtful accounts was unreasonably low given the poor collections in the current year.

Once John found out about these problems, he immediately informed the top management and the audit committee.

Answer rating: 100% (QA)

COSO is the acronym for the Committee of Sponsoring Organizations of the Treadway Commission which was created to assess internal controls As this is ... View the full answer