The entity has a standard sales contract, but sales personnel frequently modify the terms of the contract. Sales personnel frequently grant unauthorized and unrecorded sales discounts to customers without the knowledge of the accounting department. These amounts are deducted by customers in paying their invoices and are recorded as outstanding balances on the accounts receivable–aging.

Although management reviews the adequacy of the allowance for doubtful accounts each month, these amounts are individually insignificant and do now warrant further investigation. However, when added up, they are material and have occurred regularly over the past few years.

1. How would you categorize the severity of the control deficiency? Why?

What is the effect of a) on your assessment of the risk of material misstatement and the extent of procedures that you plan to perform?

Assuming that Herbert is a publicly-traded company, what type of report would be most appropriate to issue over the company’s internal controls? Why?

Provide the adjusting journal entry (without amounts) that management should record to resolve the issue.

Answer rating: 100% (QA)

The nature of the modifications can affect the timing and amount of revenue recognized The entity do... View the full answer