Fluent Essays

This case gives students an opportunity to (1) understand the process of evaluating identified control deficiencies; (2) understand the annual disclosure requirements for management’s report on internal control over financial reporting (ICFR); and (3) determine the effect of identified control deficiencies on other controls. Students are required to read the case and address the five questions listed on the last page. 1. Briefly explain the misstatements made in the company financial statement. How did ‘accepting a vendor change request and making payments to an incorrect bank account’ affect the Accounts Payable balance?  2. According to PCAOB Auditing Standard (AS 2201) (https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx), what factors should auditors consider when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement?  3. PCAOB AS 2201 distinguishes the difference between a deficiency in design and a deficiency in operation. First, explain what auditors should consider when making the distinction. Second, determine whether the Assistant Controller’s failure to adequately review the Vendor Change Form represents a deficiency in the design or operating effectiveness of the control.  4. Based on guidance in AS 2201, determine if the failure in the vendor request change form control indicative of a material weakness in internal control over financial reporting. Consider both quantitative and qualitative factors.  5. SEC Regulation S-K requires that management provide a report on a registrant’s ICFR in the company’s Form 10-K. Assuming the company and the auditor concluded that this internal control failure indicates a material weakness in internal control, what information would the company management be expected to disclose?  6. Assuming the company and the auditor concluded that this internal control failure is not severe enough to be a material weakness but indicates a significant deficiency in internal control, explain the next steps for auditors. What kinds of obligation auditors have in terms of communicating the results (e.g. To whom do they report? And How?) Compare and contrast with the case of material weakness.  7. Assume the auditor believe the deficiency is a material weakness, but the company pleads that a material weakness in internal controls will greatly damage the company’s reputation. The company notifies the auditor that the company will consider changing the auditor in the subsequent year if the auditor concludes the deficiency is a material weakness. ABC Retailers Inc. is an important client for the auditor, and losing the client will have a nontrivial impact on the auditor’s revenue. What should the auditor do? Based on what we learned in Module B and C of the textbook, explain possible consequences for the auditor who agrees to issue a more favorable report in order to retain the client. (The situations described in 5, 6, and 7 are independent from one another.) The list above does not present a complete list of issues related to the topic. You may additionally discuss other issues relevant to the audit process of internal control in your paper.ACCT 461 Writing Assignment 2 Spring 2021 1 ABC Retailers — Internal Controls Introduction This case gives students an opportunity to (1) understand the process of evaluating identified control deficiencies; (2) understand the annual disclosure requirements for management’s report on internal control over financial reporting (ICFR); and (3) determine the effect of identified control deficiencies on other controls. Students are required to read the case and address the five questions listed on the last page. Background ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files quarterly and annual reports with the Securities and Exchange Commission (SEC). ABC is a leading retail chain operating more than 100 department stores across the continental United States. ABC department stores offer customers a variety of nationally advertised products, including clothing, shoes, jewelry, and other accessories. The Company’s supply chain of products is managed through a single warehouse and distribution facility located in Kansas City, Missouri. ABC has a centralized accounting and finance structure at its corporate headquarters, where all processes and controls related to all substantive account balances occur, including controls related to accounts payable and the Vendor Master File. ABC recognizes revenues from retail sales at the point of sale to its customers. Discounts provided to customers by the Company at the point of sale, including discounts provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Cost of goods sold for the Company primarily consist of inbound freight and costs relating to purchasing and receiving, inspection, depreciation, warehousing, internal transfer, and other costs of distribution. Facts Audit Issue On June 1, 2020, the Accounts Payable (AP) Manager received an e-mail inquiry about the process required for a vendor to change its bank account information. The e-mail was sent from John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a manufacturer that supplies ABC-branded watches to ABC’s west region department stores. In addition, John Smith is the primary contact at Watch Makers with whom the Company typically interacts. The AP Manager responded to the e-mail request on June 15, 2020, with the procedures required of the vendor, which include completing a vendor bank account request form. On June 20, 2020, the AP Manager received a reply e-mail from John Smith at “Watch-Makers” with a completed vendor bank account request form, which included John Smith’s signature, new bank account information, and other related information. Upon receiving the vendor bank account request form, the AP Manager completed a separately required Vendor Change Form for internal processing. The Vendor Change Form is completed for new vendors or changes to existing First Pages lou6920x_fm_i-xxxiv.indd i 04/21/20 09:20 PM Auditing & Assurance Services First Pages lou6920x_fm_i-xxxiv.indd ii 04/21/20 09:20 PM First Pages lou6920x_fm_i-xxxiv.indd iii 04/21/20 09:20 PM Timothy J. Louwers, PhD, CPA, CISA, CFF Professor Emeritus James Madison University Penelope L. Bagley, PhD, CPA Department Chair and Associate Professor of Accounting Appalachian State University Allen D. Blay, PhD, CPA Denise Dickins Accounting Faculty Fellow and Associate Professor Florida State University Jerry R. Strawser, PhD, CPA KPMG Chair of Accounting Texas A&M University Jay C. Thibodeau, PhD, CPA Rae D. Anderson Professor of Accounting Bentley University Auditing & Assurance Services First Pages lou6920x_fm_i-xxxiv.indd iv 04/21/20 09:20 PM AUDITING & ASSURANCE SERVICES, EIGHTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2018, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 24 23 22 21 20 ISBN 978-1-260-36920-5 (bound edition) MHID 1-260-36920-X (bound edition) ISBN 978-1-260-70373-3 (loose-leaf edition) MHID 1-260-707373-8 (loose-leaf edition) Portfolio Manager: Elizabeth Eisenhart Product Developers: Erin Quinones Marketing Manager: Katherine Wheeler Content Project Managers: Mary E. Powers (core), Angela Norris (assessment) Buyer: Laura Fuller Design: Matt Diamond Content Licensing Specialists: Abbey Jones Cover Image: © Oskari Porkka/Shutterstock Compositor: SPi Global All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Louwers, Timothy J., author. | Blay, Allen D., 1970- author. | Thibodeau, Jay C., author. | Strawser, Jerry R., author. | Bagley, Penelope, author. Title: Auditing & assurance services / Timothy J. Louwers, James Madison University, Allen Blay, Florida State University, Jay Thibodeau, Bentley University, Jerry Strawser, Texas A&M University, Penelope Bagley, Appalachian State University. Other titles: Auditing and assurance services Description: Eighth edition. | New York, NY : McGraw-Hill Education, 2021. | First edition entered under title. Identifiers: LCCN 2020010135 (print) | LCCN 2020010136 (ebook) | ISBN 9781260369205 (bound edition) | ISBN 9781260703733 (loose-leaf edition) |