Case 13 9 Zou’s Fencing Controls Essay

2449 words - 10 pages

Case 13-9
ZOU’s Fencing Controls
ZOU Fencing Inc. (ZOU Fencing or the Company) is a public company in the United States that files quarterly and annual reports with the SEC. ZOU Fencing has five manufacturing facilities located in Missouri and produces and provides chain-link fencing to customers throughout the Midwest (Wisconsin, Indiana, Michigan, Ohio, Illinois, and Iowa) via rail car.
ZOU Fencing sells chain-link fencing to customers under free on board (FOB) shipping point terms. Therefore, revenue is recorded when goods are shipped from the respective warehouse. ZOU Fencing currently uses a sophisticated warehouse management system (the Warehouse K-Series System), which allows ...view middle of the document...

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:
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Case 13-9: ZOU’s Fencing Controls Page 2
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)?
b. Was the team’s interim and rollforward planned procedures to test the operating effectiveness of controls appropriate?
Copyright 2011 Deloitte Development LLC All Rights Reserved.
Case 21: ZOU's Fencing Controls Handout 1
ZOU Fencing Inc. (Case 13-9 handout) Account Scoping and Risk Assessment Account Balance and Disclosure: Revenue Class of Transaction: Recording Sales
Page 1
Risk #1
Identification of risk of misstatement ("what could go wrong")
All orders shipped are not recorded as revenue.
Relevant assertion
Completeness.
Significant risk?
No.
Risk of material misstatement because of fraud?
No.
Control activity that addresses risk of misstatement
Control #1: Sales are automatically recorded and invoices are automatically generated upon the release of the order in the Warehouse K-Series System. Orders are not released until the goods have been confirmed for shipping in the system (which occurs when the goods are scanned as they are loaded in the shipping area).
Does the control rely on information produced by the entity (or IPE)? If yes, list relevant information
No.
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?
N/A
Is the control automated?
Yes.
Relevant application system (if we are testing information produced by the entity through tests of controls or the control is automated)
Warehouse K System, which is subject to IT controls performed by management and tested within the IT controls workpaper.
Tests of controls: evaluation of design
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 control is the automation of the invoicing of goods shipped as the system will automatically...

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