1. What is the responsibility of management and the auditor with respect to the internal controls of a client?
2. Groupon disclosed a “material weakness” in its internal controls saying that it had failed to set aside enough money to cover customer refunds. Do you believe the company engaged in fraud with respect to customer refunds? Why or why not?
3. Groupon blamed EY for the admission of the internal control failure to spot the material weakness. Do you agree that EY should have spotted the internal control weakness earlier and take appropriate action? Include in your response the role that risk assessment should have played in EY’s actions.
4. According to Groupon, the merchants are responsible for fulfilling the obligation to deliver the goods and services. Group on disclosed that fact and the following statement in its restated financial statements. “We record the gross amount received from Groupon, excluding taxes where applicable, as the Company is the primary obligor in the transaction, and records an allowance for estimated customer refunds on total revenue primarily based on historical experience.the Company also records costs related to the associated obligation to redeem the award credits granted as issuance as an offset to revenue.”
Review SEC Staff Accounting Bulletin (SAB) 101 (Question 10) and Emerging Issues Task Force (EITF) pronouncement 99-19 using the links provided below and evaluate whether Groupon’s accounting for the allowance referred to above met GAAP requirements.
SAB 101 – Revenue Recognition in Financial Statements
www.sec.gov/interps/account/sab101.htm
EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent
www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175820914023&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs