Following are examples of control deficiencies that may represent signifi- cant deficiencies or material weaknesses. For each control deficiency, indi- cate whether it is a significant deficiency or material weakness. Justify your decision.

a. The company uses a standard sales contract for most transactions. In- dividual sales transactions are not material to the entity. Sales personnel are allowed to modify sales contract terms. The company's accounting function reviews significant or unusual modifications to the sales con- tract terms, but does not review changes in the standard shipping terms. The changes in the standard shipping terms could require a delay in the timing of revenue recognition. Management reviews gross margins on a monthly basis and investigates any significant or unusual relationships. In addition, management reviews the reasonableness of inventory levels at the end of each accounting period. The entity has experienced limited situations in which revenue has been inappropriately recorded in ad- vance of shipment, but amounts have not been material.

b. The company has a standard sales contract, but sales personnel fre- quently modify the terms of the contract. The nature of the modifica tions can affect the timing and amount of revenue recognized. Individ- ual sales transactions are frequently material to the entity, and the gross margin can vary significantly for each transaction. The company does not have procedures in place for the accounting function to regularly re- view modifications to sales contract terms. Although management re- views gross margins on a monthly basis, the significant differences in gross margins on individual transactions make it difficult for manage- ment to identify potential misstatements. Improper revenue recognition has occurred, and the amounts have been material.

c. The company has a standard sales contract, but sales personnel fre- quently modify the terms of the contract. Sales personnel frequently grant unauthorized and unrecorded sales discounts to customers with- out the knowledge of the accounting department. These amounts are deducted by customers in paying their invoices and are recorded as out- standing balances on the accounts receivable-aging. Although these amounts are individually insignificant, when added up they are material and have occurred regularly over the past few years. p-986