SOUTHOCO is a major energy company that operates worldwide, primarily in fossilfuel exploration, production, and distribution. One of the company’s distribution methods is through consignees, who contract as independent agents to operate as wholesale distributors of SOUTHOCO’s products. The company’s auditors in the southeastern region recently completed an audit of consignee operations in the northern sales district of one state in the three-state region. The auditors focused their examination on gasoline, diesel fuel, and oil. Price differentiations have been established during the past year for different types of customers — private contractors, service stations, and local and state governments.

The consignees were supposed to have received notification of the changes in pricing policies nine months prior to the beginning of the audit. New bookkeeping procedures for the changes required the use of new forms with additional space for the classification of the customers. These forms would allow the company to keep track of both the actual charges and the amount that should have been charged on each sale.

The auditors found that approximately one-half of the consignees were still using the old forms. Further investigation showed that erroneous pricing by many of the consignees had cost the company more than $200,000 in lost revenues since the new pricing policies went into effect. The consignees said the reason they were using the old forms was that the new forms were slow in arriving and because they wanted to use up the old forms first. Further, they claimed that they had not received adequate communication about how to apply the new pricing policies. Consequently, they did not feel they had much choice but to use the old forms and prices, and since no one had complained, they thought it was okay.

The auditors made the following recommendations:

1. The company should make a concerted effort to see that all of the consignees receive and learn how to use the new sales forms.

2. The company should send representatives to each consignee office to inform and train the managers about the new pricing policies and how to use them.

3. Headquarters accounting personnel should check the consignee sales documents to see that the new procedures are being used properly.

Required:

a. Plan a simple inquiry follow-up review. What key questions need to be answered?

b. Plan a follow-up review at the auditees’ headquarters to verify that the corrective measures have been taken. What key questions need to be answered? What documents do you think should be reviewed?

c. Plan an on-site follow-up review to examine both the documents and the performance of corrected procedures. What key questions need to be answered? What methods would you use?