3. Referring to Jones and Jones LLP's policy for evaluating control deficiencies (see Appendix A), determine if the following three deficiencies represent a control deficiency, a significant deficiency, or a material weakness. Consider each case separately and justify your answers by indicating how the likelihood and magnitude thresholds are met for each case. a. While examining Front Porch Furniture's period-end financial reporting process, you discover that revenue has been recognized on orders that were received and completed, but not yet shipped to the customer. No specific goods were set aside for these orders; however, there is sufficient inventory on hand to fill them. Also, you observe that some orders were shipped before being recorded as sales, so that your best estimate of total revenue cutoff error at year-end was approximately $2.3 million with an upper bound of $2.7 million (i.e., the potential magnitude of a misstatement resulting from the deficiency). b. Front Porch Furniture's revenue recognition policy requires that all non-routine sales (i.e., sales to client other than dealerships) receive authorization from management in order to verify proper pricing and terms of sales. However, after examining a sample of non-routine sales records you find that this control is not closely adhered to and that sales representatives offered discounts or altered sales terms that were not properly recorded in Front Porch Furniture's records. As a result, in instances when the control is not followed the recorded sales prices tend to be too high and/or terms are not correctly reflected in sales invoice and the customers complain. In some situations, customers have cancelled orders due to the over-billing or changes sales terms. Non-routine sales represent about 10% of Front Porch Furniture's sales revenue. From your sample testing of the authorization control, you find that the control doesn't operate 4% of the time, with an upper bound of 9% (i.e., based on your sample, you can be 95% confident that the exception rate does not exceed 9%). c. Front Porch Furniture requires that all credit sales to new customers or to customers with a current balance over their pre-approved credit limit be approved by the credit manager prior to shipment. However, during peak seasons you find this policy is not strictly followed in order to accommodate the need of both the company and its customers to have orders processed rapidly. Based on your findings, you estimate that the allowance for doubtful accounts is materially understated by $42 million