Auditing Cases, An Interactive Learning Approach, Seventh Edition.

Oilfields-R-Us, Inc. Evaluation of Management Review Controls

PART B Do NOI begin this part of the case until instructed to do so After receiving feedback from the external auditor on the documentation of the management review control (MRC) over the allowance for doubtful accounts, Emma, the Company's controller, has provided you with this updated description of the MRC. REVISED CONTROL DESCRIPTION Management Review Control Over the Allowance for Doubtful Accounts To ensure appropriate valuation of accounts receivable, management performs a quarterly review of the calculation for the allowance for doubtful accounts. The inputs, activities, and outputs of this review are as follows: Inputs On a quarterly basis, Tyler, the AR clerk, creates an aged AR schedule and calculation of the allowance for doubtful accounts. Tyler agrees total AR per the aging schedule to the trial balance and foots and crossfoots the schedule before providing the schedules to Gavin. Specific quarterly review activities Gavin, the CFO, obtains schedules from Tyler and 1) reviews each of the percentage assumptions for reasonableness based on experience, 2) compares each aging category's total balance to the average corresponding aging category balance from the previous two years, 3) considers extemal factors affecting the industry and specific customers, and 4) identifies differences (i.e., deviations) as either any aging category whose balance exceeds the two-year average by greater than 2 percent or any other specific transactions or customer balances that appear unusual. Outputs Gavin (CFO) discusses identified deviations with Emma (controller) and Tyler (AR clerk).After resolving any identified deviations, Gavin signs off on the schedules. REQUIRED - PART B [1] Based on the revised management review control (MRC) description provided in Part B, what is (a) the control's purpose, (b) the risk(s) of material misstatement addressed by the control, and (c) the significant account(s) related to the control. [a] Control's purpose: [b] Risk(s) of material misstatement addressed by the control: [c] Significant account(s) related to the control: [2] Evaluate the design effectiveness of the Company's MRC over the allowance for doubtful accounts provided in Part B by answering questions [a] through [f]. [a] Does the control, as currently designed, address the control's objective and address the related risk of material misstatement? Yes No Please briefly explain your answer. [b] Is the control, as currently designed, sufficiently precise? Factors to consider include the appropriateness of expectations, level of aggregation, and criteria for identifying and investigating potential material misstatements. Yes No Please briefly explain your answer. [C] Does the control, as currently designed, include steps involved in identifying, investigating, and resolving deviations? Yes No Please briefly explain your answer. [d] Is the control, as currently designed, performed by individuals with sufficient competence and authority? Yes __ No___ Please briefly explain your answer. [e] Is the control, as currently designed, performed frequently enough to prevent or detect material misstatements? Yes No Please briefly explain your answer. [f] Does the control, as currently designed, ensure the completeness and accuracy of information included in the report? Yes No Please briefly explain your answer. [3] In your role as financial statement auditor, provide an overall assessment as to whether the MRC over the allowance for doubtful accounts described in Part B can "effectively prevent or detect errors or fraud that could result in material misstatements in the financial statements" (AS 2201.42). If you assess the control as being designed effectively, please state one or two reasons why. If you assess the control as having significant design deficiencies, please state one or two reasons why, and what changes the Company can make to improve. Yes, it is designed effectively No, it is not designed effectively [4] List three tests you would perform as Oilfields' auditor to test the control's operating effectiveness, including the supporting evidence you would request from management. Test 1: Test 2: Test 3: PART B Do NOI begin this part of the case until instructed to do so After receiving feedback from the external auditor on the documentation of the management review control (MRC) over the allowance for doubtful accounts, Emma, the Company's controller, has provided you with this updated description of the MRC. REVISED CONTROL DESCRIPTION Management Review Control Over the Allowance for Doubtful Accounts To ensure appropriate valuation of accounts receivable, management performs a quarterly review of the calculation for the allowance for doubtful accounts. The inputs, activities, and outputs of this review are as follows: Inputs On a quarterly basis, Tyler, the AR clerk, creates an aged AR schedule and calculation of the allowance for doubtful accounts. Tyler agrees total AR per the aging schedule to the trial balance and foots and crossfoots the schedule before providing the schedules to Gavin. Specific quarterly review activities Gavin, the CFO, obtains schedules from Tyler and 1) reviews each of the percentage assumptions for reasonableness based on experience, 2) compares each aging category's total balance to the average corresponding aging category balance from the previous two years, 3) considers extemal factors affecting the industry and specific customers, and 4) identifies differences (i.e., deviations) as either any aging category whose balance exceeds the two-year average by greater than 2 percent or any other specific transactions or customer balances that appear unusual. Outputs Gavin (CFO) discusses identified deviations with Emma (controller) and Tyler (AR clerk).After resolving any identified deviations, Gavin signs off on the schedules. REQUIRED - PART B [1] Based on the revised management review control (MRC) description provided in Part B, what is (a) the control's purpose, (b) the risk(s) of material misstatement addressed by the control, and (c) the significant account(s) related to the control. [a] Control's purpose: [b] Risk(s) of material misstatement addressed by the control: [c] Significant account(s) related to the control: [2] Evaluate the design effectiveness of the Company's MRC over the allowance for doubtful accounts provided in Part B by answering questions [a] through [f]. [a] Does the control, as currently designed, address the control's objective and address the related risk of material misstatement? Yes No Please briefly explain your answer. [b] Is the control, as currently designed, sufficiently precise? Factors to consider include the appropriateness of expectations, level of aggregation, and criteria for identifying and investigating potential material misstatements. Yes No Please briefly explain your answer. [C] Does the control, as currently designed, include steps involved in identifying, investigating, and resolving deviations? Yes No Please briefly explain your answer. [d] Is the control, as currently designed, performed by individuals with sufficient competence and authority? Yes __ No___ Please briefly explain your answer. [e] Is the control, as currently designed, performed frequently enough to prevent or detect material misstatements? Yes No Please briefly explain your answer. [f] Does the control, as currently designed, ensure the completeness and accuracy of information included in the report? Yes No Please briefly explain your answer. [3] In your role as financial statement auditor, provide an overall assessment as to whether the MRC over the allowance for doubtful accounts described in Part B can "effectively prevent or detect errors or fraud that could result in material misstatements in the financial statements" (AS 2201.42). If you assess the control as being designed effectively, please state one or two reasons why. If you assess the control as having significant design deficiencies, please state one or two reasons why, and what changes the Company can make to improve. Yes, it is designed effectively No, it is not designed effectively [4] List three tests you would perform as Oilfields' auditor to test the control's operating effectiveness, including the supporting evidence you would request from management. Test 1: Test 2: Test 3