Case 13-9 ZOU's Fencing Controls ZOU Fencing Inc. ("ZOU Fencing" or the "Company) is a public company in the United States that files quarterly and annual reports with the SEC. ZOU Fencing has five manufacturing facilities in Missouri and produces and provides chain-link fencing to customers throughout the Midwest (specifically, Wisconsin, Indiana, Michigan, Ohio, Illinois, and lowa) via rail car. ZOU Fencing sells chain-link fencing to customers under freight on board (FOB) shipping point terms. Therefore, revenue is recorded when goods are shipped from the respective warehouse. ZOU Fencing currently uses a sophisticated warehouse management system (the Warehouse K-Series System), which allows the Company to (1) record sales upon shipment of goods out of the warehouse, (2) automatically price fence sales on the basis of standard pricing tables, and (3) generate multiple reports for the evaluation of ZOU Fencing's operations. Engagement Team Note Materiality was determined to be $5 million. In planning the current year's audit, the engagement team obtained an understanding of the internal controls related to revenue. This understanding was done through the engagement team's walkthrough of the revenue process. As part of their walkthrough procedures, the engagement team made inquiries of appropriate personnel, inspected relevant documentation and in certain cases observed the control performers performing the control procedures. As a result, the engagement team arrived at the conclusion that there have been no significant changes in the revenue process since the prior year. Furthermore, the engagement team has determined that they will not be using the work of others for testing the operating effectiveness of controls related to revenue. The engagement team identified three risks of material misstatement relating to the recording of sales. For each risk identified the team documented in the excerpted worksheet (see the Handout) the control activity that addresses the risk of material misstatement, the evaluation of the design of that control activity, and the planned testing of operating effectiveness. Required: 1. What are the key considerations when evaluating the design and testing the operating effectiveness of internal controls in conjunction with a financial statement audit? Include considerations in determining what additional audit evidence to obtain about controls that were operating during the rollforward period. 2. For each of the three revenue risks identified by the engagement team, address the following: a. Was the engagement team's assessment of the evaluation of the design of each control appropriate (i.e., does the control identified by the team address the specific risk of material misstatement and associated assertion)? b. Was the engagement team's assessment of the risk associated with each control appropriate? c. Was the team's interim and rollforward planned procedures to test the operating effectiveness of each control appropriate considering the risk associated with the control
