CASE STUDIES Case Study 1: Auditing Entity-Level Controls Senior management is continuing its efforts to grow the company, increase its market share, and enhance shareholder value by: Further expanding its direct sales globally. Systematically increasing the number of retail stores. Selectively acquiring other businesses that are aligned with its core competencies. Increasing competition over the past several years has motivated management to continuously pursue new and innovative ways to differentiate SHR's products, streamline the company's business processes, and take full advantage of advances in IT. Operating efficiency is a critical component of SHR's competitive pricing strategy. The risks that concern senior management the most heading into fiscal 2018 include: The continuing economic uncertainty further decreases discretionary consumer spending, which in turn will adversely affect the company's sales and profitability. Mounting competition in the industry may make it increasingly difficult to differentiate the company's high-quality merchandise at prices consumers are willing to pay. Deterioration of the company's brand or its positive image in the marketplace may adversely affect sales and profitability. Failure to successfully integrate newly acquired businesses may adversely affect the company's performance. The inability to generate operating efficiencies and leverage IT may adversely affect the company's profits. Placing too much emphasis on operating efficiencies may adversely affect product quality and customer service. During the first six months of 2018, SHR has experienced slower sales growth and higher operating expenses than anticipated. There is growing concern that forecasted performance targets for the year will not be achieved. Scenario 1: Ethical Behavior is Good Business The concept that "ethical behavior is good business" is integral to SHR's strategy. For example, the company's 2017 annual report includes this statement: "Sound ethical conduct is a key component of how we do business and continues to contribute significantly to the company's success." Requirements of CASE STUDIES Case Study 1: Part A - Auditing Entity-Level Controls Remember the following definitions as you complete the requirements under Scenario 1 Activities 1 below: Business Objective: To demonstrate sound ethical conduct in everything we do. Business Risk: Disregard for sound ethical principles, either intentional or unintentional, may cause managers and employees to cut corners, embellish performance results, misuse company resources, or otherwise act in a manner that harms the company and its stakeholders. Use the business objective and business risk stated above as the basis for answering the following questions. As he or she deems necessary Use the business objective and business risk stated above as the basis for answering the following questions. As he or she deems necessary Scenario 1 Activities 1. Management asserts that entity-level controls are designed adequately and operating effectively to reduce the above stated risk to an acceptably low level. Identify the key entity-level controls you expect to find in place if management's assertion is true. Keep in mind that entity-level controls may exist in any of the five COSO components of internal control (control environment, risk assessment, controls, information and communication, and monitoring). Many elements of the control environment are "soft" in nature. They may, for example, involve senior management behavior that intrinsically leaves little, if any, audit trail. An example of a soft control that you may have included in your answer to question 1 above is expressed as follows: Senior management fosters a strong corporate ethical climate by what they say and what they do. They lead by example when faced with tough business decisions involving ethical ramifications. Requirements of Part A: 1. Identify the audit procedures you would use to determine whether this control exists and are operating effectively within SHR Corporation. Describe the evidence you might find that would indicate operating effectively (be specific). Keep in mind that you need to build a sufficient body of appropriate evidence to support a valid conclusion. CASE STUDIES Case Study 1: Auditing Entity-Level Controls Senior management is continuing its efforts to grow the company, increase its market share, and enhance shareholder value by: Further expanding its direct sales globally. Systematically increasing the number of retail stores. Selectively acquiring other businesses that are aligned with its core competencies. Increasing competition over the past several years has motivated management to continuously pursue new and innovative ways to differentiate SHR's products, streamline the company's business processes, and take full advantage of advances in IT. Operating efficiency is a critical component of SHR's competitive pricing strategy. The risks that concern senior management the most heading into fiscal 2018 include: The continuing economic uncertainty further decreases discretionary consumer spending, which in turn will adversely affect the company's sales and profitability. Mounting competition in the industry may make it increasingly difficult to differentiate the company's high-quality merchandise at prices consumers are willing to pay. Deterioration of the company's brand or its positive image in the marketplace may adversely affect sales and profitability. Failure to successfully integrate newly acquired businesses may adversely affect the company's performance. The inability to generate operating efficiencies and leverage IT may adversely affect the company's profits. Placing too much emphasis on operating efficiencies may adversely affect product quality and customer service. During the first six months of 2018, SHR has experienced slower sales growth and higher operating expenses than anticipated. There is growing concern that forecasted performance targets for the year will not be achieved. Scenario 1: Ethical Behavior is Good Business The concept that "ethical behavior is good business" is integral to SHR's strategy. For example, the company's 2017 annual report includes this statement: "Sound ethical conduct is a key component of how we do business and continues to contribute significantly to the company's success." Requirements of CASE STUDIES Case Study 1: Part A - Auditing Entity-Level Controls Remember the following definitions as you complete the requirements under Scenario 1 Activities 1 below: Business Objective: To demonstrate sound ethical conduct in everything we do. Business Risk: Disregard for sound ethical principles, either intentional or unintentional, may cause managers and employees to cut corners, embellish performance results, misuse company resources, or otherwise act in a manner that harms the company and its stakeholders. Use the business objective and business risk stated above as the basis for answering the following questions. As he or she deems necessary Use the business objective and business risk stated above as the basis for answering the following questions. As he or she deems necessary Scenario 1 Activities 1. Management asserts that entity-level controls are designed adequately and operating effectively to reduce the above stated risk to an acceptably low level. Identify the key entity-level controls you expect to find in place if management's assertion is true. Keep in mind that entity-level controls may exist in any of the five COSO components of internal control (control environment, risk assessment, controls, information and communication, and monitoring). Many elements of the control environment are "soft" in nature. They may, for example, involve senior management behavior that intrinsically leaves little, if any, audit trail. An example of a soft control that you may have included in your answer to question 1 above is expressed as follows: Senior management fosters a strong corporate ethical climate by what they say and what they do. They lead by example when faced with tough business decisions involving ethical ramifications. Requirements of Part A: 1. Identify the audit procedures you would use to determine whether this control exists and are operating effectively within SHR Corporation. Describe the evidence you might find that would indicate operating effectively (be specific). Keep in mind that you need to build a sufficient body of appropriate evidence to support a valid conclusion