1. Emile Santiago was anxious to start the selection and testing of controls at Dooley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Buzz Dooley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating, and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Buzz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Emile had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.

Emile was concerned about the following issues:

1) Revenue recognition was the trickiest as many of the transactions took place over longer than one year time frames. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.

2) The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Dooley Real Estate Group's profile and the deep pockets of its clientele.

Instructions

a) What are detective and preventive controls?

b) Can Emile use these preventive and detective controls to help him resolve the two issues he is concerned about?

c) Which factors will Emile have to consider when determining the "extent" of tests to be performed?

d) When would Emile perform substantive testing of revenue?