Highland Brick Pavers Inc. is a public company in the United States that files quarterly and

annual reports with the SEC. Highland has five manufacturing facilities in Michigan and

produces and provides brick pavers and stepping stones to customers throughout the Midwest via

rail car and ground transportation. Highland sells brick pavers and stepping stones to customers

under freight on board (FOB) shipping point terms. Therefore, revenue is recorded when goods

are shipped from the respective warehouse.

Highland currently uses a sophisticated warehouse management system, which allows the

Company to (1) record sales upon shipment of goods out of the warehouse, (2) automatically

price brick paver and stepping stone sales on the baasis of standard pricing tables, and (3)

generate multiple reports for the evaluation of Highlands operations.

Materiality was determined to be $5 million. In planning the current years audit, the

engagement team obtained an understanding of the internal controls related to revenue.

This understanding was done through the engagement teams 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 roll-forward period.

2. For each of the three revenue risks identified by the engagement team, address the

following:

a. Was the engagement teams 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 teams assessment of the risk associated with each control appropriate?

c. Was the teams interim and roll-forward planned procedures to test the operating effectiveness

of each control appropriate considering the risk associated with the control?