I have posted the question below. I do not think the background or auditing revenues section are important to answering the question, but I provided it in case it may help. The underlined part is the question.

Company Background

You were recently promoted to audit senior at your firm, Greenvale LLP, and one of your primary clients is Soup Stores Inc. Soup Stores(''the company'') is a privately held business headquartered in Maine, and has a fiscal year-end of December 31. The company has been in business for nine years and prides itself on offering creative soups at a reasonable price and that are made with locally sourced ingredients. The most popular soups include sweet potato corn chowder, curried root vegetable and lentil, and maple- roasted butternut squash. Soup Stores typically experiences increased sales during winter months since soup hits the spot on a cold and snowy day. To further encourage sales on days when customers often avoid venturing outside, the company provides a delivery service and guarantees that soup can be delivered to anyone no matter what the weather. The company found this strategy to be particularly successful in 2018 when New England (including Maine) experienced record snowfall during February and March.

Soup Stores sells their soup at several restaurant locations throughout Maine. The company employs three managers that direct the day-to-day operations for a group of stores that are organized by approximate geographic region: northern Maine (Store Type 1), mid-Maine (Store Type 2), and coastal Maine (Store Type 3). Appendix A provides a map of these store locations. Each manager knows their local market well and has the flexibility to advertise and offer promotions with the overall goal of increasing sales year over year. If total sales at the end of the year exceed total sales from the prior year for thatmanager's set of locations (i.e., ''Store Type''), then the manager earns a monetary bonus from the company.

An audit of the company is required to comply with debt covenants related to a large bank loan that the company entered into when it began operations. Specifically, Soup Stores must provide audited annual financial statements to the bank within 90 days of the fiscal year-end. The company must also provide unaudited quarterly financial statements to the bank within 45 days of the end of each quarter. The debt contract includes a financial covenant that requires pre-tax income in each quarter to be greater than zero. If not met, the bank has multiple remedies at its disposal, including calling the loan such that the entirebalance is due immediately, seizing the company's assets that are posted as collateral, or providing awaiver for the violation. Soup Stores'net income for the year ended December 31, 2019 is $468,810, while net income for the prior year ended December 31, 2018 was $825,229.

Auditing Revenues

As part of your new role as audit senior, you will be performing a large portion of the planning and testing of sales for the 2019 audit of Soup Stores. AU-C Section 240.26 states that ''when identifying andassessing the risks of material misstatement due to fraud, the auditor should, based on a presumption that risks of fraud exist in revenue recognition, evaluate which types of revenue, revenue transactions, orassertions give rise to such risks.'' During planning for theaudit, the partner and manager determined that the following three management assertions represent significant risks for revenues:

(1) recorded sales occurred;

(2) sales are accurately recorded; and

(3) sales are recorded in the proper period.

In prior years, the audit approach relied on random sampling to test revenues. However, the partner wanted to develop more focused procedures in the current year to hone in on potentially riskier sales transactions. As a result, the plan is to use analytics to identify unusual trends in the daily sales data with the goal of identifying sales on specific days at specific store locations that should be subjected to substantive detail testing due to heightened risks. The remainder of the population would then be sampled using a random sampling approach.

Based on your experience from prior audits, you know that Soup Stores'daily sales fluctuate with temperature and snow accumulation. To perform your revenue analytics, you request a file from the client that includes daily sales by store location for both 2019 (current year) and 2016 (prior year). You also retrieve daily weather data from the National Oceanic andAtmospheric Administration's (NOAA) website for the weather centers closest to Soup Stores' store locations. Total revenuefor the current year ended December 31, 2019 is $18.8 million, while total revenue for the prior year ended December 31, 2018was $19.1 million. The audit team's workpapers include the following lead sheet for revenue testing, and the total balances foreach year agree to the trial balance and the company's draft financialstatements for 2019.

Soup Stores Inc. Revenue Lead Sheet December 31, 2019

Revenue, 2019 2018

Store Type 1 Revenue, $4,062,390.97 $4,032,383.16

Store Type 2 Revenue, 9,331,175.81 9,558,584.07

Store Type 3 Total Revenue 5,425,421.53 5,546,767.89

Total $18,818,988.31 $19,137,735.12

Visualization Analysis #1:Analysis of Temperature and Sales, by Store Type

• -2018 on the left; 2019 on the right
• -Minimum temperature (in degrees) on the x-axis; Sales (in dollars) on the y-axis
• -Store Type 1 = blue; Store Type 2 = orange; Store Type 3 = red

ili Columns AVG(Tmin) Pages YEAR(DATE (SB d.. Rows AVG(Sales) Store Type 1 Filters Temp/Sales by Store Type N DATE (SB daily sales data) 2016 2015 Marks 4000 80 Automatic T O oooo Color Size Label 3500 Detail Tooltip Shape Store Type 3000 Store Location Date 2500 Avg. Sales 2000 o 1500 1000 500 (8888880 0 10 20 30 40 50 60 70 40 60 70 -20 -10 O 50 -30 -30 -20 -10 O 10 20 30 Avg. Tmin Avg. Tmin