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Prepare a word doc., about 1 page long where you discuss: 1. Fraud risk assessment (describe only 3 risk factors and how might the related accounts and relevant assertions be affected) 2. Completeness and accuracy of data (include only the two numbers you've got from working with the data for (a) total number of valid sales in 2017, and (b) total number of unpaid invoices as of Dec. 31, 2017) 3. Exceptions and potential risks from data visualizations in Tableau 4. Reach conclusions based on YOUR level of Audit Risk (as one of the two levels mentioned in class) and using the audit risk model ( AR=IRCRDR). Specifically: a. Make your assessment of Internal Risk and Control Risk and overall RMM for assertions of Occurrence/Existence, Cutoff, and Accuracy/Valuation regarding Sale Revenues and Accounts Receivable. b. Make a recommendation on DR and the resulting substantive procedures' Nature, Timing, \& Extent. Urgent Medical Device, Inc. (the Company) is a medical device company founded in 2013 in Provo, Utah that specializes in the development and manufacturing of cutting-edge medical devices designed for all types of joint replacement surgeries. In January 2015, the FDA approved Urgent's premier product, a hinged titanium axle designed to provide physicians with more precise placement of joints during joint replacement surgery. In early 2016, approximately one year after the new product's approval, the Company hired a new senior vice president (SVP) of sales to oversee sales, physician training, product delivery, and customer service. The broad set of responsibilities allowed the charismatic SVP to significantly influence the Company's revenue generation. The hiring of the new SVP was also done in large part to help guide the company's development of an important new sales channel: third-party distributors that are each strategically located in close proximity to key hospitals in regions around the country. The move to hire the SVP was in direct response to overwhelming disappointment about the first year's sales volume for the new surgical implant, which was lagging significantly behind expectations. Reports from the field led management to recommend the new sales channel to the board of directors that overwhelmingly approved the new strategy, the execution of which was being led by the new SVP. Execution of strategy To help execute the new strategy, the SVP hired five regional sales managers who would become his trusted cohorts. Together, they set aggressive sales targets for the Company's surgical implants. The sales targets focused on achieving a growth pattern that was characterized by a record high sales volume for each successive quarter in each region. In fact, it is fair to say that the sales targets were intentionally created at almost unreachable levels to remove any question about possible weakness in demand for the Company's new product. The strategy focused on the development of a new sales channel with third-party distributors. Each of the distributors had already established close relationships with the physicians that were actually using the product during surgical procedures. To help pay for the launch of their new product, along with the execution of the new strategy, the Company was also working hard to raise a significant amount of new investment capital to fund the resulting increased operating costs. In order to be successful in attracting the new investment capital, top management made it clear to the SVP how important it was to report strong sales for its premier product, the surgical implant for titanium joints. The SVP, in turn, passed along the same message to the regional sales managers. Management control philosophy The upper management team of Urgent can be described as being aggressive in business practices and often emphasizes speed and efficiency when implementing their decisions. Management rarely hires external consultants because they are of the opinion that consultants are too expensive and often follow a conservative approach. The upper management team meets regularly with its key managers. In general, the upper management team has cooperated with the audit team in order to provide fair and adequate financial reporting, but there have been disagreements in the past. The Company has a strict policy for following all established internal control procedures. Incentive compensation Top management focuses significant attention on achieving short-term performance measures based on the audited financial statements when determining compensation and making promotion decisions. Revenue earned is the most important criterion in performance assessment throughout the organization. As part of the launch of its new surgical implant, a new bonus plan was established to provide additional incentives for the entire organization to focus on this new opportunity, with revenue earned as the key criterion used to determine incentive compensation. Preliminary results Despite the SVP's optimism about sales in 2017, internal reports have indicated that the actual sales volume of the surgical implant was well below budget each quarter. The SVP responded to these reports by repeatedly communicating his disappointment to the regional sales managers. Furthermore, he consistently warned that if the team could not boost sales, the Company would likely not be able to raise additional investment capital and would then be forced to significantly downsize its headcount. Unfortunately, boosting revenue of the new surgical implants was not as simple as merely shipping the product to distributors. The distributors were hesitant to purchase product until the sale to the final customer was finalized as the distributors did not want to be stuck with the inventory on their own balance sheets. Further, the terms of the sales do not include any refund or rebate conditions. In addition, the Company has no intention of changing those terms and accepting any return. Therefore, any sale to distributors are final. By the end of 2017, the Company had signed on a total of 73 distributors to sell its surgical implants in more than 20 different states throughout the United States. Each distributor was independently owned and operated but the company routinely shared best practices among its network. The SVP monitored sales closely from the distributor network through his regional sales managers. In fact, he even maintained a monthly sales report from each of the 73 distributors. The Company invoices customers when the goods are shipped, and invoicing triggers the recording of revenue. The Company does not include freight costs in sales revenue but does offset shipping costs with any freight charged to customers. The following relevant financial data is taken from the Company's unaudited trial balance, which was used to produce the unaudited financial statements: Audit approach Your audit team is currently in the midst of year-end testing in the revenue and accounts receivable cycle for the audit of the calendar year 2017 financial statements. Your testing will focus on the existence/occurrence, cutoff, and accuracy assertions for sales revenue, as well as the existence and valuation assertions for accounts receivable. As relationships with third-party distributors generally require significant contract analysis to ensure the appropriateness of when revenue is recognized, the audit team expects more hours to be spent this year testing revenue and accounts receivable as compared to the prior year. In addition to the procedures you will perform, the audit team will also confirm accounts receivable and perform other procedures according to the audit plan. The audit team has assessed the risk of material misstatement (RMM) for each relevant assertion in order to determine the nature, timing, and extent of the procedures to be performed at Urgent. Other members of the audit team have already completed a walk-through of the revenue and accounts receivable processes, identified "what could go wrongs" within the process, and identified the controls that have been placed in operation to mitigate the risks. Based on the work performed, the team decided to test the operating effectiveness of certain key controls during interim testing. The results are found below. Tests of controls - Revenue and accounts receivable cycle Interim There are four key application controls tested at interim. Prior to testing the application controls, the information technology (IT) auditors tested the general controls (GITCs) over program changes, access to programs, and computer operations that are relevant to the revenue and accounts receivable cycle. The GITCs were found to be effective and can be relied upon to support the effective operation of application controls. In addition, the IT auditors tested the system to make sure that proper segregation of duties occurred throughout the period and that controls over data input, data integrity, and the completion and accuracy of data used in the four application controls were operating effectively. No exceptions were noted in the testing performed by the IT auditors, and the team decided to test the four key application controls. The first control is an automated three-way sales match. The control matches the details from 1) an approved sales order; 2) relevant shipping documents; and 3) the sales invoice before revenue is recorded. The control has been designed to support the existence/occurrence assertion for revenue. A test of the control's operating effectiveness was conducted at the interim. No exceptions were noted. The second control requires the credit department at Urgent to conduct a detailed credit check for all new customers, including the new distributors. To do so, the credit department obtains information from the customer that allows for a comprehensive review of the financial condition of the new customer and an assessment of the customer's capacity to pay outstanding invoices. The control culminates with an approval of the new customer and the establishment of a credit limit by the credit department manager based on the information reviewed. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. The third control is an automated sales authorization control. When a sales order is entered into the system, the amount of the sale is added to the existing accounts receivable balance for that customer. The sum is then compared to the customer's credit limit. If the sum is greater than the credit limit, the sale is not approved. If the sum is less than the credit limit, the sale is approved. A credit manager notes the approval and authorizes shipment by electronically entering their initials into the system, which gets posted into the sales order database. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. The fourth control is a monthly review of the adequacy of the allowance for doubtful accounts, completed by the controller. On a monthly basis, the controller reviews the aging of accounts receivable report produced by the company's information system. During the review, the controller identifies for follow-up all balances greater than 90 days past due for consideration in the allowance calculation. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. Roll-forward period By the end of the third quarter of 2017 , sales revenue for the company's premier surgical implant was still lagging far behind expectations. To help ensure that Urgent delivered impressive fourth quarter revenue numbers, the entire sales team, led by the SVP and the regional sales managers, began to exert pressure on a number of distributors in an attempt to improve sales in 2017 . This effort seemed to be paying off as the sales team successfully persuaded more than a dozen distributors to purchase product in advance of final customer demand. These circumstances presented a problem for the Company, because the distributors began to ask for concessions from Urgent Medical. For example, in order to persuade the distributors, the Company agreed to hold the inventory in their own warehouse. The SVP's actions led to a dramatic increase in revenue for the fourth quarter of 2017. In fact, sales increased year-over-year by 214 percent for the fourth quarter alone. The upward trajectory of sales revenue helped the Company raise the much-needed investment capital as Urgent issued more than 10 million shares of common stock for $40 million in early 2018. Most importantly, roll-forward testing procedures were completed for each of the four key application controls. No exceptions were noted in the roll-forward procedures. Thus, the audit team concluded that the controls were operating effectively throughout the year. Substantive testing - Revenue and accounts receivable cycle - Final As a result of the tests of controls, the audit team assessed the control risk as low for the existence/occurrence, cutoff, and the accuracy assertions for revenue and the valuation assertion for accounts receivable. Since the recognition of revenue is a presumed fraud risk, along with the significant risk of sales cutoff related to the launch of the new surgical implant, the audit team concluded that fraud risk related to the timing of revenue recognition over period-end is high. Overall, based on the control risk assessment as low and the inherent risk assessment of high, the overall assessment of RMM is moderate for each of the assertions. In response to the RMM assessment, the audit team has asked that you complete a number of substantive testing procedures. In addition, since your manager is trying to improve the efficiency and effectiveness of substantive testing, you have been asked to use two technological tools, IDEA and Tableau, to facilitate identification of potential concerns related to the substantive testing for the revenue and accounts receivable cycle. Urgent has provide you with the following databases to facilitate your testing. 1. According to the professional auditing standards, an audit team should ordinarily presume that revenue recognition is a fraud risk. Complete the following steps. a. Based on your understanding of fraud risk assessment and the case information, identify at least three specific fraud risk factors related to Urgent. Classify these risks in terms of What Can Go Wrong (WCGW) with each of the significant accounts and relevant assertions identified for Urgent's revenue and accounts receivable cycle. b. What do you believe is the most significant risk related to the revenue account for Urgent? c. What special audit considerations would you propose in response to the significant risk you identified above? In your response, consider how you would change your approach to the nature, timing, and extent of evidence in response to the identified risk. Financial Reporting A.2 The following are examples of risk factors relating to misstatements arising from fraudulent financial reporting. Incentives/Pressures a. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by): - High degree of competition or market saturation, accompanied by declining margins - High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates - Significant declines in customer demand and increasing business failures in either the industry or overall economy - Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent - Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth - Rapid growth or unusual profitability, especially compared to that of other companies in the same industry - New accounting, statutory, or regulatory requirements b. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following: - Profitability or trend level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages - Need to obtain additional debt or equity financing to stay competitive-including financing of major research and development or capital expenditures - Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements - Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business combinations or contract awards c. Information available indicates that management or the board of directors' personal financial situation is threatened by the entity's financial performance arising from the following: - Significant financial interests in the entity - Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow 1 - Personal guarantees of debts of the entity d. There is excessive pressure on management or operating personnel to meet financial targets set up by the board of directors or management, including sales or profitability incentive goals. Opportunities a. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following: - Related party transactions that are also significant unusual transactions (e.g., a significant related party transaction outside the normal course of business) - Significant transactions with related parties whose financial statements are not audited or are audited by another firm - A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or nonarm's-length transactions - Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate - Significant or highly complex transactions or significant unusual transactions, especially those close to period end, that pose difficult "substance-over-form" questions - Significant operations located or conducted across international borders in jurisdictions where differing business environments and cultures exist - Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no clear business justification - Contractual arrangements lacking a business purpose b. There is ineffective monitoring of management as a result of the following: - Domination of management by a single person or small group (in a nonowner-managed business) without compensating controls - Ineffective board of directors or audit committee oversight over the financial reporting process and internal control - The exertion of dominant influence by or over a related party c. There is a complex or unstable organizational structure, as evidenced by the following: - Difficulty in determining the organization or individuals that have controlling interest in the entity - Overly complex organizational structure involving unusual legal entities or managerial lines of authority - High turnover of senior management, counsel, or board members d. Internal control components are deficient as a result of the following: - Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required) - High turnover rates or employment of ineffective accounting, internal audit, or information technology staff - Ineffective accounting and information systems, including situations involving reportable conditions Attitudes/Rationalizations Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor: - Ineffective communication, implementation, support, or enforcement of the entity's values or ethical standards by management or the communication of inappropriate values or ethical standards - Nonfinancial management's excessive participation in or preoccupation with the selection of accounting principles or the determination of significant estimates - Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or board members alleging fraud or violations of laws and regulations - Excessive interest by management in maintaining or increasing the entity's stock price or earnings trend - A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts - Management failing to correct known reportable conditions on a timely basis - An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasons - Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality - The relationship between management and the current or predecessor auditor is strained, as exhibited by the following: - Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters - Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of the auditor's report - Formal or informal restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with the board of directors or audit committee - Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor's work or the selection or continuance of personnel assigned to or consulted on the audit engagement Prepare a word doc., about 1 page long where you discuss: 1. Fraud risk assessment (describe only 3 risk factors and how might the related accounts and relevant assertions be affected) 2. Completeness and accuracy of data (include only the two numbers you've got from working with the data for (a) total number of valid sales in 2017, and (b) total number of unpaid invoices as of Dec. 31, 2017) 3. Exceptions and potential risks from data visualizations in Tableau 4. Reach conclusions based on YOUR level of Audit Risk (as one of the two levels mentioned in class) and using the audit risk model ( AR=IRCRDR). Specifically: a. Make your assessment of Internal Risk and Control Risk and overall RMM for assertions of Occurrence/Existence, Cutoff, and Accuracy/Valuation regarding Sale Revenues and Accounts Receivable. b. Make a recommendation on DR and the resulting substantive procedures' Nature, Timing, \& Extent. Urgent Medical Device, Inc. (the Company) is a medical device company founded in 2013 in Provo, Utah that specializes in the development and manufacturing of cutting-edge medical devices designed for all types of joint replacement surgeries. In January 2015, the FDA approved Urgent's premier product, a hinged titanium axle designed to provide physicians with more precise placement of joints during joint replacement surgery. In early 2016, approximately one year after the new product's approval, the Company hired a new senior vice president (SVP) of sales to oversee sales, physician training, product delivery, and customer service. The broad set of responsibilities allowed the charismatic SVP to significantly influence the Company's revenue generation. The hiring of the new SVP was also done in large part to help guide the company's development of an important new sales channel: third-party distributors that are each strategically located in close proximity to key hospitals in regions around the country. The move to hire the SVP was in direct response to overwhelming disappointment about the first year's sales volume for the new surgical implant, which was lagging significantly behind expectations. Reports from the field led management to recommend the new sales channel to the board of directors that overwhelmingly approved the new strategy, the execution of which was being led by the new SVP. Execution of strategy To help execute the new strategy, the SVP hired five regional sales managers who would become his trusted cohorts. Together, they set aggressive sales targets for the Company's surgical implants. The sales targets focused on achieving a growth pattern that was characterized by a record high sales volume for each successive quarter in each region. In fact, it is fair to say that the sales targets were intentionally created at almost unreachable levels to remove any question about possible weakness in demand for the Company's new product. The strategy focused on the development of a new sales channel with third-party distributors. Each of the distributors had already established close relationships with the physicians that were actually using the product during surgical procedures. To help pay for the launch of their new product, along with the execution of the new strategy, the Company was also working hard to raise a significant amount of new investment capital to fund the resulting increased operating costs. In order to be successful in attracting the new investment capital, top management made it clear to the SVP how important it was to report strong sales for its premier product, the surgical implant for titanium joints. The SVP, in turn, passed along the same message to the regional sales managers. Management control philosophy The upper management team of Urgent can be described as being aggressive in business practices and often emphasizes speed and efficiency when implementing their decisions. Management rarely hires external consultants because they are of the opinion that consultants are too expensive and often follow a conservative approach. The upper management team meets regularly with its key managers. In general, the upper management team has cooperated with the audit team in order to provide fair and adequate financial reporting, but there have been disagreements in the past. The Company has a strict policy for following all established internal control procedures. Incentive compensation Top management focuses significant attention on achieving short-term performance measures based on the audited financial statements when determining compensation and making promotion decisions. Revenue earned is the most important criterion in performance assessment throughout the organization. As part of the launch of its new surgical implant, a new bonus plan was established to provide additional incentives for the entire organization to focus on this new opportunity, with revenue earned as the key criterion used to determine incentive compensation. Preliminary results Despite the SVP's optimism about sales in 2017, internal reports have indicated that the actual sales volume of the surgical implant was well below budget each quarter. The SVP responded to these reports by repeatedly communicating his disappointment to the regional sales managers. Furthermore, he consistently warned that if the team could not boost sales, the Company would likely not be able to raise additional investment capital and would then be forced to significantly downsize its headcount. Unfortunately, boosting revenue of the new surgical implants was not as simple as merely shipping the product to distributors. The distributors were hesitant to purchase product until the sale to the final customer was finalized as the distributors did not want to be stuck with the inventory on their own balance sheets. Further, the terms of the sales do not include any refund or rebate conditions. In addition, the Company has no intention of changing those terms and accepting any return. Therefore, any sale to distributors are final. By the end of 2017, the Company had signed on a total of 73 distributors to sell its surgical implants in more than 20 different states throughout the United States. Each distributor was independently owned and operated but the company routinely shared best practices among its network. The SVP monitored sales closely from the distributor network through his regional sales managers. In fact, he even maintained a monthly sales report from each of the 73 distributors. The Company invoices customers when the goods are shipped, and invoicing triggers the recording of revenue. The Company does not include freight costs in sales revenue but does offset shipping costs with any freight charged to customers. The following relevant financial data is taken from the Company's unaudited trial balance, which was used to produce the unaudited financial statements: Audit approach Your audit team is currently in the midst of year-end testing in the revenue and accounts receivable cycle for the audit of the calendar year 2017 financial statements. Your testing will focus on the existence/occurrence, cutoff, and accuracy assertions for sales revenue, as well as the existence and valuation assertions for accounts receivable. As relationships with third-party distributors generally require significant contract analysis to ensure the appropriateness of when revenue is recognized, the audit team expects more hours to be spent this year testing revenue and accounts receivable as compared to the prior year. In addition to the procedures you will perform, the audit team will also confirm accounts receivable and perform other procedures according to the audit plan. The audit team has assessed the risk of material misstatement (RMM) for each relevant assertion in order to determine the nature, timing, and extent of the procedures to be performed at Urgent. Other members of the audit team have already completed a walk-through of the revenue and accounts receivable processes, identified "what could go wrongs" within the process, and identified the controls that have been placed in operation to mitigate the risks. Based on the work performed, the team decided to test the operating effectiveness of certain key controls during interim testing. The results are found below. Tests of controls - Revenue and accounts receivable cycle Interim There are four key application controls tested at interim. Prior to testing the application controls, the information technology (IT) auditors tested the general controls (GITCs) over program changes, access to programs, and computer operations that are relevant to the revenue and accounts receivable cycle. The GITCs were found to be effective and can be relied upon to support the effective operation of application controls. In addition, the IT auditors tested the system to make sure that proper segregation of duties occurred throughout the period and that controls over data input, data integrity, and the completion and accuracy of data used in the four application controls were operating effectively. No exceptions were noted in the testing performed by the IT auditors, and the team decided to test the four key application controls. The first control is an automated three-way sales match. The control matches the details from 1) an approved sales order; 2) relevant shipping documents; and 3) the sales invoice before revenue is recorded. The control has been designed to support the existence/occurrence assertion for revenue. A test of the control's operating effectiveness was conducted at the interim. No exceptions were noted. The second control requires the credit department at Urgent to conduct a detailed credit check for all new customers, including the new distributors. To do so, the credit department obtains information from the customer that allows for a comprehensive review of the financial condition of the new customer and an assessment of the customer's capacity to pay outstanding invoices. The control culminates with an approval of the new customer and the establishment of a credit limit by the credit department manager based on the information reviewed. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. The third control is an automated sales authorization control. When a sales order is entered into the system, the amount of the sale is added to the existing accounts receivable balance for that customer. The sum is then compared to the customer's credit limit. If the sum is greater than the credit limit, the sale is not approved. If the sum is less than the credit limit, the sale is approved. A credit manager notes the approval and authorizes shipment by electronically entering their initials into the system, which gets posted into the sales order database. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. The fourth control is a monthly review of the adequacy of the allowance for doubtful accounts, completed by the controller. On a monthly basis, the controller reviews the aging of accounts receivable report produced by the company's information system. During the review, the controller identifies for follow-up all balances greater than 90 days past due for consideration in the allowance calculation. A test of the control's operating effectiveness was conducted at interim. No exceptions were noted. Roll-forward period By the end of the third quarter of 2017 , sales revenue for the company's premier surgical implant was still lagging far behind expectations. To help ensure that Urgent delivered impressive fourth quarter revenue numbers, the entire sales team, led by the SVP and the regional sales managers, began to exert pressure on a number of distributors in an attempt to improve sales in 2017 . This effort seemed to be paying off as the sales team successfully persuaded more than a dozen distributors to purchase product in advance of final customer demand. These circumstances presented a problem for the Company, because the distributors began to ask for concessions from Urgent Medical. For example, in order to persuade the distributors, the Company agreed to hold the inventory in their own warehouse. The SVP's actions led to a dramatic increase in revenue for the fourth quarter of 2017. In fact, sales increased year-over-year by 214 percent for the fourth quarter alone. The upward trajectory of sales revenue helped the Company raise the much-needed investment capital as Urgent issued more than 10 million shares of common stock for $40 million in early 2018. Most importantly, roll-forward testing procedures were completed for each of the four key application controls. No exceptions were noted in the roll-forward procedures. Thus, the audit team concluded that the controls were operating effectively throughout the year. Substantive testing - Revenue and accounts receivable cycle - Final As a result of the tests of controls, the audit team assessed the control risk as low for the existence/occurrence, cutoff, and the accuracy assertions for revenue and the valuation assertion for accounts receivable. Since the recognition of revenue is a presumed fraud risk, along with the significant risk of sales cutoff related to the launch of the new surgical implant, the audit team concluded that fraud risk related to the timing of revenue recognition over period-end is high. Overall, based on the control risk assessment as low and the inherent risk assessment of high, the overall assessment of RMM is moderate for each of the assertions. In response to the RMM assessment, the audit team has asked that you complete a number of substantive testing procedures. In addition, since your manager is trying to improve the efficiency and effectiveness of substantive testing, you have been asked to use two technological tools, IDEA and Tableau, to facilitate identification of potential concerns related to the substantive testing for the revenue and accounts receivable cycle. Urgent has provide you with the following databases to facilitate your testing. 1. According to the professional auditing standards, an audit team should ordinarily presume that revenue recognition is a fraud risk. Complete the following steps. a. Based on your understanding of fraud risk assessment and the case information, identify at least three specific fraud risk factors related to Urgent. Classify these risks in terms of What Can Go Wrong (WCGW) with each of the significant accounts and relevant assertions identified for Urgent's revenue and accounts receivable cycle. b. What do you believe is the most significant risk related to the revenue account for Urgent? c. What special audit considerations would you propose in response to the significant risk you identified above? In your response, consider how you would change your approach to the nature, timing, and extent of evidence in response to the identified risk. Financial Reporting A.2 The following are examples of risk factors relating to misstatements arising from fraudulent financial reporting. Incentives/Pressures a. Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as indicated by): - High degree of competition or market saturation, accompanied by declining margins - High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates - Significant declines in customer demand and increasing business failures in either the industry or overall economy - Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent - Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth - Rapid growth or unusual profitability, especially compared to that of other companies in the same industry - New accounting, statutory, or regulatory requirements b. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following: - Profitability or trend level expectations of investment analysts, institutional investors, significant creditors, or other external parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly optimistic press releases or annual report messages - Need to obtain additional debt or equity financing to stay competitive-including financing of major research and development or capital expenditures - Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements - Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business combinations or contract awards c. Information available indicates that management or the board of directors' personal financial situation is threatened by the entity's financial performance arising from the following: - Significant financial interests in the entity - Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow 1 - Personal guarantees of debts of the entity d. There is excessive pressure on management or operating personnel to meet financial targets set up by the board of directors or management, including sales or profitability incentive goals. Opportunities a. The nature of the industry or the entity's operations provides opportunities to engage in fraudulent financial reporting that can arise from the following: - Related party transactions that are also significant unusual transactions (e.g., a significant related party transaction outside the normal course of business) - Significant transactions with related parties whose financial statements are not audited or are audited by another firm - A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or conditions to suppliers or customers that may result in inappropriate or nonarm's-length transactions - Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate - Significant or highly complex transactions or significant unusual transactions, especially those close to period end, that pose difficult "substance-over-form" questions - Significant operations located or conducted across international borders in jurisdictions where differing business environments and cultures exist - Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no clear business justification - Contractual arrangements lacking a business purpose b. There is ineffective monitoring of management as a result of the following: - Domination of management by a single person or small group (in a nonowner-managed business) without compensating controls - Ineffective board of directors or audit committee oversight over the financial reporting process and internal control - The exertion of dominant influence by or over a related party c. There is a complex or unstable organizational structure, as evidenced by the following: - Difficulty in determining the organization or individuals that have controlling interest in the entity - Overly complex organizational structure involving unusual legal entities or managerial lines of authority - High turnover of senior management, counsel, or board members d. Internal control components are deficient as a result of the following: - Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required) - High turnover rates or employment of ineffective accounting, internal audit, or information technology staff - Ineffective accounting and information systems, including situations involving reportable conditions Attitudes/Rationalizations Risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor: - Ineffective communication, implementation, support, or enforcement of the entity's values or ethical standards by management or the communication of inappropriate values or ethical standards - Nonfinancial management's excessive participation in or preoccupation with the selection of accounting principles or the determination of significant estimates - Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or board members alleging fraud or violations of laws and regulations - Excessive interest by management in maintaining or increasing the entity's stock price or earnings trend - A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts - Management failing to correct known reportable conditions on a timely basis - An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasons - Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality - The relationship between management and the current or predecessor auditor is strained, as exhibited by the following: - Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters - Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of the auditor's report - Formal or informal restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with the board of directors or audit committee - Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor's work or the selection or continuance of personnel assigned to or consulted on the audit engagement