Waste Management is an $18 billion company that picks up solid waste and operates landfills, recycling centers, and electrical-generation facilities. It produces electricity from landfill by-products that serves about 1 million homes a year. It operates solely in North America and is organized as follows.
The company is headquartered in Houston, Texas, and is organized to serve five major regions across the United States and Canada (East, North, South, West, and Canada). The regions are further subdivided into market areas, such as New York, Philadelphia, and Eastern Ohio. Within each market area are the business units, e.g., a landfill, a waste transfer station, a waste hauling division, and a recycling center. Much of the accounting takes place at the businessunit level. The company operates about 300 landfill sites, 160 recycling centers, 400 solid-waste sites, and about 1,000 waste-hauling units. Thus, the company has approximately 2,000 separate business units.
Some of the company's applications operate at the corporate level (e.g., purchasing and accounts payable) and some at the market-area level (e.g., financial consolidation of units, development of monitoring reports, and payroll processing). The remainder of the activities, particularly revenue processes, takes place at the business-unit level.
Principal revenue recording activities include the following:
● Billing governmental entities for contract prices for hauling solid waste. Billing is based on the target number of households but increases if the actual number of houses exceeds the set limit, and vice versa.
● Billing individuals for special-request pickups, e.g., disposing of appliances.
● Selling recycled products to the secondary market.
● Collecting cash for non-Waste Management haulers that show up at a landfill. This is done through weighing the full trucks and collecting cash from the hauler for the amount weighed.
At this point, Waste Management has only begun installing integrated weighing and billing scales at the landfills. For most of the landfills, a scale operator weighs the truck, calculates the amount of solid waste received, and charges the hauler (or consumer) an amount based on authorized landfill policies. The operator collects the cash, and later, when time permits, enters all the data into the revenue recognition and cash accounting system kept on the computer. All decisions on hiring new workers take place at the business-unit level even though payroll processing takes place at the market-area level.
Required
a. Identify the control procedures that Waste Management should have in place for revenue processing and revenue recognition. Use the framework of internal control objectives for transaction processing to assist in the identification of needed controls. Also consider the risks associated with the processing, i.e., what things could go wrong with someone operating the weighing scales, collecting cash, and entering the data into the computer for revenue recognition purposes.
b. Identify two or three monitoring controls or exception reports that management might have in place to assure that all solid waste accepted at a transfer station (to later be trucked to a landfill) or at a landfill is recorded.
c. Identify the control procedures the company should have in place to assure that the internal control objectives for payroll processing are met.
d. Management has documented the controls and needs to develop tests to determine that the controls are operating effectively. For all the controls identified in part (a), indicate a test that would determine the effectiveness of the controls in operation.
e. Consider revenue recognition. Develop a comprehensive approach that would guide the external auditor in determining how many controls need to be tested, and at what level they need to be tested, for each of the three processes. Consider the amount of testing that must take place at the corporate level, the market-area level, and the business-unit level.