ZOU Fencing

What are the key considerations when evaluating the design and testing of 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 operating during the roll-forward period.

The designing of the test controls considers the interests of the financial statement audits and the eventual implication to the internal control. Implementing a test control would imply both models remain hinged to a simultaneous implementation prospect. On expectation, the Company’s interest would involve ensuring the developed test controls manifest an inclination to protect and mitigate potential errors and possible fraud attributes. ZOU Fencing places a significant interest in the accuracy of its fiscal attributes, such as sales, due to the embraced bookkeeping model. Arguably, introducing revenue or inventory misstatement would suggest a dire effect on the firm’s fiscal position.

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The operations of the auditor involve appreciating the potential blend of inputs needed to attain a reliable impression of the firm’s fiscal position. Ideal auditing involves making numerous inquiries from the employees while recording the registered findings. Also, auditors may opt to make observations regarding the Company’s operations and the subsequent consideration of the appropriateness of the adopted techniques (Ardelean, 2015). Other attributes include the verification of the appropriateness of the adopted accounting model, with aspects such as the measure of effectiveness in capturing the business position playing a key role in the quantification of the eventual decision by the auditor.

The interests in the element of efficiency in the description of the adopted controls involve evaluating the impression of the firm’s fiscal position. In the case of ZOU Fencing, the interest in efficient controls would allow the confrontation of the potential concerns regarding the registered performances (Brean & Kobrak, 2016). Integrating the interests of the auditors while ensuring the adopted models meet the expectations of efficiency allows the eventual appreciation of the desired position of financial obligation.

Roll forward

The impression of roll forward involves appreciating the input of the previous financial position in defining the current fiscal. Reflecting on the performance of the previous accounting period allows the introduction of a sense of continuity in bookkeeping; integration of the existing accounting data allows the reflection of the achieved performance and eventual growth in operations and revenue generation. However, roll forward needs to appreciate the implication of continuity in describing the expected outcomes. There is possible interest in describing the impact of the potential input of the roll forward in promoting effective, efficient controls.

The interest in controls reflects the business’s expectations and the suggested revenue generation projections. Encountering potential increases in revenue generation implies the future need to evaluate the role of the adopted control systems further (Tang et al., 2017). Other interests in defining the expectation of the auditor’s report involve the evidence gathered in support of the fiscal records. Ensuring effective implementation of the dynamic controls implies that the auditor’s report’s potential input remains essential in ensuring a reliable fiscal position for ZOU Fencing.

Was the engagement team’s 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)?

The assessment of the dynamic controls pointed to the potential improvement of the nature of gee-rated information while reflecting on the expectations of ZOU Fencing. Among the identified attributes include the automation of the sales and invoice reports and the introduction of automated error checks and controls. Both measures aim at ensuring the gathered outcome captures the ambitions of the business about promoting credibility and transparency in the maintenance of financial books.

Two control models manifested from the assessment process. They include the input at the transactional level and the integration of continuity through roll forwarding. Also, the lack of potential discrepancies when describing the expectations of financial records from previous years assists in designing the expectations of the venture (Morin, 2016). In either case, the decision’s impact on the adopted design controls assists in illustrating the eventual sense of appropriateness in the adopted solution.

Was the engagement team’s assessment of the risk associated with each control appropriate?

The ideal procedure to promote interim procedure would involve examining the validity of the inventory through observations and sampling of the impressions shared by the targeted clients. Clients would offer a better insight into the expectations shared regarding the validity of the inventory, leading to the development of a better insight into the expected performance outcomes. Other measures aiming at capturing the clients’ impression would involve examining the feedback from the customer service managers as considering the examination of the shipped products before their dispatch. Other concerns would involve re-examining the test controls focusing on operating systems to ensure a sense of reliability in their operations (Tang et al., 2017). There exists an additional interest in promoting a sense of continuity through roll forwarding, where the authenticity of the previous sales gets integrated into the performances of the current financial position. Besides, the prospect of sales having fictitious sales from previous records remains a hampering concern in the development of reliable records for the current fiscal season.

Was the team’s interim and roll-forward planned procedures to test the operating effectiveness of each control appropriate considering the risk associated with the control?

The evaluation of the roll forwarding process would involve an investigation from the technical department regarding the efficiency of the adopted technology and the reflection of the implication of the results on the operations of ZOU Fencing. However, such tests need to align the findings of the test controls engaged with the systems at ZOU Fencing. A further examination of the process would involve the appreciation of the potential interests that define the expectation of the shipping process in line with the inventory records. Ensuring the attainment of a sense of harmony in the shipped inventory would allow the subsequent address of the risks of possible discrepancies.

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References

Ardelean, A. (2015). Perceptions on Audit Quality Based on the Ethical Behaviour of Auditors. Audit Financiar, 13(123).

Brean, D. J., & Kobrak, C. (2016). Corporate Governance in the Twenty-First Century. In Corporate, Public and Global Governance (pp. 83-104). Routledge.

Morin, D. (2016). Democratic accountability during performance audits under pressure: a recipe for institutional hypocrisy? Financial Accountability & Management, 32(1), 104-124.

Tang, F., Ruan, L., & Yang, L. (2017). Does regulator designation of auditors improve independence? The moderating effects of litigation risk. Managerial Auditing Journal, 32(1), 2-18.

Tanyi, P. N., & Roland, K. C. (2017). Market reaction to auditor ratification vote tally. Accounting Horizons, 31(1), 141-157.

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Question

ZOU’s Fencing Controls

ZOU Fencing Inc. (“ZOU Fencing” or the “Company”) is a public company in the United States that files quarterly and annual reports with the SEC. ZOU Fencing has five manufacturing facilities in Missouri. It produces and provides chain-link fencing to customers throughout the Midwest (specifically, Wisconsin, Indiana, Michigan, Ohio, Illinois, and Iowa) via rail car.

ZOU Fencing sells chain-link fencing to customers under freight on board (FOB) shipping point terms. Therefore, revenue is recorded when goods are shipped from the respective warehouse. ZOU Fencing currently uses a sophisticated warehouse management system (the Warehouse K-Series System), which allows the Company to

record sales upon shipment of goods out of the warehouse, (2) automatically price fence sales based on standard pricing tables, and (3) generate multiple reports for the evaluation of ZOU Fencing’s
ZOU Fencing

Engagement Team Note

Materiality was determined to be $5 million. In planning the current year’s audit, the engagement team obtained an understanding of the internal controls related to revenue. This understanding was done through the engagement team’s 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 concluded that there had 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 to test 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:

What are the key considerations when evaluating the design and testing of 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 operating during the roll-forward period.
For each of the three revenue risks identified by the engagement team, address the following:

Was the engagement team’s 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)?
Was the engagement team’s assessment of the risk associated with each control appropriate?
Were the team’s interim and rolled Wereward procedures to test each control procedure to test each control’s operating effectiveness with the control?