INSTRUCTIONAL OBJECTIVES
To help students gain an understanding of the steps involved in the scoping process for the audit of internal control over financial reporting. To provide an opportunity for students to determine the significance of accounts and locations based on both quantitative and qualitative metrics in order to plan the nature and extent of the testing of controls. To help students understand the role of testing coverage in terms of significant accounts and locations and also in regards to the overall financial statement picture.
To allow students to understand and apply an evaluation methodology to determine the likelihood and magnitude of control deficiencies. To help students appreciate the judgment involved in evaluating internal control deficiencies.
KEY FACTS
Sarbox Scooter, Inc. is a publicly traded manufacturing firm specializing in motorized scooters and G.P. (Grand Prix) pocket bikes. The company was founded in 1997 and is headquartered in Basking Bridge, New Jersey. Sarbox Scooters business units are segmented by geographical region into the U.S., Mexico, and Europe.
The U.S. region is further sub-divided into five business units: Northeast, Southeast, Central, Southwest, and Northwest. Sarbox Scooters management is striving to increase brand share, by 1% each year for the next five years, to 30% of the market. However, increases in brand share will be not be easy as competition in the industry is very intense. The Finance Director of the companys Mexican division recently resigned following deep scrutiny from Sarbox Scooters internal audit team of his control, monitoring, and reporting practices. a The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Sarbox is a fictitious company.
All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental. Copyright 2006 by Prentice-Hall, Inc. Beasley / Buckless / Glover / Prawitt Sarbox Scooters customer base consists primarily of dealerships both domestically and internationally. Sales to the dealerships account for approximately 90% of Sarbox Scooters annual sales. The Company also sells bulk orders directly to rental agencies and vacation resorts, which account for the remaining 10% of sales. The company has continued to progress in the areas of corporate governance and social responsibility by strengthening its Board of Directors and its internal audit function.
USE OF CASE
This case is designed primarily to expose students to the basic scoping and evaluation judgments that are involved in the planning stage of the audit of internal control over financial reporting and in the evaluation of internal control deficiencies. It contains two parts that can be assigned independently according the to the instructors discretion. Specifically, in Part A students are introduced to the quantitative and qualitative factors that must be addressed when deciding which locations and accounts will be tested and also when determining the extent, nature, and timing of the testing.
In addition, students are required to consider the coverage of accounts and locations necessary to achieve a high level of assurance. In Part B, students are introduced to the considerations and steps used by auditing firms to evaluate the likelihood and magnitude of possible misstatement for the various levels of internal control deficiency.
The firm policy provided in the case is designed to present the major issues involved in the scoping and evaluation judgments and does not necessarily address every possible factor that might be considered. When this case was published, the PCAOB and the auditing profession were continuing to refine the professional guidance regarding the audit of internal control over financial reporting and certain changes may take place in the future to alter the emphasis of certain aspects of this case. If this case is used for an in-class discussion, we recommend that students read the case as an out-ofclass reading assignment prior to the in-class discussion.
Roundtable activities are a useful cooperative learning technique for in-class discussion. To implement the Roundtable activity, divide students into small groups. Have each group discuss and record their answers, important ideas, and issues for each question assigned. Once all students have had an opportunity to state their ideas and arrive at a group consensus, the instructor can randomly call on individual students to share their groups answers with the class. The class time allocated to the group discussion can be shortened by assigning groups responsibility for different case questions.
Randomly calling on individual students to share their groups answers with the class helps to ensure that all students take responsibility for learning the material. If the case is used as an out-of-class assignment, we recommend discussing the case requirements with students prior to their completing the assignment. While most of the material needed to complete the case is included in the firm policy, students should have the necessary background in basic auditing concepts and theory in order to fully understand the process that is being demonstrated. Instructors may also want to include information regarding the events leading up to the new auditing standards and any changes or guidance that may have been given to the profession that is not included in this case.
SUGGESTED SOLUTION PART
Act of 2002 requires management to assess and evaluate the effectiveness of their internal controls. Management of Sarbox has decided to consider all accounts reported in the financial statements as significant. The PCAOBs AS2 requires the auditor to arrive at their own conclusion about which accounts are significant as part of evaluating managements assessment.
Referring to the following case materials describing Delmoss Watergrants policy on identifying significant accounts and Sarbox Scooter Inc.s consolidated balance sheet and income statement information, identify Sarboxs significant accounts. In your response, include the planning materiality threshold you applied (to determine materiality you may refer to your textbook or footnote 1 in Delmoss Watergrants policy on identifying significant accounts).
If an account is considered significant for qualitative, but not quantitative reasons, please include the qualitative factors you considered. Similarly, if an account is not considered significant, even though it is quantitatively over the planning materiality threshold, please include the qualitative factors you considered.
