Share
Explore BrainMass

DOMO Electronics internal control -- red flags?

You have been assigned to work on your firm's largest client, DOMO Electronics, a publicly traded company with operations in North and South America, Europe, and Asia. In your process of evaluating ICFR, your audit plan instructs you to evaluate DOMO Electronics' Control Environment, a major component of COSO's IC Framework. In your evaluation you have found the following:

DOMO Electronics has a written code of conduct that it requires all employees to
understand and follow. It has never had any ethical conflicts reported and therefore
does not have a formal mechanism for top management or the Board of
Directors to receive confidential information from employees lower in the organizational
hierarchy.

All of DOMO's staff are required to complete a certain amount of continuing education
credits every year. From what you can see, they seem to be well trained at
their tasks, or at least they stay very busy.

The Board of Directors and audit committee consist of several financially savvy
individuals who take their jobs very seriously. Furthermore, all members of its audit
committee are top managers in the company, so they are intimately familiar with
the company's operations.

Management stresses an ethical environment. In their weekly meetings each team
reports its operating results, and the different teams quiz each other and respond
with solutions and challenges. In the weekly meetings, management encourages the
teams to act ethically while achieving their mandatory year-over-year, 40% revenue
growth numbers.

Due to high industry growth, DOMO has enhanced its market share largely by
significant mergers and acquisitions. To keep up with its growth, DOMO is
constantly upgrading its internal control system. Fortunately, the well-trained staff
have been able to continue testing the new programs after they are put in place
and to change programming problems as they crop up.

The human resource department ensures that workers are assigned to work that
they are capable of doing and ensures that every employee understands his or her
responsibilities.

Required:

(a) What 'red flags' do you see in the above description concerning DOM's control environment?
(b) What accounts and financial statement management assertions might ultimately be affected if the red flags indicate problems?
(c) Develop an audit step you would use to follow up on the concern raised by each of the red flags.

Solution Preview

Required:

(a) What 'red flags' do you see in the above description concerning DOMO's control environment?

No formal process for complaints or whistle blowing
'Staying busy' is not the same as 'well-trained'. If the firm doesn't have a method for evaluating work quality (performance reviews at a minimum), that is a red flag.
The audit committee should be independent of management (outside directors).
The extremely aggressive target of 40% revenue increase creates pressure, one of the three key ingredients in the fraud triangle, and that raises risk that management will do something unethical to try to meet targets. In addition, unreasonably high targets may give managers justification for doing something not-quite-right to meet the targets since they rationalize that no legitimate way could possibly work. This kind of rationalization is another of the three fraud conditions.
Large changes in systems, processes and programs creates a high level of inherent risk for error, both intentional and unintentional.
Are there checks on the employees work after they are assigned to see if they are doing the work correctly and consistently?

(b)What accounts and financial statement management assertions might ultimately be affected if ...

Solution Summary

Your tutorial is 746 words and helps you to understand how these policies and conditions impact the audit. There isn't an 'audit step' to address or correct all of these red flags but I did indicate how the red flag would likely impact the audit.

$2.19