auditing cases - an interactive learning approach (6th edition): part 2

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Find more at www.downloadslide.com 6 S E C TI O N C A S ES INC LU DE D IN T HIS SE CTION 6.1 Harley-Davidson, Inc. 205 . . . . . . . . . . . . . . . . . . . . . . . Identifying eBusiness Risks and Related Assurance Services for the eBusiness Marketplace 6.2 Jacksonville Jaguars . . . . . . . . . . . . . . . . . . . . . . . . . 211 Evaluating IT Benefits and Risks and Identifying Trust Services Opportunities O T HE R C ASE S T H AT DISCUSS TOPICS REL ATED TO THIS SECTION 2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues . . . . . . . . 5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . Evaluation of Manual and IT-Based Sales Accounting System Risks 5.5 Collins Harp Enterprises . . . . . . . . . . Recommending IT Systems Development Controls . . . . . . 169 . . . . . . . . . . . . . . 177 9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . Understanding the IT Accounting System and Identifying Audit Evidence for Retail Sales © 2015 Pearson Education, Inc. 23 . . . . . . . 265 Find more at www.downloadslide.com This page intentionally left blank Find more at www.downloadslide.com C A S E Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt L EA R N ING OB JE C T IVE S After completing and discussing this case you should be able to [1] [2] Identify business risks associated with eBusiness models used in today’s supply-chain management systems Describe assurance services CPAs can provide to clients involved in eBusiness partnerships [3] Recommend effective internal controls to address risks associated with eBusiness supplychain systems INTRODUCTION The Harley-Davidson Motor Company (Harley-Davidson) began over 100 years ago, fulfilling a dream of 21-year-old William S. Harley and 20-year-old Arthur Davidson. In 1903, they made available to the public the first Harley-Davidson motorcycle, a bike built to be a racer. The factory in which they worked was a 10- by 15-feet wooden shed with the words “Harley-Davidson Motor Company” scrawled on the door. Arthur’s brother Walter later joined their efforts. Over one-hundred years later, Harley-Davidson’s total assets and net sales have each grown to over $4 billion, with annual production of over 220,000 motorcycles and a 55% share of the U.S. heavyweight motorcycle market with 31 domestic models included in its 2010 model year. The Milwaukee-based company has an avid following of motorcycle enthusiasts. The HarleyDavidson Owners Group, frequently referred to as “H.O.G.,” is the largest factory-sponsored motorcycle club in the world, with over one million members worldwide. In 2001, a difficult year for many companies, Harley's sales increased 15 percent and earnings grew 26 percent. The S&P Index fell by 15 percent that year but Harley-Davidson's stock price increased by 40 percent. In fact, according to Forbes, from the time they went public up to 2001, Harley-Davidson's stock price rose by 15,000 percent, while then hot tech company Intel's stock price increased by 7,200 percent over the same time period.1 HARLEY-DAVIDSON’S eBUSINESS SUPPLY CHAIN In the mid-1990s, Harley-Davidson faced the enormous challenge of meeting production demand for its motorcycles. Like many companies in today’s global marketplace, Harley-Davidson struggled to manage all of its upstream suppliers (who provide parts and raw materials) to ensure the effective downstream manufacture and delivery of motorcycles to customers. Company leaders found that 1 Fahey, Jonathan. “Love Into Money.” FORBES, January 7, 2002: 60-65. 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. It is not intended to illustrate either effective or ineffective handling of an administrative situation. © 205 Find more at www.downloadslide.com managing complex supply-chains, which involve material and information flows concerning new product development, systems management, operations and assembly, production scheduling, order processing, inventory management, transportation, warehousing and customer service, presents numerous challenges for large manufacturing organizations like Harley-Davidson. Harley-Davidson attacked the supply-chain problem by streamlining its cumbersome and bureaucratic supply-chain into a vertically and technologically integrated system of suppliers directly interested in Harley-Davidson’s success. To assist with the transformation, Harley-Davidson’s Vice President of Materials Management, Garry Berryman, initiated a consolidation of HarleyDavidson’s supply-chain to overhaul this vital aspect of company management. His plan involved a company-wide consolidation of its various purchasing departments, the formation of new business partnerships, and several technological innovations. Consistent with other companies with complex supply-chain systems, Harley-Davidson faced huge hurdles associated with coordinating a large number of material requirements and suppliers. To effectively implement its internal supply chain makeover, Harley-Davidson had to radically alter its corporate purchasing philosophy and move to a more centralized purchasing process. Prior to initiating the overhaul, Harley-Davidson had nine separate purchasing systems, over 4,000 separate suppliers, and little or no central guidance for purchasing. The company consolidated its purchasing function by forming a select group of suppliers from its enormous supply chain and ultimately cut its supplier base by 80%, from 4,000 to 800 suppliers. In addition to consolidating its purchasing function, Harley-Davidson also worked hard to foster new business partnerships with these key suppliers, but bringing the suppliers into strategic partnerships was difficult. Management had to show its business partners that being selected as a key supplier for a company like Harley-Davidson would have a tremendous positive impact. Then, the company had to convince suppliers to agree to certain conditions associated with its offer. For example, Georgia Pacific’s Unisource division had to commit to double quality, cut product development time in half, and simultaneously lower the cost of goods in order to meet HarleyDavidson’s requirements for inclusion in its supply chain. Fortunately, Unisource recognized the potential payoff. Unisource’s revenues increased over ten times as a result of being selected as a key Harley-Davidson supplier. Once suppliers were integrated into Harley-Davidson’s supply chain, the company faced another problem: how to effectively and seamlessly share information with its new network of suppliers? Harley-Davidson turned to the Internet as the solution for integrating its supplier network. Use of the Internet enabled smaller suppliers, previously unable to connect to the company’s legacy electronic data interface (EDI) systems, to participate in the supply-chain process. The versatility of the Internet provided an interface for transactions and interactions with the majority of its suppliers, removing costly hurdles imposed by the restrictive technology compatibility requirements of its old EDI systems.2 To provide the technological interface for communicating with its suppliers, Harley-Davidson selected Manugistics Group, Inc. to power the Harley-Davidson Supplier Network that provides real-time access to detailed order and inventory data. Manugistics is one of the leading suppliers of Enterprise Profit Optimization (EPO) services. These services use information technology (IT) innovations to allow companies and their suppliers to lower operating costs by simultaneously improving supply-chain management and supplier relationship management.3 The Manugistics-designed private Internet trading network enables Harley-Davidson and its trading partners to communicate and collaborate around key aspects of the company’s supply chain. The network provides transaction execution capability to the company’s supply chain. Suppliers have the ability to initiate and monitor transactions related to the order lifecycle, from planning through order processing and invoicing. For example, the Harley-Davidson eBusiness supply-chain network enables suppliers to access information from Harley-Davidson about upcoming demand 2 3 206 Milligan, Bryan. “Harley-Davidson Wins by Getting Suppliers On Board.” Purchasing , September 21, 2000: 52-65. PR Newswire, September 27, 2001. © 2015 Pearson Education, Inc. Find more at www.downloadslide.com for parts and past order histories. The system includes supplier-reporting tools and even allows Harley and its suppliers to create collaborative forecasts for parts needs. This eBusiness site offers secure access to billing histories and a full year’s forecast for total demand for various parts. The company also encouraged cost reductions through innovation and efficiency. After whittling down the number of relationships to be managed, Berryman invited Harley-Davidson’s key suppliers to place employees at Harley’s facilities, thereby including key suppliers not only in purchasing decisions but also in product design and manufacturing discussions. These in-house suppliers were granted access to Harley’s Intranet, which allows suppliers access to meeting minutes, schedules, plans, and other internal systems. With increased sharing of information between HarleyDavidson and its supply-chain through Harley-Davidson’s Intranet, the company became a model for successfully using eBusiness and technologically-fueled partnerships to facilitate and enhance core business activities. Dave Cotteleer, Harley-Davidson’s Manager of Planning and Control explained some of the motives for the change, indicating that the company used technology to reduce communication times and administrative tasks like tracking of invoices, thus allowing a greater focus on strategic issues between the company and its suppliers. According to Cotteleer, Harley-Davidson's goal was to allow suppliers to see the company's actual consumption rates and supply parts and materials accordingly, rather than using historical information to form projections.4 Did these changes make a difference? By forming strategic alliances with all of its top suppliers, bringing them into the design and planning process, and integrating with them through the Internet, Harley-Davidson was able to dramatically reduce the cost of producing its famous “hogs.” The company shaved $40 million off its materials costs over a five-year period. Productdevelopment time fell by 30%. Defect levels on bike parts plummeted from an average of 10,000 defective parts per million to only 48 parts per million for over 75% of its suppliers.5 BENEFITS AND RISKS OF eBUSINESS MODELS6 eBusiness solutions, such as Harley-Davidson’s supply-chain system, leverage the power of information technology (IT) and electronic communication networks, such as the Internet, to transform critical business strategies and processes. These eBusiness models remove traditional boundaries of time and geography and make possible the creation of new virtual communities of suppliers and customers. Formally defined, eBusiness is the use of IT and electronic communication networks to exchange business information and conduct transactions in electronic, paperless form. As indicated in the definition, eBusiness includes the exchange of business information that may or may not directly relate to the purchase or sale of goods or services. For example, businesses are increasingly using electronic mechanisms to improve company performance by facilitating collaboration and data sharing among employees as well as to provide improved customer support. Participants in eBusiness transactions and information exchanges may be individuals (consumers and employees) or automated agents (information systems that are programmed to perform with little or no human intervention). Transactions and information exchanges can take place within a company, between companies, between companies and individuals, and between individuals. As evidenced by Harley-Davidson’s supply-chain network, the Internet is frequently one of the electronic mechanisms used by companies to support core business functions. Companies that recognize the ability of the Internet to assist in essential business operations often find synergies through the implementation of the technology. eBusiness is becoming an integral part of the way many companies conduct business. 4 5 6 Sullivan, Missy, “High-Octane Hog.” FORBES, September 10, 2001: 8-10. Ibid. See Glover, Liddle, Prawitt, eBusiness: Principles & Strategies for Accountants, Prentice Hall, 2001 © 2015 Pearson Education, Inc. 207 Find more at www.downloadslide.com The integration of technology at companies like Harley-Davidson, however, introduces new issues and risks that must be effectively managed. Companies must be sure they have the resources to integrate new technologies effectively and efficiently. This is often accomplished through strategic partnerships within the company’s supply chain and by adding partners to obtain technical abilities not currently found within the organization. eBusiness partnerships create interdependencies between business partners that can substantially increase the amount of business risk faced by each organization. The success of technology-linked partnerships is often determined by the ability of each partner to identify and mitigate risks to its business and IT systems. The integrity and quality of each partner’s IT system and the communication system between partners are critical. Because of the amount of information access and sharing that takes place in eBusiness partnerships, participating companies must be concerned not only with the integrity of their own information systems, but also with the quality of the IT systems of their strategic business partners. An effectively integrated system involves not only an interdependent relationship between business partners, but also a complete system of hardware, software, people, procedures, and data that effectively isolates and manages the risks associated with eBusiness models. Because of the interdependencies often involved in an eBusiness environment, organizations must realize their responsibility to ensure that trading partners are using effective risk identification and management practices to protect the strength and the integrity of the entire network of interdependent enterprises. Understanding the benefits and risks associated with eBusiness models is important to CPAs for several reasons. First, CPAs need a good understanding of the key technologies underlying eBusiness models to effectively identify, measure, and assess the related costs and benefits when potential eBusiness solutions are being evaluated. In addition, CPAs who are engaged as auditors to provide assurance about client financial statements need a good understanding of eBusiness systems to effectively evaluate business risks that may increase the likelihood of material misstatements in those financial statements. Such an understanding is particularly vital today given the new risk assessment standards. Further, auditors of public companies are required by the Sarbanes–Oxley Act of 2002 to provide an opinion on the operating effectiveness of internal control over financial reporting. To do so, they must understand the nature of eBusiness partnerships powered by the Internet and the risks and controls involved. 208 © 2015 Pearson Education, Inc. Find more at www.downloadslide.com R EQ U I R E D [1] Identify the most significant new business risks facing Harley-Davidson as a result of integrating eBusiness into its supply-chain management system and by allowing suppliers to have access to the company’s Intranet. If your instructor does not specify the number of risks for you to identify, list at least three. [2] For each risk you identified in question number one above, identify a control Harley-Davidson might have implemented to mitigate that risk. Note: Your instructor may request that you prepare your answers to questions 1 and 2 using the worksheet found on the website: www.pearsonhighered.com/beasley. [3] Given the technology linkages between business partners in eBusiness systems, how might an eBusiness system like Harley-Davidson’s increase business risks for its business partners? [4] Research the SysTrust and WebTrust services from the information on the following website (or search the Internet or within the AICPA’s Information Technology Center website for “Trust Services”): http://www.webtrust.org. Describe how WebTrust services differ from SysTrust services. Describe how they are related. [5] According to the CICA website indicated in question number four, what professional standards must a CPA follow when providing assurance services that result in the expression of a WebTrust or SysTrust opinion? [6] What Trust Services Principles are examined in a SysTrust engagement? Describe the role of the criteria when evaluating these principles in a SysTrust engagement. [7] Assume Harley-Davidson asks your CPA firm about the WebTrust and SysTrust services that it provides. Write a brief memo to Gerry Berryman, Vice president of Materials Management, detailing the potential benefits of WebTrust and SysTrust for Harley-Davidson. Include in the memo a recommendation regarding which of these assurance services would be most appropriate for Harley-Davidson’s supply chain management system. Be sure to explain to Mr. Berryman the nature of the two different services and why you are recommending the one you chose. © 2015 Pearson Education, Inc. 209 Find more at www.downloadslide.com This page intentionally left blank Find more at www.downloadslide.com C A S E Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt L EA R N ING OB JE C T IVE S After completing and discussing this case you should be able to [1] [2] [3] Identify benefits to businesses from implementing information technology Recognize risks that are associated with the use of information technology Understand the Trust Services® Principles and Criteria framework of assurance services [4] [5] Distinguish between SysTrust® and WebTrust® services Determine how CPAs can provide assurance about processes designed to reduce risks created when new information technology systems are introduced INTRODUCTION The Jacksonville Jaguars National Football League (NFL) team was one of the first major sporting organizations to take advantage of information technology (IT) tools in the sale of stadium snacks and souvenirs. Beginning in 1995, football fans at Alltel Stadium (which is now called the EverBank Field), where the Jaguars play their home games, began using Spot Cards to purchase soft drinks, beer, popcorn, and Jaguar souvenirs rather than fumble for cash and change when making their purchases.1 These reloadable Spot Cards, which contain an embedded computer chip, operate in a manner similar to other smart cards such as FedEx Office’s ExpressPay cards and many retail establishments including university student identification cards that are used for fee payment, meal and book purchases, and building access. Not only does the Spot Card offer benefits to fans in the stadium, but the use of IT also offers advantages for snack and souvenir vendors by providing better information for monitoring their businesses. Although IT offers improvements for the fans and vendors, those who rely on the Spot Card to process sales need assurance that the technology and related information produced is accurate and reliable. BACKGROUND The implementation of the Spot Card at the stadium in Jacksonville in the fall of 1995 represents one the first uses of that type of IT in a major sports stadium. The stadium contracted with First Union Bank, (which was subsequently acquired by the Wachovia Corporation that is now part of Wells Fargo Bank, one of the country’s largest financial institutions), to develop and implement the Spot Card system. First Union contracted with Diebold Incorporated of Canton, Ohio, a manufacturer of card-based transaction systems, to develop the Spot Card system. 1 Many of the facts about the Spot Card system are based on an article titled, “Jacksonville Jaguars Fans Score Big with Smart Cards,” by Maura McEnaney which appeared in EC World, January 1998, pp. 24 –27. 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. It is not intended to illustrate either effective or ineffective handling of an administrative situation. © 211 Find more at www.downloadslide.com A description of how the system was originally designed to function follows. Customers purchased Spot Cards in various denominations such as $20, $50, and $100. ATM-like machines in the stadium allowed fans to transfer funds from their bank or credit card onto an electronic chip on the Spot Card. Fans could also buy cards with cash or with a debit card. Other terminals were located in various bank branches around Jacksonville. Card readers located throughout the stadium allowed fans to check card balances. Fans purchasing snacks and souvenirs presented their Spot Card to vendors at concession and souvenir stands who calculated sales amounts and swiped the cards through point-of-sale (POS) machines. Software tracked each transaction for vendors. Before the transaction was complete, fans reviewed the amount to be deducted and punched the “Yes” key on the POS machine. At that point, the POS device deducted the purchase amount from the chip-embedded balance on the fan’s Spot Card. These cards could also be used at battery-operated POS computers carried by vendors who roamed the stadium stands selling merchandise during the game. The POS machines captured information about each transaction. The system recorded the card number, location code, and the date and time of the transaction as well as the items sold. That information was later summarized for vendors. Once the game was over, vendors linked their POS machines to a network that allowed the transfer of data stored on each POS machine to a computer located in the stadium counting room. Once all the data were downloaded to that computer, the information was then transmitted to a host computer at the bank in Jacksonville. The host computer used the transmitted data to settle that day’s sales with each vendor in the stadium. The host computer produced various reports, which provided vendors detailed information to track sales volume for specific products in specific sections of the stadium. The bank received a fee from every Spot Card transaction, and the bank collected whatever remained on an unused Spot Card at the end of two years. Soon after implementation, the bank also began selling player-signature Spot Cards with pictures of selected Jaguar players on the front for an additional fee. Other stadiums around the country, such as the Carolina Panthers’ stadium in North Carolina, have used similar technologies and now smart cards are used in all types of retail settings. OPPORTUNITIES FOR CPAS TO PROVIDE ASSURANCE In the mid-1990s, the American Institute of Certified Public Accountants (AICPA) began to develop CPA “assurance services” opportunities designed to allow CPAs to provide assurance about the reliability and relevance of information decision-makers use to run their businesses. Certain forms of assurance services have always been performed by CPAs. For example, auditors of historical financial statements provide assurance about whether those financial statements are in conformity with generally accepted accounting principles. Continuous changes in IT provide new opportunities for CPAs to provide assurance regarding the accuracy, reliability and relevance of information produced by these technologies. As IT continues to play a larger role in business, some argue that the need for assurance on IT systems and controls will continue. In response to this perceived need, the AICPA developed Trust Services Principles and Criteria that provide a framework for CPAs to assess and report on various aspects of information system reliability and accuracy. The Trust Services Principles and Criteria are developed within the framework of the Statement on Standards for Attestation Engagements (the “attestation standards”). Only CPAs may provide Trust Services that result in a Trust Services opinion. Under the Trust Services framework, CPAs can be engaged to perform an AICPA SysTrust service to provide assurance regarding the reliability of IT systems. In these engagements, CPAs can provide users with assurance that an IT system has been properly designed and produces reliable data. In doing so, CPAs might test the integrity of an information system by analyzing sample IT output for accuracy. Assurance providers can also provide valuable services to help organizations determine whether systems are secure and whether adequate contingency plans are in place in the event of system failure or disaster. 212 © 2015 Pearson Education, Inc.
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