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Answer questions 1 – 4 using handouts 1 and 2 . Assignment has already been started.

Auditing Marvelous Marketers

Background

Marvelous Marketers (MM) is a marketing company that offers a variety of marketing
offerings to its customers, including TV commercial production, app construction, and
Facebook page creation. MM accounts for its revenue in accordance with ASC 606, Revenue
From Contracts With Customers.

As part of our audit procedures, we need to understand the accounting for an account balance
before we begin auditing that balance. Therefore, this case assumes you have read and
understood MM’s marketing services and the accounting of such services (last week’s
assignment). Note that you have also been provided with Handout 1, which contains the risks
of material misstatement matrix, and Handout 2, which is MM’s control matrix.

Required Activities:

1. Refer back to last week’s case. On the basis of the facts stated therein related to the
contract between MM and Stone, a customer, what are some risks of material
misstatement (RoMMs) that we may identify as part of our audit? Handout 1, the
RoMMs matrix, may be used to assist with identifying relevant RoMMs.

2. Tailoring RoMMs to the specific revenue streams and assertions is an important step
in designing an audit plan for revenue. Now that you have identified the RoMMs that
are applicable to the contract between MM and Stone, how might you tailor the
RoMMs that you identified in Activity 1 to the facts presented in this case?

3. Identify internal controls that address the tailored RoMMs identified in Activity 2.
Handout 2, MM’s internal control matrix, may be used to assist with identifying
relevant internal controls. If REV 7 is identified as a relevant internal control, identify
which specific step in the control addresses the RoMM.

4. Design substantive procedures that address the tailored RoMMs identified in Activity
2.

Handout 1

Auditing Marvelous Marketers — Risks of Material Misstatement (RoMMs) — Revenue

RoMM No. RoMM Description
1 Contract modifications are not identified and accounted for

correctly.
2 All promised goods or services are not properly identified in the

contract, or promised goods and services in the contract are not
distinct, causing revenue to be recorded in the wrong period.

3 Revenue is inappropriately recognized for consignment sales
before transfer of control has occurred in accordance with the
contract terms.

4 The transaction price has not been allocated to performance
obligations on a relative stand-alone selling price basis.

5 The fixed consideration identified in the transaction price of the
contract is identified at the incorrect amount or does not meet
the definition of fixed consideration.

6 Revenue is recognized when a contract (as defined by ASC 606-
10-25-1) does not exist.

7 The amount of variable consideration is recorded at an incorrect
amount.

8 Service-type warranties are not appropriately identified as
separate performance obligations.

9 Licensing arrangements when the entity receives consideration
from a customer (e.g., in the form of a sales- or usage-based
royalty) are recorded incorrectly.

Handout 2

Auditing Marvelous Marketers – Internal Control Matrix — Revenue Process

Control
No. Control Title Control Description

REV 1 Recording of, and
adjustments to,
contract assets are
reviewed and
approved.

As of period-end, MM’s controller reviews open
contracts with customers to evaluate progress towards
the satisfaction of the performance obligations. For
those performance obligations that have been satisfied
before consideration has been received or before
payment is due, the controller determines whether a
contract asset has been appropriately recorded.

REV 2 Policies regarding
pricing are reviewed
and approved.

Policies for transactions with customers are established.
These policies cover all terms and conditions and
document MM’s customary business practices,
including, but not limited to:

• The price to be charged to the customer.
• Discounts (e.g., cash, volume, bundles).
• Incentives.
• Performance bonuses.
• Penalties.

The policies are reviewed and approved by MM’s
controller.

REV 3 Technical accounting
policies and memos
are reviewed and
approved.

MM’s controller reviews MM’s accounting policies and
supporting documentation for all significant revenue
streams to determine whether the accounting policies
are in accordance with the requirements of ASU 2014-
09 and other U.S. GAAP applicable to revenue
recognition. Policies are approved on a periodic basis.

REV 4 Nonroutine journal
entries are reviewed
and approved.

MM’s controller reviews MM’s full contract analysis,
underlying supporting documentation, and the journal
entry(s) before approving the journal entry(s) for
posting.

REV 5 The financial
statements and
footnote disclosures
are reviewed.

An independent review of the financial statements
using a financial statement presentation and disclosure
checklist is performed by MM’s technical accounting
manager to determine that (1) the financial statements
are fairly presented in accordance with U.S. GAAP and

Handout 2: Auditing Marvelous Marketers Page 2

Control
No. Control Title Control Description

(2) disclosures (including critical accounting policies)
are complete.

REV 6 Establishment of
credit limits.

Credit limits are established by MM’s credit manager
on the basis of the customer’s ability to pay and past
collection results and are reviewed on a regular basis.

REV 7 The accounting for
each contract is
reviewed and
approved.

An analysis of the accounting conclusions for the
contract is prepared and submitted along with the
customer contract to MM’s controller. MM’s controller
reviews the contract, as well as other relevant
information that form the contract, to determine the
appropriate accounting for revenue recognition,
including whether the contract is within the scope of
ASU 2014-09 or other accounting standard. The
controller’s review of each contract and accounting
conclusions includes the following:

Step A — Read the terms of the agreement to
determine whether all the criteria to be accounted for as
a contract with customers under ASU 2014-09 have
been met.

1. Each party has approved the contract and is
committed to perform their respective
obligations.

2. MM can identify each party’s rights and
obligations regarding the transfer of and
payment for goods.

3. MM can identify the payment terms for goods
or services to be transferred.

4. The contract has commercial substance.

In addition, collectibility is assessed upon customer
acceptance. See Control REV-6: Establishment of
credit limits.

Step B — Evaluate whether all performance
obligation(s) of the contract have been identified,
considering both those explicitly stated in the contract
and those implicit through MM’s customary business
practices; potential promises MM’s makes in its Web
site or marketing materials; MM’s published policies;
and industry, regulatory, or other external factors
affecting MM’s business. MM’s controller considers
whether the promises within the contract have been

Handout 2: Auditing Marvelous Marketers Page 3

Control
No. Control Title Control Description

appropriately identified and determines whether the
promises within the contract relate to a delivery of
goods, performance of services, or both. The controller
considers whether, as applicable:

1. Specified goods or services have been correctly
identified as immaterial and are not included for
further analysis.

2. The specified goods or services are capable of
being distinct, including distinct within the
context of the contract.

3. Promised goods or services that are not distinct
are combined with other promised goods or
services to form a performance obligation (i.e.,
a bundle of goods or services that are distinct).

4. The distinct good or service is part of a series of
distinct goods or services that are substantially
the same and should be accounted for as a single
performance obligation.

5. The contract explicitly or implicitly contains
customer options for additional goods or
services, whether those options are material
rights and whether those material rights have
been appropriately identified as performance
obligations.

6. The nonrefundable up-front fees, if applicable,
are associated with a promised good or service.

Step C — Determine whether the transaction price is
complete and accurate, including evaluating the
following, as applicable:

1. Whether the transaction price represents the
total consideration MM expects to receive from
the customer, including fixed and variable
consideration, in the contract.

2. The fixed consideration identified is complete
and accurate and agrees with the terms in the
contract.

3. Variable consideration is appropriately
identified based on the terms of the contract,
MM’s policies and customary business
practices, history of granting price concessions,
specific statements that MM will accept an
amount of consideration that is less than the
price stated in the contract, or other evidence

Handout 2: Auditing Marvelous Marketers Page 4

Control
No. Control Title Control Description

indicating the MM’s intention to offer a price
concession.

4. The calculation of each type of variable
consideration identified in the contract and
whether a consistent method was applied to
each type of variable consideration within the
contract. MM’s controller evaluates whether the
assumptions used in estimating the variable
consideration are appropriately supported and
contradictory evidence has been identified and
considered. MM’s controller evaluates the
reasonableness of the probabilities assigned to
each value when using the expected value
method.

5. MM’s controller reviews the evaluation of
whether variable consideration should be
constrained considering the likelihood of a
reversal and the magnitude of the potential
reversal in the cumulative amount of revenue
recognized, and the threshold that triggers a
constrained estimate (i.e., what is probable).

Step D — Evaluate whether the transaction price has
been appropriately allocated to performance
obligations.

1. MM’s controller evaluates whether the stand-
alone selling price for each performance
obligation was estimated using directly
observable inputs. The controller evaluates any
assumptions used when the stand-alone selling
price is not directly observable. If the residual
method is used to determine the stand-alone
selling price, the controller determines whether
the use of such method is appropriate.

2. MM’s controller evaluates whether any
discounts or variable consideration have been
appropriately allocated to each performance
obligation, considering any significant
assumptions.

3. MM’s controller recalculates the allocation of
the transaction price and discounts/variable
consideration to each of the performance
obligations. Any differences are investigated
and resolved.

Handout 2: Auditing Marvelous Marketers Page 5

Control
No. Control Title Control Description

Step E — Evaluate whether performance obligations
are recognized at a point in time or over time:

1. MM’s controller evaluates, with respect to each
performance obligation, whether any of the
“over time” criteria have been met and, if not,
whether the performance obligation is to be
recognized at a point in time.

2. For performance obligations recognized over
time, the controller evaluates whether the
selected method to measure progress
(inputs/outputs) faithfully depicts the progress
of the contract and whether any of the “over
time” criteria have been met.

Step F — Evaluate whether revenue is recognized
appropriately on the basis of the determination that it be
recognized at a point in time or over time:

1. For performance obligations recognized over
time, MM’s controller recalculates the
inputs/outputs expended to date relative to the
estimate of total expected inputs/outputs for the
contract (e.g., total costs incurred to date
relative to total estimate costs for the contract).
Revenue to be recognized from this evaluation
is reviewed before the journal entry is posted.

2. For performance obligations recognized at a
point in time, the controller evaluates whether
control has transferred to the customer at the
point in time and the performance obligation is
satisfied, allowing for revenue recognition.

After performing each review step, any differences
identified as a result of the review are investigated and
resolved, and all questions are addressed. MM’s
controller then approves the accounting conclusions for
the contract and submits the approved contract for entry
into the customer master file and set-up in MM’s ERP
system for processing.

8 Accounting estimates
in contracts are
reevaluated.

Each reporting period, the accounting estimates in the
contract are reevaluated, including:

Handout 2: Auditing Marvelous Marketers Page 6

Control
No. Control Title Control Description

• For ongoing contracts with a variable element of
consideration, the expected amount of consideration
to be received is reevaluated, including whether
estimated variable consideration and constrained
variable consideration should be revised based on
new information identified in the reporting period
or the resolution of uncertainties.

• Changes in the fair value of noncash consideration
are evaluated as variable consideration and the need
to constrain the fair value estimate of the noncash
consideration is evaluated, and calculated and
reviewed, as necessary.

The analysis of changes in estimates is reviewed by
MM’s controller and any discrepancies are resolved
before recognizing revenue. MM’s controller also
considers whether the change in estimate is significant
enough to be disclosed in the footnotes.

Marvelous Marketers

RoMM No

RoMM Description

RoMM – Facts of Case

Assertion Identified/Addressed

1

Contract modifications are not identified and accounted for correctly.

· Verbal agreement between MM & Stone.

· Terms and conditions are unidentifiable due to contract being verbal.

Rights and obligations

2

All promised goods or services are not properly identified in the contract or promised goods and services in the contract are not distinct, causing revenue to be recorded in the wrong period.

·  All promised goods/services are NOT distinct, causing revenue to be potentially recorded in the wrong period

Cut Off

3

Revenue is inappropriately recognized for consignment sales before transfer of control has occurred in accordance with the contract terms.

Existence & Cutoff

4

The transaction price has not been allocated to performance obligations on a relative stand-alone selling price basis.

Accuracy

5

The fixed consideration identified in the transaction price of the contract is identified at the incorrect amount or does not meet the definition of fixed consideration.

6

Revenue is recognized when a contract (as defined by ASC 606- 10-25-1) does not exist.

Existence

7

The amount of variable consideration is recorded at an incorrect amount.

8

Service-type warranties are not appropriately identified as separate performance obligations.

9

Licensing arrangements when the entity receives consideration from a customer (e.g., in the form of a sales- or usage-based royalty) are recorded incorrectly