Please reply of at least 200 words to the discussion below.
Support your assertions with at least 2 scholarly citations in APA format.any sources cited must have been published within the last five years.
- Does it matter that Groupon reported its weakness in internal controls as a disclosure control under SOX Section 302 rather than pointing it out in its report on internal controls under Section 404? Explain.
It makes a difference for Groupon to report its weakness in internal controls as a disclosure under the Sarbanes-Oxley Act of 2002 (SOX) §302 instead of §304. The first of these sections covers management’s responsibility for financial reporting (SOX §302). This encompasses the chief executive officer (CEO) and chief financial officer’s (CFO) duty to design, implement, and monitor internal control as well as affirm the fair presentation of financial statements free from material misstatements to their knowledge (SOX §302). The latter section addresses the requirement for management to give their assessment of internal control; additionally, an organization’s external auditors are to report on the reality of this statement (SOX §404). Significantly, the inappropriate disclosure of the material weakness under §302 financial statement users may miss the disclosure.
- Describe the risks of material misstatements in the financial statements that should have raised red flags for EY.
The risk of material misstatement (RMM) consists of inherent risks and control risks (Popova, 2018). Ernst & Young (EY), when assessing RMM, should consider Groupon’s involvement in e-commerce, material weakness of internal control over financial reporting, overstatement of revenues, and indicators of fraud. Up until the year, Groupon recognized a material weakness in its internal control EY issued clean opinions on financial statements and internal control. Consequently, this suggests that EY experienced an ethical lapse by valuing its duty to the client over that to the public (Verwey & Asare, 2022). The Bible reveals that there is a hierarchy of authority originating with God, who is ultimately overall (English Standard Version [ESV], 2014, Romans 13:1-2; Hebrews 13:17). The actions of all people should be informed by this knowledge, submitting to the will of the Lord. Significantly, 1 Peter 2:13-14 (ESV, 2014) expands on this concept with the instruction to “Be subject for the Lord’s sake to every human institution.” The institution that auditors owe the most loyalty to is the public, as the consistent issuance of quality audit reports provide stability for the economy.
- According to a 2012 survey of 192 U.S. executives conducted by Deloitte & Touché LLP and Forbes Insights, social media was identified as the fourth-largest risk, on par with financial risk. This ranking derives from social media’s capacity to accelerate to other risks, such as financial risk associated with disclosures in violation of SEC rules, for example. Other risks inherent to social media include information leaks, reputational damage to brand, noncompliance with regulatory requirements, and third-party and governance risks.
a. Why is it important for a firm such as EY, in a case such as Groupon, to fully understand the nature of risk when a company conducts its business online?
Part of the planning process of an audit engagement is for the auditor to obtain a proper understanding of its client’s industry, business, and internal control (AU §150.02). This enables a firm like EY to assess RMM. With a proper understanding of Groupon’s participation in e-commerce, EY will increase its inherent risk while simultaneously decreasing the detection risk. Consequently, it would be prudent for EY to conduct more effective substantive procedures. If an external auditor fails to fully grasp the RMM of a client that conducts its business online, then there is a greater likelihood that material misstatements will go undetected.
b. What role can internal auditors play in dealing with such risks?
An effective internal control operates to prevent and detect fraud and errors in a timely manner (Chang et al., 2019). Internal auditors participate in this function by helping management evaluate areas for improvement (Chang et al., 2019). To help reduce the risk surrounding e-commerce, internal auditors can develop controls addressing this concern. Academics suggest the implementation of the following controls matching e-documents to verify existence, “evaluate the system user and operator authority,” and look at system maintenance and storage (Shi, 2021; Tkachenko et al., 2019).
c. How should external auditors adapt their risk assessment procedures for social media/networking clients?
The Public Company Accounting Oversight Board (PCAOB) states that risk assessment procedures exist to supply a sufficient and reasonable basis for determining RMM (AS 2110.04). Given the knowledge that online businesses are at higher risk for RMM, an external auditor should perform more effective risk assessment procedures to base their audit upon.