Is this a significant deficiency and should it be reported to the audit committee?

  • Ticket Sales are “booked” over the internet and an entry is made debiting a receivable account (from the credit card) and crediting sales.
  • ·         When a ticket is canceled, the only entry made is to a database that maintains specific seat availability.
  • ·         Customers are emailed a “Cancellation Form” when this occurs.
  • ·         No accounting journal entry is recorded, and no refund occurs until the customer requests (in writing) a refund.
  • ·         If the customer never requests the refund, the receivable is billed to the credit card and collected.
  • ·         After it is billed to the credit card, many customers complain and are given a refund, and then an accompanying journal entry is made for the cancellation.
  • ·         After analyzing the “Canceled Form”, you note that it says nothing about requiring a written cancellation for a refund.
  • ·         The internal controller responded to your inquiry about the policy of requiring a written request for a refund by indicating that the policy is presented on the website’s “business policies and procedures” section.
  • ·         The controller says that in total about two-thirds of the customers ask for and receive refunds, while one-third do not.
  • ·         The CPA’s attorneys say that while it is probably a questionable policy, they are unable to say it is illegal—in fact, it probably is not.
  1.      Is this a significant deficiency and should it be reported to the audit committee?
  2.     Should it be reported elsewhere? Where? How?
  3.     What impact should this policy have on the audit?
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