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.
Question 1: 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. According to SOX Section 404 the act states, “The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 to contain an internal control report, which shall –
- State the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
- Contain an assessment, as of the end of the most recent fiscal year of the issuer of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.”
Based on this excerpt from the Sarbanes-Oxley Act of 2002 it is appropriate for Groupon to report its weakness in internal controls under section 404 rather than section 302.
Question 2: Describe the risks of material misstatements in the financial statements that should have raised red flags for EY. Red flags that Ernst & Young (EY) should have noticed are that between years 2010 and 2011 Groupon reported a 1,367% increase in revenues for the three months ending the first quarter. Although Groupon had no significant competition during these years their revenue increase should have been noticed. Had EY questioned this percentage of increase they would have found out that Groupon was reporting revenues incorrectly. According to the textbook Groupon stated in its annual report, “We did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate” (Mintz et al., 2020). This should have been noticed immediately by the auditing firm.
Question 3a: 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? Prior to taking on any new clients, the audit team should do a risk assessment of the new client. They should find out why the client is leaving the old firm or why the firm dropped the client. They should make sure there are not internal control problems and how effective the company’s control procedures really are. With a company doing the bulk of its business online it is much more difficult to inspect the risks of the organization. Much of their business is conducted in cyberspace therefore there is very little paper trail to inspect. Also, the company is much more likely to be hacked when doing much of its business online.
Question 3b: What role can internal auditors play in dealing with such risks? By having an internal audit team in place, they can ensure the control procedures are adequate and up to date with the latest cybersecurity. They can also do more inspecting of the accounting and leadership team than an external audit team. They are in the trenches with the team, and they can experience the strategy of management firsthand. They can also recommend ways to improve internal control processes or things the company is doing to put them at risk.
Question 3c: How should external auditors adapt their risk assessment procedures for social media/networking clients? External auditors should be familiar with their client’s website and social media pages to make sure they know the ins and outs of the business. By frequently visiting these pages online they are already aware of any problems, customer dissatisfactions, or possible risks the company may be experiencing. They will be prepared to go in and inform the client of how and why they should change certain aspects of their website or social media pages. Social media is how everyone communicates today. It is used for good and evil, and many people say and do whatever they want because they are hiding behind a computer screen. Social media has become the backbone of communication which in my opinion is a sad, sad way to communicate. We need to have human interaction rather than computer interaction.