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Consider the facts presented below. Using the Observation Evaluation and Escalation Process (see exhibit 14-4), assess the facts presented and determine the following: a. What observation(s) is (are) indicated? b. What COSO objective categories are affected? c. Classify the observation(s) as inadequately designed, ineffectively operating, or both. d. Determine the impact and likelihood of the observation(s). e. Assess whether the observation(s) is (are) insignificant, significant, or material. f. Based on your answers, how and to whom would you communicate the observation(s)? Facts: ABC Company is a major wholesaler of electrical lighting fixtures and ceiling fans. The company opened a large store in a growing metropolitan area near the beginning of the company's fiscal year. The following facts surfaced during post-year-end audit procedures performed by the company's financial statement auditor (independent outside auditor):

The manager of the new store had booked a large year-end adjustment-a debit to sales and a credit to accounts receivable. The journal entry explana- tion indicated that the entry was made to adjust the general.ledger accounts receivable account to the accounts receivable subsidiary ledger. The year-end gross margin percentage at the new store was significantly lower than the average gross margin percentage of the company's other stores. The manager of the new store was stealing pay- ments customers made on account. That is why the general ledger was out of balance with the subsidi- ary ledger. The store manager made the large year- end adjusting entry to cover up the theft, which is why the store's gross margin was lower than the average of other stores. The year-end adjustment was material to the store but not to the company as a whole.

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