Q&A Hero

Question

Gonzo is an on-line dating agency. Gonzo has been in business for 5 years and has been able to reach revenues of $1 million last year. Given its recent expansion, Gonzo's shareholders have required that the company's financial statements be audited for the first time this year. You have been assigned to the audit team for this mandate.

The senior manager asked you to review the process description for the sales of Gonzo. The manager asked you to identify the controls in place that could be tested and used for the audit and also, any controls that might be missing. Briefly explain the impact on the audit.

Gonzo's CEO provided you with the following description of their processes and activities for the past year:

Sales

Gonzo's web-site is operational 24 hours per day. All of the sales for Gonzo are done on-line when the customer opens a profile. A customer will pay $50 to open a profile and will then pay $10 per month to keep his profile active. Most customers pay on-line with their credit cards and the sale is automatically recorded in the sales ledger of Gonzo at the time of payment.

Gonzo also had a promotion for the last 3 months of the year. If the customer wanted to subscribe for one year, they could pay $100 upfront to keep their profile active for the full year instead of paying $10 each month for 12 months. This proved to be a popular sales tactic as customers enjoyed the $20 savings.

Web-Site Security

In the past year, one hacker managed to intrude the web-site and steal the credit card information of 25 Gonzo customers. To ensure quality of customer service, Gonzo reimbursed a total of $10,000 to the customers to compensate them for the amounts that were stolen as a result of the intrusion on their web-site. Since then, Gonzo hired a third party, Mindster Box, to update the security features of their web-site. Mindster Box performs monthly updates to the security features and monitors any intrusion attempt. Gonzo did not have a problem since.

Collection and Reconciliation

As most of the sales are done by credit card, Gonzo receives the money from large credit card companies on a by-weekly basis.

When the money is received from the credit card company, Jo-Ann, the accounting manager of Gonzo, reconciles the detail of the payments received by the credit card company to the sales ledger of Gonzo. Jo-Ann has often complained that this is nearly impossible to do since the accounting system of Gonzo keeps track of the payment by the on-line user name which is often very different from the actual name of the person as stated on the detailed report provided by the credit card company.

Jo-Ann therefore mostly relies on the statement of the credit card company to record and adjust revenues reported by Gonzo.