You were recently promoted to audit senior at your firm, Aoife & Josephine LLP, and one of your primary clients is
Souper Bowl Inc. Souper Bowl (‘‘the company’’) is a privately held business headquartered in Maine, and has a fiscal year-end
of December 31. The company has been in business for nine years and prides itself on offering creative soups at a reasonable
price and that are made with locally sourced ingredients. The most popular soups include sweet potato corn chowder, curried
root vegetable and lentil, and maple-roasted butternut squash. Souper Bowl typically experiences increased sales during winter
months since soup hits the spot on a cold and snowy day. To further encourage sales on days when customers often avoid
venturing outside, the company provides a delivery service and guarantees that soup can be delivered to anyone no matter what
the weather. The company found this strategy to be particularly successful in 2015 when New England (including Maine)
experienced record snowfall during February and March.
Souper Bowl sells their soup at several restaurant locations throughout Maine. The company employs three managers that
direct the day-to-day operations for a group of stores that are organized by approximate geographic region: northern Maine
(Store Type 1), mid-Maine (Store Type 2), and coastal Maine (Store Type 3). Appendix A provides a map of these store
locations. Each manager knows their local market well and has the flexibility to advertise and offer promotions with the overall
goal of increasing sales year over year. If total sales at the end of the year exceed total sales from the prior year for that
manager’s set of locations (i.e., ‘‘Store Type’’), then the manager earns a monetary bonus from the company.
We appreciate the helpful and constructive feedback from Valaria P. Vendrzyk (editor), Ronald F. Premuroso (associate editor), and two anonymous
reviewers. We are also grateful to the 2016 Deloitte Foundation Trueblood Seminar for providing us with the inspiration for this case study. Lauren M.
Cunningham received financial support from the PwC INQuires Grant for the purpose of integrating technology into accounting programs.
Supplemental material can be accessed by clicking the link in Appendix C.
Editor’s note: Accepted by Valaria P. Vendrzyk.
Submitted: December 2017
Accepted: May 2018
Published Online: May 2018
33
An audit of the company is required to comply with debt covenants related to a large bank loan that the company entered
into when it began operations. Specifically, Souper Bowl must provide audited annual financial statements to the bank within
90 days of the fiscal year-end. The company must also provide unaudited quarterly financial statements to the bank within 45
days of the end of each quarter. The debt contract includes a financial covenant that requires pre-tax income in each quarter to
be greater than zero. If not met, the bank has multiple remedies at its disposal, including calling the loan such that the entire
balance is due immediately, seizing the company’s assets that are posted as collateral, or providing a waiver for the violation.
Souper Bowl’s net income for the year ended December 31, 2016 is $468,810, while net income for the prior year ended
December 31, 2015 was $825,229.
Auditing Revenues
As part of your new role as audit senior, you will be performing a large portion of the planning and testing of sales for the
2016 audit of Souper Bowl. AU-C Section 240.26 states that ‘‘when identifying and assessing the risks of material misstatement
due to fraud, the auditor should, based on a presumption that risks of fraud exist in revenue recognition, evaluate which types of
revenue, revenue transactions, or assertions give rise to such risks.’’ During planning for the audit, the partner and manager
determined that the following three management assertions represent significant risks for revenues:
(1) recorded sales occurred;
(2) sales are accurately recorded; and
(3) sales are recorded in the proper period.
In prior years, the audit approach relied on random sampling to test revenues. However, the partner wanted to develop more
focused procedures in the current year to hone in on potentially riskier sales transactions. As a result, the plan is to perform
disaggregated sales analytics to identify unusual trends in the daily sales data with the goal of identifying sales on specific days
at specific store locations that should be subjected to substantive testing due to heightened risks. The remainder of the
population would then be sampled using a random sampling approach.1
Based on your experience from prior audits, you know that Souper Bowl’s daily sales fluctuate with temperature and snow
accumulation. To perform your revenue analytics, you request a file from the client that includes daily sales by store location
for both 2016 (current year) and 2015 (prior year). You also retrieve daily weather data from the National Oceanic and
Atmospheric Administration’s (NOAA) website for the weather centers closest to Souper Bowl’s store locations. Total revenue
for the current year ended December 31, 2016 is $18.8 million, while total revenue for the prior year ended December 31, 2015
was $19.1 million. The audit team’s workpapers include the following lead sheet for revenue testing, and the total balances for
each year agree to the trial balance and the company’s draft financial statements for 2016.
Souper Bowl Inc.
Revenue Lead Sheet
December 31, 2016
2016 2015 Change
PBC
% Change
Revenue, Store Type 1 $4,062,390.97 $4,032,383.16 $30,007.81 0.74%
Revenue, Store Type 2 9,331,175.81 9,558,584.07 (227,408.26) 2.38%
Revenue, Store Type 3 5,425,421.53 5,546,767.89 (121,346.36) 2.19%
Total Revenue $18,818,988.31 $19,137,735.12 $(318,746.81) 1.67%
Your manager stated that Tableau is a popular data visualization tool that your firm recently adopted and she instructed that
you learn how to use it to perform these sales analytics. Since she is busy overseeing the planning and testing of other audit
areas, she wants you to take the first pass and then document your results in a memo for her review. The manager wants you to
provide thoughtful analyses and a thorough exploration of the possible relationships in the data. You are eager to impress her
with your work, especially following your recent promotion to senior.
1 As noted in Christensen, Elder, and Glover (2015), most of the large accounting firms emphasize the use of specific identification testing before random
sampling to increase the efficiency and effectiveness of substantive tests. Specific identification testing, also referred to as directed sampling, is usually
used to select and test individually significant items and those items identified as having a higher risk of misstatement.
34 Cunningham and Stein
Issues in Accounting Education
Volume 33, Number 4, 2018
Requirements
- Read the articles assigned by your instructor to gain an understanding about how Big Data, data analytics, and new
technologies are transforming external audits. After reading these articles, provide a response to the following two
questions:
a. Discuss at least three specific ways in which Big Data, data analytics, and new technologies can enhance external
audits. How does each item discussed improve the effectiveness and/or efficiency of the audit?
b. On the other hand, what challenges do auditors face when using Big Data, data analytics, and new technologies
during an audit? - As noted in the case, auditing standards specifically require auditors to identify revenue recognition as a fraud risk in
most audits. Based on your understanding of the company, what factors may increase the risk of fraudulent financial
reporting in Souper Bowl’s 2016 revenues? - Use the daily sales by location as provided by the client (2016 and 2015) and the weather data from NOAA to perform
disaggregated sales analytics in Tableau. Your goal is to develop visualizations that identify potential outliers in the
2016 daily sales data related to the significant risks identified by the partner and manager. Using the memo template in
Appendix B, document your analyses and conclusions as to the specific daily sales from certain locations that you
recommend selecting for focused substantive testing.