On the basis of the contract between Trans Ocean and Heavy, what is the risk of material misstatement (RoMM) that we may identify as part of our audit to address the valuation and allocation of the right-of-use (ROU) asset and lease liability, in determining the appropriate lease term in the lease contract?

No matter the internal or the external auditors can play a vital role during the adoption process of ASC 842, Internal audit proficiency is the one that can easily help for setting up all the controls along with the different processes for the transitioning to all of the new standards along with the post compliance reporting. On the basis of a contract between the Trans Ocean and Heavy, risk of material misstatement that has been identified is that sharing of such transition plans with all of the external auditors. While on the other hand, it will definitely lay the groundwork for the avoidance of surprises in the first audit after getting the adoption of ASC 842. (Schultz Jr, 2010)

Identification of the different assertion that has been assessed:

·         Completeness is the first one and it is one of the major audit area as well for all of the leases in particular asserts in which all of the leases have been captured as well as capitalized in a proper way on a balance sheet. All of the leases are particularly required for the recognition of right of use ROU assets along with the leases liability for the operating out leases.

·         Next one is the existence or presence, it is not a high risk area for the leases along with the asserts that may or may not these leases actually exists or present in nature. Auditors in general don’t spend much of their time on the assertion as being the financial statement that preparers may get incentivized for the understanding of all such liabilities. (Blay, 2007)

·         Cut off asserts are the ones that may or may not the lease has been recorded successfully in the right period of the accounting. For the this shipping company, that takes the package of all the practical expedients for then the cut off procedures would be entirely focused upon the leases after the date of transition and since the determination of the lease term as well and all of the classification would not change at all in the transition.

Question 1B. Considering the “Additional Facts” of the case, what additional RoMMs may we identify as part of our audit to address the completeness of identifying all events or circumstances that would require a reassessment of the lease term, the premeasurements of the ROU asset and lease liability, or both, to reflect the reassessment event?

Considering all of the additional facts of the case, here are some of the additional RoMMs that we have identified being the part of audit for addressing the completeness for the identification of all events or even some of the circumstances that would completely require a reassessment of all the lease term along with the premeasurements of the ROU assets and the lease liability as well. Coming towards the points that have been identified.

·         Cargo vessel can use different routes for the shipping purpose but as according to the treaty it would be dangerous for it to use any other route because it can harm us in any way and the cargo service can be cancelled at any time.

·         Cargo vessel is very big and this has been identified that it can have number of different products in it that needs to be shipped because that would save time and fuel both. So this is one advantageous thing. Still if the cargo vessel is not that big enough to handle all of the things along they may use a bigger cargo vessel as well for the future time.

·         All of the promised goods or services need to be delivered at the specified time to make sure the reputation don’t falls off the cliff.

·         Transaction price needs to be allocated for the performance of an obligation on the relatively stand-along selling upon the different price basis.

Question 2. The fixed consideration needs to be identified in the price of a transaction. Identify internal controls that address the RoMMs identified in Activity 1. Handout 2, Trans Ocean’s internal control matrix, may be used to assist with identifying relevant internal controls.

Identification of the relevant internal controls are:

Mandatory or the Voluntary, these are the internal controls that needs to implemented and they would be really feasible for the Trans Ocean’s internal control matric. These are being used abruptly and broadly for the prevention of different policies along with the minimization of the risks that are related to the safety and health of the employees working. Voluntary controls are the ones that are being applied as per the judgement of the organization along with the head who manage the Trans Ocean shipping. (Krishnan, 2005)

Discretionary or the non-discretionary, in this kind of internal control manager of the Trans Ocean shipping may get permitted for the discretion on the basis of interpretation or along with the different judgement of the risks that are being given at any of the circumstance. These Non-discretionary needs to be implemented here.

Manual or automated are the third type of an internal control that has been identified. These Manual controls are being applied by the employees themselves while automated programs are the ones that are already programmed into the systems of this Trans Ocean shipping. There are some kind of the systems that can combine for both of them like for example, while making a decision that whether the customer should be allowed some of the days on hand for payment, there exists an automated acceptance above the specified rating or even in the decline or below the specified rating of credit, an there also exists an intermediate range where the manager becomes able to override the automated system completely. (Feng, 2009)

Last one is the general control or the application controls, this classification of the controls implies particularly to some of the information systems. This General control helps to make sure about the reliability of the data that is being generated by the system of Trans Ocean shipping. Application control is automated and it is further designed to make sure all of the accurate and complete recording of the data from an input towards the output.

Question 3. Design substantive procedures that address the RoMMs identified in Activity 2.

Two different kind of the substantive procedures which address the RoMMs that are being identified in Activity 2 are:

Analytical procedure is the first one and it has addressed the RoMMs, these are also the kind of auditing procedures which particularly involves the analyzation of the different relationships between the data that is financial along with the non-financial one. This helps in the identification of the different variances along with the relationships as well which seems to be inconsistent with one another. (Uludağ, 2016)

The next substantive procedure is tests of details and this is being used by the different auditors for the collection of different evidences which includes the balances, disclosures and underlying different transactions that are being associated with the client that they have received the cargo vessel along with the confirmation that they are correct or not. (Smith, 2020)

These two are the methods or the procedures that have been designed for the substantive procedure that can address all of the RoMMs that have been identified in the activity 2.

References On the basis of the contract between Trans Ocean and Heavy, what is the risk of material misstatement (RoMM) that we may identify as part of our audit to address the valuation and allocation of the right-of-use (ROU) asset and lease liability, in determining the appropriate lease term in the lease contract?

Blay, A. D. (2007). The effects of fraud and going‐concern risk on auditors' assessments of the risk of material misstatement and resulting audit procedures. International Journal of Auditing, 11(3), 149-163.

Feng, M. L. (2009). Internal control and management guidance. Journal of accounting and economics, 48(2-3), 190-209.

Krishnan, J. (2005). Audit committee quality and internal control: An empirical analysis. The accounting review,, 80(2), 649-675.

Schultz Jr, J. J. (2010). Integrating business risk into auditor judgment about the risk of material misstatement: The influence of a strategic-systems-audit approach. 35(2), 238-251.

Smith, J. L. (2020). The Reel Wheel: Using Analytical Procedures as Substantive Tests of Account Balances. Issues in Accounting Education. 35(1), 13-24.

Uludağ, S. (2016). The importance of control environment in an organization for an independent auditor to determine nature, timing, and extent of substantive tests: An application in Turkey. 2(6), 294-303.