Waren Sports Supply Part 1

Each audit team received an initial packet of general information from the Systems Understanding Aid case. Each packet contained introductory information, flowcharts, and portions of the procedures manuals from the SUA project. Instructions, as reproduced in Exhibit 2, required students to identify and report in a given tabular form the internal control strengths for WSS, and also to indicate the strengths in the flowcharts/manual, using sequential S-1, S-2… notations.

The AIS and auditing instructors created an answer key for this part of the assignment, coming up with a total of forty-five identified strengths. This list will be used by the AIS instructor to help direct class discussion when studying internal control. The auditing instructor used the identified strengths during the class debriefing, which was held when the graded submissions were returned to students.

After discussing the internal control strengths, the auditing instructor then led a brainstorming session about which strengths could be considered “key” strengths, characterizing them as to preventative, detective, complementary and redundant in nature. Finally, the discussion was directed toward determining which strengths could actually be tested in an audit setting, and the types of audit evidence and procedures that auditors would employ.

Waren Sports Supply Part 2

In the second part of the assignment, each audit team was given written instructions as reproduced in Exhibit 3 along with a unique set of “client” materials from the prior semester's SUA projects. Students were specifically instructed not to alter, deface, or destroy any of the client's original documents. The materials included the following:

• The WSS balance sheet, income statement, and statement of cash flows

• The WSS working trial balance, with adjustments posted

• The journals and general ledger

• The year-end bank reconciliation, aging of accounts receivable, fixed assets trial balance and accounts payable trial balance

• All source documents from the SUA files

Using the “client” materials, the teams tested for the appropriate functioning of internal controls for one transaction involving each of the following areas: Revenue, Accounts Receivable Write-offs, Sales Returns, Cash Receipts, Purchases on Account, Cash Disbursements, and Payroll. Each team created an audit working paper to document their testing, and prepared a memorandum to file summarizing their findings and conclusions with regard to internal controls. When the graded submissions were returned to the audit teams, the instructor again held a debriefing where the varying results were discussed in class. Relevant teaching points from this session included the following:

• Circumstances where WSS manager (Ray Kramer) was not doing his job in overseeing the financial reporting function of WSS. Internal control functions were not being carried out, or at times were being performed in a manner that did not follow company policy and circumvented the internal controls.

• Instances where WSS accounting personnel were engaging in “force balancing.”

• Testing one transaction from each cycle is not a sufficient sample size. Not only is the sample too small, but it only covers the last two weeks of the year under audit. Results cannot be projected to the entire year.

• Some cycles may have strong internal controls that are operating as designed, while others in the same company may be weak or improperly designed.

• The effect on other auditing procedures, such as expanded year-end testing, was discussed in light of the varying results from the audit teams.

At this point, the auditing and AIS instructors met to discuss the second part of the assignment. The purpose of the meeting was to determine if any adjustments/improvements could be made in the AIS class given what the “auditors” were finding. Two adjustments will be made in the SUA assignment during the spring of 2012 on the basis of this meeting. First, there is the issue of “force balancing.” The AIS instructor had allowed students to see the answer-key journals after they had completed all their journal entries. Two problems were occurring. On occasion, students would copy the totals from the answer-key journals without correcting the line(s) on the journal that had the errors in them. Also, some students would correct the journals properly but not correct the source documents. In the future, the AIS instructor will look at the completed journals and identify any errors. The students must then fix the errors themselves, re-add and re-post. This will mitigate the problem of force balancing on journals, which is particularly confusing to auditing students. Once that is corrected, even if there remain a few errors unfixed on related source documents, the auditing students should not have as much difficulty detecting those problems and reporting on them.

A second issue is with missed steps. For example, Ray Kramer does not initial his approval on a document. To address this issue in future semesters, students will be asked to role-play. One will be Nancy, one Jim, and one Ray. (If four students end up in a group, Jim's duties will be divided between two students in a pre-determined way). The authors see two possible advantages: (1) if someone misses their steps, they can be held accountable (less chance of social loafing) and (2) all students in the group will be expected to participate (less chance that one student will take over). The authors hope that with an actual role-play, the students will get a better understanding of the separation of duties concept, but concede that perhaps shifting ledgers and journals around will create more confusion than clarity. This role-play requirement will be implemented and evaluated in spring 2012.

Waren Sports Supply Part 3

In the third part of the assignment, teams were given instructions (Exhibit 4), a notebook with dividers and tabs, and an audit program (Exhibit 5). Audit teams were to perform traditional tracing, vouching, footing, and recalculating procedures related to the audit of cash, receivables, fixed assets, and payables. They prepared a full set of audit working papers that included the internal control documentation and testing from parts 1 and 2 of the project, as well as memoranda related to their audit conclusions and the type of audit report they would recommend be issued. They also prepared and included a draft of the client's Footnote 1, Accounting Policies.

As with the internal control testing in part 2, the audit teams had widely varying results, depending upon the “competence” of the SUA teams in the prior semester. Once again, force balancing seemed to be an issue in the various trial balances and the financial statements themselves. The instructor-led debriefing was a lively discussion, covering such topics as improper financial reporting; indicators of fraud; the role of management in oversight of the financial reporting process; and the various reporting options available to audit teams, including qualified, adverse, and disclaimer opinions. One group recommended complete withdrawal from the engagement.

As they had done at the completion of step two, the auditing and AIS instructors met to discuss the project at the conclusion of step three. The main issue needing to be addressed in the AIS class was again that of force-balancing. The AIS instructor had given students the correct trial balance figures after they completed their work, but before they submitted their projects. The original purpose was to give students a chance to locate their errors and fix them through the entire accounting cycle—source documents, journals, ledgers, and worksheet. Many students did use this as an excellent learning opportunity. There were those, however, who would simply use the correct trial balance figures without tracing their errors back and making corrections. Therefore, in future AIS classes, the correct trial balance amounts will not be distributed to the students.

Project Grading

Each of the three parts of the assignment was separately graded using a rubric included in the Teaching Notes. Due to the largely unstructured nature of the project, (and in many cases, to having no clear right or wrong answer to the auditing issues raised by the audit teams), the projects were graded based upon completeness, effort, the ability to follow instructions, and written communication skills. Overall grades for all three parts ranged from a low of 81.25% to a high of 100%.

Likert-scale Questions

After completing the projects, auditing students were asked to fill out a short questionnaire. The responses are shown in Exhibit 6 and summarized below. Overall, student attitudes were quite positive, especially considering this was a first run-through of the project.

Do students believe this simulation project was successful in its attempt to cement AIS concepts and convey auditing concepts? As shown in Table 2, the survey results indicate a resounding ‘Yes.’ Overall, students agreed that the project was a valuable learning experience and felt more confident in their knowledge. In particular, there were two critical aspects of auditing where students felt more confident: Internal Controls and the Audit Process. In addition, a large majority of students disagreed that they were ‘more confused now about this material than I was before doing the project,’ and all but one disagreed with the statement that ‘the material had no value.’

Table 2 Value of the Learning Experience

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Attitudes toward other aspects of the project are summarized in Table 3. Seventy percent of students found the project interesting and felt the project should be repeated in future semesters.

Table 3 Other Student Attitudes

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The raw data (Exhibit 6) reveals that there were a few students who had a difficult time with the project. Five, and at times, six students, responded that they did not enjoy the project, did not have sufficient time, felt lost, had no interest in learning anything else about the material, and did not feel more confident about doing audit work in the real world.

Students do not seem to mind the idea of group work and very strongly agree that hands-on simulation is an effective teaching method (Table 4). In addition to the three questions in Table 4, students were asked how they best like to learn new things. As seen in Exhibit 6, question 16, nineteen out of the twenty-three favored ‘hands-on’ learning, one preferred to read about it, two preferred lecture/talks and one preferred watching someone else. Their clear preference is for simulation.

Table 4 Group work and Simulation

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Open-ended responses

The final question on the survey was open-ended: “Please provide any other comments you believe would be helpful to us in further developing this learning project.” All but five students wrote responses. A summary of their comments is presented in Table 5. Comments concur with objective responses, further demonstrating that most students saw value in their experience.

Table 5 Open-ended Responses

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Other than comments about the workload, which may or may not be a criticism, and negative group work comments, there were only three areas of complaints about the SUA auditing project. (1) Five students complained about inadequate directions, two of whom said they were only confused by the third assignment. As a response, in the future, directions will be clarified and improved as faculty members learn where students have difficulty. (2) Consistent with the results of survey question fifteen, four students said they needed more time on the project. One of those said only part three required more time. The last part of the project was admittedly close to the end of the semester, and consideration will be given to the timing of the assignment and the length of time to be allowed for completion. (3) Four students had concerns about the disparity in quality among SUA projects. They felt it “wasn't fair” that some groups had “good” SUA projects and some had “messy” ones. One student commented “I felt overwhelmed because this seemed like accounting triage rather than auditing.” This problem is easily addressed: as more SUA projects are created in the AIS class and retained by faculty, those few that are poorly-prepared can be eliminated.

Teamwork

One goal of this project, in both the AIS and audit classes, was to enhance teamwork skills and get students to actively participate in the learning process. Team members were asked to rate themselves and their teammates at the completion of each project. In the AIS class, students self-selected their team. In the audit class, they were assigned teams by the instructor in such a way that each team had at least two members who had already taken the AIS class. Overall, results were very good. In the AIS class, nine out of the ten groups worked very well together, as indicated by their self-reported Team Evaluation sheets. However, in one group, a member was reported to be a slacker by the other two members. In the auditing class, five students received teammate evaluations indicating a lower level of contribution to the overall project. Despite the presence of these “weaker” teammates, the auditing groups were able to resolve differences, overcome obstacles, and submit projects on a timely basis, with none of these particular teams scoring lower than 90%, and one of these teams achieving 100% on the project itself.

Goals for SUA Completion Portion

Goals to be achieved during the completion of the SUA assignment in the AIS class focused on source documents, internal controls, and recordkeeping procedures. Evidence supporting the idea that students were learning from the SUA project is anecdotal, but persuasive. First, out of ten projects turned in, seven scored 90% or above (good to excellent), one scored 85% (marginal), and the last two projects scored 80% (poorly done). The Grading Sheet used is presented in Exhibit 7. In the authors' opinions, scores in the 90% range could not be achieved without a proper understanding of source documents, internal controls, and recordkeeping procedures.

Another subjective gauge is the students' interactions while they are working on SUA, both with the professor and within the groups. Conversations, questions asked, the level of concentration, and the tone in the classroom certainly leads the instructors to believe learning is taking place, except in the case of some of the more obvious ‘social loafers.’ Engaging them can be a challenge; however, as mentioned previously, the ‘role-play’ approach will be attempted in the spring of 2012.

Supporting evidence regarding learning can also be found in the questionnaire when comparing responses of those students who have taken AIS prior to the auditing class to those who have not. While this does not distinguish between what students learned in the AIS class aside from SUA versus what they learned from SUA, it is still worth mentioning.

On all but three questions, response patterns were similar. The three questions where responses differed indicated (1) students who had taken AIS were more likely to recommend using the project in future semesters, (2) students who had taken AIS were more likely to feel they had sufficient time, and (3) students who had not taken AIS were more likely to feel lost (see Table 6).

Table 6 Questionnaire Response Patters Students Who Had AIS and Those Who Had Not

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Finally, two of the open-ended comments indicate the value of taking the AIS class (and presumably doing the SUA project) before trying to audit Waren's books:

• I was glad I had taken the AIS class first.

• The person in our group who had not had the systems class was totally lost and couldn't contribute.

From this, we presume that students who had completed SUA knew more about the flow of information (so tracing and vouching was easier) and had a better understanding of internal controls. As an aside, on the basis of this evidence, we have decided to make the AIS class a prerequisite for the auditing class, because we believe auditing students need the background provided by both the SUA assignment and the AIS course to fully benefit from the auditing curriculum.

Goals for SUA Audit Portion

As discussed in the background section, research has shown that student learning is optimized when students take an active role in the learning process. Given this, it is not surprising that practice sets, real-world case studies, and other simulations are commonly used in auditing courses to engage students in the learning process. When students participated in the Waren audit simulation, they had the opportunity to review concepts introduced in SUA, mainly those of internal controls, source documents, and accounting records. They were also required to plan and carry out an audit of these records, including reviewing internal controls, conducting substantive testing, documenting their work in audit working papers and writing a memo regarding their findings. But any good audit practice set could have afforded students this experience. What are the advantages of this particular project to meet these goals?

One of the major advantages of the Waren Sports Supply project is that new data is available each semester. The auditing instructor can use the same instructions and same grading rubrics each time, but the students cannot simply copy from previous semester's students. Along the same line, a second advantage is that not all SUAs in the auditing class will be the same. Some may differ due to errors made, but some will be different because SUA numbers are different each year. So as our bank of projects grows, the number of different SUAs used in the audit class will grow. These slight differences add to the richness of the overall audit experience.

A third advantage is that students have seen these records before—they have actually generated records similar to the ones they audit. (Not all students had taken AIS, but as mentioned, we plan to remedy that by making AIS a prerequisite to auditing.) Using the SUA project rather than other simulations results in (1) less start-up time because students are familiar with the records, (2) a second chance to go through the recordkeeping process, giving students the opportunity to more thoroughly understand a manual accounting system, (3) the ability to close the loop on the financial reporting process as they determine the appropriate audit report to be issued (a “cradle to grave” concept).

The SUA audit project proved valuable, even to those choosing not to pursue a career in auditing, in that it helped confirm this decision. Case in point: One person said, “This class/assignment has confirmed my thoughts that I do not want to pursue the Masters of Accounting program nor the CPA exam.” The student reported no interest in learning anything else about the matter, felt hopelessly lost working through this project, yet recommended using it in future auditing classes!