Superior Foods: A Case Study in Coso Risk Assessment

By Kraut, Marla; Pforsich, Hugh D. | Journal of the International Academy for Case Studies, November 1, 2004 | Go to article overview

Superior Foods: A Case Study in Coso Risk Assessment


Kraut, Marla, Pforsich, Hugh D., Journal of the International Academy for Case Studies


CASE DESCRIPTION

This case addresses the risk assessment process in the internal audit function. The level of difficulty is four. The case should require about three hours of classroom time for coverage and students should expect to spend another three to four hours in preparation time outside class.

This case is designed to be used in an accounting information systems or auditing course, graduate or undergraduate. In order for students to learn how to audit a client's risk assessment process, they must first gain a detailed understanding of that process. This case has been developed to provide exposure to an actual company's risk assessment process and thereby provide guidance for this understanding.

CASE SYNOPSIS

This case describes the development, implementation, and results of a Fortune 500 company's risk assessment process. Some information about the company has been altered due to the company's request for anonymity. However, the detailed descriptions of the risk assessment process and the risks identified by management are factual.

The newly hired Director of Internal Audit Services in this case already had seven years of experience managing external audits for a major international public accounting firm. The company had been one of his audit clients, so he was very familiar with their internal controls and financial reporting procedures. He was hired to develop a comprehensive internal control program to comply with the COSO Report (1992). His first step was to develop a process of risk assessment. This case describes the design and implementation of that risk assessment process.

"I've done over fifty audits...evaluation of internal control systems, tests of controls, substantive tests, etc... now COSO requires management to have a risk assessment process. How do we design, implement, and then audit this new 'process?'"

- Greg Johnson, CPA

Director of Internal Audit

Superior Foods, Inc.

INSTRUCTORS' NOTES

1. List additional "general" risks that would pertain to a company that owns and operates grocery stores.

GENERAL RISKS: Business acquisitions

Changes in competition

Changes in sales policies

Civil unrest - riots

Concentration of senior mgmt

Discontinuity of increase in earnings

Discontinuity of increase in sales

Discontinuity of store expansion

Disruption of supply of product

Embezzlement of cash

Fraudulent financial reporting

Employee turnover

General business liabilities

Hostile takeover

Human errors

Inability to meet daily cash needs

Inflation

Labor strikes

Market decline in stock price

Misuse of information

Negative media exposure

Noncompliance with benefit plan regulations

Noncompliance with business license laws

Noncompliance with debt covenants

Noncompliance with EPA regulations

Noncompliance with pharmaceutical regs

Noncompliance with union contracts

Noncompliance with GAAP

Noncompliance with SEC regulations

Noncompliance with tax regulations

Poor quality products

Poor quality service

Product liability (customer harm, lawsuits)

Theft of cash

Theft of inventory

Unavailability of capital

Unreliable financial reporting

Untrained work force

Vandalism

Workplace violence

2. List additional "technical" risks that would pertain to a company that owns and operates grocery stores. The locations of such risks would include corporate office, division offices, distribution centers, and retail operations.

Telecommunications

Computer equipment failure

Software failure

Technology changes

Loss of data integrity & security

Equipment failure

Power loss

3. …

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