Auditing HW

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Case 20-10

Auditing Logistical Logistics

Background

Logistical Logistics Inc. (Logistical Logistics or the “Company”) provides transportation and
logistics services to customers throughout a network of offices in North America, South
America, and Asia. The Company contracts fleets of shipping vessels, trucks, and aircraft to
provide regional, long-haul, and international shipments of customer goods. In addition, the
Company contracts warehouse operators across North America for use of their facilities as
distribution centers that temporarily store goods in transit. Assume the Company has adopted the
new leasing standard, ASC 842, Leases.

The Company has entered into the following contracts with the vendors identified below.

Logistical Logistics enters into a contract with See Boat Inc. (See Boat) to use its shipping
vessels to transport customer goods from North America to Asia. See Boat has a fleet of 25
multi-use shipping vessels, each of which has the capacity to hold 1,000 shipping containers.

Logistical Logistics enters into a contract with Fly-By-Air Inc. (Fly-By-Air) to use its aircraft to
transport customer goods from South America to North America. Fly-By-Air has a fleet of 50
multi-use aircraft, each of which has the capacity to hold 500 shipping pallets of customer goods.

Logistical Logistics enters into a contract with Trucking Co. Inc. (Trucking Co.) to use its trucks
to transport customer goods from distribution centers to retail stores across North America.
Trucking Co. has a fleet of 1,500 multi-use long-haul trucking carriers, each of which has the
capacity to hold 100 shipping pallets of goods.

Logistical Logistics enters into a contract with Warehouse Co. Inc. (Warehouse Co.) to store up
to 18,000 shipping pallets of customer goods at one of Warehouse Co.’s locations. Warehouse
Co. has the capacity to store 20,000 shipping pallets of goods.

The terms of the shipping contracts are as follows:

• See Boat

o The contract term is for the voyage to transport Logistical Logistics’ cargo from
Los Angeles to Shanghai. Logistical Logistics does not have discretion to change
the departure or arrival ports without a renegotiation of the contract fees.

o SB0829, a commercial shipping vessel in See Boat’s fleet, is dedicated to
delivering Logistical Logistics’ cargo for the term of the contract. See Boat
cannot substitute SB0829 with another vessel in its fleet.

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All Rights Reserved.

o The contract identifies the shipping containers and acceptable cargo (e.g.,
semiconductors) to be transported on the ship as well as the transportation route.
Logistical Logistics does not have discretion to change the identified cargo
without renegotiating the contract fees.

o See Boat is responsible for the safe passage of the cargo, as well as operation and
maintenance of SB0829. The crew determines the ship’s route, speeds, and date of
departure from Los Angeles. In addition, Logistical Logistics cannot, under any
circumstances, replace See Boat’s crew.

• Fly-By-Air

o The contract term is five years.

o FBA1231, a commercial aircraft in Fly-By-Air’s fleet, is dedicated to delivering
Logistical Logistics’ shipping pallets during the term of the contract.

o Logistical Logistics determines (1) the airports from and to which goods are
shipped and received and (2) the order in which deliveries are made to the
airports. Fly-By-Air provides the aircraft’s pilot and crew, and Logistical
Logistics instructs Fly-By-Air accordingly.

o While Logistical Logistics determines what cargo will be transported throughout
the term of the contract, certain restrictions prevent the Company from shipping
flammable materials.

o Logistical Logistics has the right to send the aircraft regardless of whether its
cargo levels meet the full storage capacity of the aircraft. If FBA1231 is below
capacity, Fly-By-Air cannot use the excess storage space to ship products of its
other customers.

• Trucking Co.

o The contract term is five years.

o Trucking Co. must deliver Logistical Logistics’ shipments within three weeks of
the Company’s notification that it has pallets of customer goods ready for
shipping.

o Trucking Co. may choose any truck from its fleet to fulfill the shipping request.

o Logistical Logistics may request shipment of 25 to 100 shipping pallets of goods
in a single request. (Individual shipping requests generally do not exceed 50
shipping pallets.)

o Trucking Co. has the right to use any excess storage space to ship products of its
other customers.

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All Rights Reserved.

o Trucking Co. determines the shipment’s delivery date (within the three-week
period), as well as the shipping route.

• Warehouse Co.

o The contract term is 10 years.

o Logistical Logistics can store up to 18,000 shipping pallets at one specified
Warehouse Co. location. Logistical Logistics will be charged for storage of
18,000 shipping pallets, regardless of the actual number of pallets stored, and
Warehouse Co. cannot use any of Logistical Logistics’ unused storage space for
other storage needs.

o Warehouse Co. can use the remaining space in its warehouse for other storage
needs.

o Warehouse Co. cannot relocate Logistical Logistics’ inventory to another facility.

o Logistical Logistics has the right to decide which shipping pallets are placed in
storage and when they can be removed.

o Warehouse Co. provides the loading and unloading services for the warehouse
activities, both of which are dependent on Logistical Logistics’ decisions about
which shipping pallets are placed in storage and when they can be removed.

The CFO of Logistical Logistics recognizes that the new leasing standard contains certain
provisions that may affect how the Company treats contracts of this nature.

Note that you have been provided with Handout 1, which contains the risks of material
misstatement (RoMMs) matrix, and Handout 2, which is Logistical Logistics’ control matrix.

Required Activities:

1. On the basis of the facts related to the contracts between the Company and its vendors,
what are the RoMMs that we may identify as part of our audit to address the
completeness and existence of those contracts that are or contain a lease? Handout 1, the
RoMMs matrix, may be used to assist with identifying relevant RoMMs.

2. Tailoring RoMMs to the specific lease contracts and assertions is an important step in
designing an audit plan for leases. Now that you have identified the RoMMs that are
applicable to the contracts between the Company and its vendors, how might you tailor
the RoMMs that you identified in Activity 1 to the facts presented in this case?

3. Identify internal controls that address the tailored RoMMs identified in Activity 2.
Handout 2, Logistical Logistics’ internal control matrix, may be used to assist with
identifying relevant internal controls.

4. Design substantive procedures that address the tailored RoMMs identified in Activity 2.