In the Groupon incident, the primary internal-control deficiency related to refunds was which area?

• A. Revenue recognition
• B. Refund liability reserves
• C. Customer data privacy
• D. Expense accruals

Answer: (B)

The main idea being tested is how well a company estimates and records the obligation to refund customers, so revenue is reported net of anticipated refunds. In this case, the internal controls around refund estimates were weak, meaning the company did not properly establish or adjust the refund liability reserve. That leads to overstating revenue and underreporting the liability for anticipated refunds. While revenue recognition is part of the broader process, the specific deficiency was the adequacy and accuracy of the refund reserves. Customer data privacy and general expense accruals aren’t addressing this refund-specific control weakness.