Easy Clean, Co: Evaluation of Internal Control Environment

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Learning OBJECTIVES

Measure a new audit client’s control environment.

Supply an initial rating of certain constituents of the client’s control environment

Appreciate the judgement involved in measuring the overall internal control environment based on interview informations

Supply support for your internal control appraisals

Ted is a director in the Business Advisory and Assurance Services division of a national public accounting house. He has been given the occupation of pull offing the audit of Easy Clean. Co. . which provides industrial and domestic rug steam-cleaning services. Easy Clean has ne’er been audited. Therefore. Ted does non hold any prior-year working documents to reexamine. Ted late conducted a preliminary interview with Doug Dosio. who along with his brother. Phil. owns Easy Clean. Ted’s aim for the interview was to set up an apprehension of the control environment. To fix for his interview. Ted reviewed professional auditing criterions. Those auditing criterions ( AU 319 ) indicate that the control environment “sets the tone of an organisation. act uponing the control consciousness of its people. It is the foundation for all other constituents of internal control. supplying subject and construction. ” The criterions province that control environment factors include the followers:

1. Integrity and ethical values
2. Committedness to competence
3. Board of managers or audit commission engagement
4. Management’s doctrine and operating manner
5. Organizational construction
6. Assignment of authorization and duty
7. Human resource policies and patterns





Based on the interview duologue provided below. you will be asked to measure the seven constituents of the client’s control environment noted antecedently in order for you to do an rating of the overall internal control environment. Before reading the interview information. delight pass a twosome of proceedingss reexamining the appraisals you will do. Based on the information provided in the interview that follows. you are to measure Easy Clean’s overall control environment. To help you in doing this overall appraisal. you will happen elaborate descriptions of factors noted below that may weaken or beef up each of the seven constituents consisting the overall control environment.

INTERVIEW WITH CLIENT

Ted: Doug. can you give me a small information on the background of Easy Clean? Doug: Easy Clean provides both a domestic and industrial rug steam-cleaning service and sells a comparatively little sum of stock list. such as topographic point removers and rug fresheners. Our company provides this service throughout three counties. which cover over 40 townships in a dumbly populated country. Easy Clean is wholly owned by Phil and me. Our concern has grown steadily over the class of several old ages after get downing out with merely one car-pulled dawdler over five old ages ago. Over the old ages. the concern has bit by bit added 12 to the full equipped new waves. worth about $ 30. 000 each. Now in our 6th twelvemonth of concern. we plan to buy about one new new wave each twelvemonth to run into the turning demand for our services. The company grossed merely over $ 1. 650. 000 in grosss last twelvemonth. about half of which was collected in hard currency. We feel our go oning success is due in big portion to “word of oral cavity. ” Ted: Can you state me something about the daily operations?

Doug: Well. Mr. Day. our office director. and I are in charge of a little gross revenues force that goes out on leads to give estimations for new occupations. Mr. Day is paid a salary plus a per centum of the entire gross revenues each month. My brother. Phil. is normally out in the field pull offing the 20 employees who work as cleaners for Easy Clean. Phil besides helps with managerial and operating determinations. Salesperson are paid on a committee footing. selling both the domestic and industrial occupations based on standard monetary values established by the proprietors. Salesperson may sometimes negociate particular cut rates during the slower spring and autumn seasons. Of class. these are about ever capable to blessing by me or Mr. Day. Large industrial occupations are typically booked good in progress of the existent work. The occupation committednesss obtained by the sales representative are usually submitted to Mr. Day. who marks them to bespeak his blessing and so returns them to the sales representative.

Gross saless people so frontward occupation committednesss to one of two informations input clerks for processing. The computing machine processes each committedness by widening the figure of occupations by the standard monetary value stored on the pricing file. or in specially negotiated state of affairss. by the monetary value on the input papers. The gross revenues. histories receivable. and commitment files are updated and bills are produced. An exception study of particular monetary values is produced and sent to the sales representative to guarantee that the specially negotiated committednesss to occupations were processed right. Mr. Day developed this gross revenues system himself and it’s working instead good. He’s presently in the procedure of making the user manual for the system. I’ve besides noticed that he sometimes makes accommodations to better the system. which makes the accounting procedure more efficient.

We’ve agreed that he’ll reevaluate the procedure at least one time every eight hebdomads. Ted: And how approximately your accounting section? How large is it. and who oversees the accounting procedure? Doug: The accounting section of Easy Clean consists of seven parttime clerks. including the two informations input clerks. who are all paid an hourly pay. All except one are college pupils working toward their accounting grades. Mr. Day trains all new accounting aid when they are hired. Typically. they stay on with us until they graduate. which normally covers two full old ages. We keep them reasonably busy around here. but everyone helps each other out and they ever get the occupation done. Ted: What are your brother Phil’s duties?

Doug: Phil manages the service constituent of the concern. He normally trains all freshly hired cleansing employees and explains their specific responsibilities and duties. When he feels certain that the employee is ready. the new hire is teamed up with a more experient worker and assigned to a truck unit. When extra aid is needed. Phil topographic points ads in the local newspaper. Phil is the expert at running that terminal of the concern. Ted: What about employee turnover?

Doug: We haven’t had a job with employee turnover. Phil expects some turnover in this type of concern and knows how to cover with it. We try to forestall any employee concerns by keeping an unfastened door policy and encouraging employees who have inquiries or concerns about their duties to inquire for aid or to come talk with us. If a job should originate that might impact others. Phil or I will instantly turn to the job at the monthly office meeting. doing all employees aware of the issue. Both Phil and I work hard to guarantee that any job is resolved quickly. Doug leaves to give an estimation and Ted continues his observations of the concern.

Subsequently that twenty-four hours. after disbursement clip with the accounting staff. Ted has a minute to inquire Mr. Day a few inquiries. Ted: Mr. Day. I’m inquiring if you could assist me clear up some things sing my brief observations of the accounting staff? Mr. Day: Certain. I’d be glad to. What can I make for you?

Ted: I got the feeling from the staff that they’re non ever certain about their assigned maps. Are occupation duties clearly defined? Mr. Day: In delegating office duties. Doug says the chief considerations are that work should be done by the people who are familiar with a undertaking and who are capable of making it. But. he besides admits that handiness has to be a consideration. Although this does take to some convergence in responsibilities. it doesn’t make any confusion in duties.

I carefully assign the day-to-day responsibilities and overview each day’s accounting records. This keeps the office running swimmingly and in a well-organized mode. Ted: The staff mentioned that they’ve on occasion had jobs treating aggregations of trade receivables. Do you prelist hard currency grosss before they’re recorded? Mr. Day: Well. we haven’t truly experienced any demand to. The system is set up so that we collect all of the cheques at the terminal of the twenty-four hours. doing it possible to enter them all at one clip. This manner. we can be more efficient by avoiding the demand to compose them down twice. On those rare occasions when there is a aggregation processing job. we resolve it instantly. Ted: Do you of all time run into accounting policy jobs?

Mr. Day: Not really frequently. I normally handle any policy jobs that do arise. although Doug will manage the state of affairs if he feels strongly about the issue. Ted: Well. thank you Mr. Day. I need to speak to Doug before he leaves for the twenty-four hours. A few minutes subsequently. in Doug’s office…

Ted: Are you satisfied with the processing of trade receivables? Doug: Yes. decidedly. Mr. Day is punctilious in his clerical operations. which is good systematized. He has first-class control over the trade receivables. In fact. it’s been over a twelvemonth and a half since the bank accepted a list of sworn receivables as security for a loan. From so on. we’ve had entree to a continually renewable loan based on a list that’s updated hebdomadally. The loan is comparatively little. and the contract allows the bank to entree Easy Clean ‘s look intoing history in the improbable event that aggregation of the loan seems dubious. Possibly I should add that although Phil and I have no formal accounting preparation and we have given Mr. Day full duty for the accounting responsibilities. Phil and I are the lone people allowed to subscribe company cheques. Ted: One of the accounting clerks mentioned that you’re believing about doing a alteration in the accounting system. Doug: As a affair of fact. Mr. Day has been looking into utilizing a new accounting package bundle that should do the clerking procedure an easier undertaking for the clerks.

This bundle includes a budgeting system that should assist command costs and place those countries that need attending. Although I’ve ever monitored the company’s disbursals. I didn’t antecedently see the demand for a formal budgeting system. If something didn’t seem right. Phil or I would convey the job up at the informal monthly office meeting between all the employees and seek to decide the issue. Give our current success. the execution of a more sophisticated budgeting system seems like a wise investing. Ted: I’m besides interested in your security steps. How do you protect your accounting records and physical assets? Doug: After hours. the office door and Windowss are to a great extent bolted. Merely Phil. Mr. Day. and I have keys to open the office. Although there haven’t been any jobs. we’re sing locking up the file cabinets where the difficult transcripts of the accounting records and informations discs are stored at dark. I’ve besides been intending to see about holding the computing machines bolted down to the desks. As for the new waves. they’re kept in a fenced-in batch behind our office.

Each driver gets a key to the gate lock so they can allow themselves in or out for work. We have to make this because a batch of the commercial cleansing is done after hours. when the office is closed. As a precautional step. we change the lock on a regular basis. Ted: That should approximately make it for now. until I can acquire in to make some preliminary audit work. But before I leave. I’d like to inquire you a few more general inquiries. To get down with. can you state me what you feel is responsible for Easy Clean’s recent success? Doug: Well. Ted. because Easy Clean is utilizing the newest steam-cleaning process. we provide a much better consequence than the traditional rotary shampoo methods used by our rivals. And. our clients can state. Plus. Phil and I understand the concern good. we are personable. and we pride ourselves on making good work.

Ted: Having an audit performed by our house is a large measure. Why did you make up one’s mind to hold an audit now? Have you of all time been audited before? Doug: Phil and I are confident that Easy Clean is a genuinely feasible concern. We feel that audited fiscal statements will confirm our claim. We’re eager to larn what suggestions your house can give us sing the most professional manner to record and present our fiscal statements. We besides have an involvement in larning how to increase the company’s credibleness with the local concern and banking community. Both Phil and I are excited about the success of our company and we’re motivated to go on beef uping the organisation with the eventual end of prosecuting extra concern chances and enterprises. We’ve ne’er been audited earlier. although we have used a local revenue enhancement preparer to make full out our revenue enhancement returns of all time since Easy Clean has been in concern. We did inquire another house. about two old ages ago. to come in to make an audit.

We decided non to hold the audit performed. though. because the company’s fees were excessively high. Although I’d have to look up the audit firm’s name. Phil and I decided that Easy Clean would hold to wait for an audit until we could moderately afford the fees. We’ve come to the determination that now is the clip. Ted: Are at that place any issues of concern that you have sing the audit? Doug: Not truly. I’m proud of Easy Clean. The company has had no record of serious jobs and has seldom had a job with bad debts. since most of our receivable balances are collected within two to three hebdomads. Ted: I understand that Easy Clean does non hold an audit commission. which is typical of an organisation this size.

Can you state me if Easy Clean has a board of managers and. if so. who serves on the board and how active the board is in supervising of import issues at Easy Clean? Doug: We do hold a board of managers. It is slightly informal. but Phil. I. and our married womans function as managers. We do hold at least one on a regular basis scheduled meeting each twelvemonth and we have met on other occasions as necessary. Obviously. Phil and I have a reasonably good thought of what is go oning at Easy Clean on a day-to-day footing. We do non believe our company is yet at a phase that could efficaciously back up a separate board comprised of outside managers. Possibly we’ll do that in a twosome of old ages. if we keep turning.

Ted: One concluding thing I’d like to ask—have you and your brother Phil set out any ends for the hereafter? Doug: Phil and I have spent a batch of clip speaking about our ends and aims. but we’ve ne’er officially recorded them anyplace. Our long-run ends are reasonably unsure. but we’re hoping to construct our nest egg to the point where we can potentially retire early. We both agree that our hereafter programs include spread outing our gross revenues district. increasing advertisement. puting more aid and extra equipment. and. I have to acknowledge. taking a well-deserved holiday in Hawaii.

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