Easy Clean, Co.:
Evaluation of Internal Control Environment
Evaluate a new audit client's control environment.
Provide an initial evaluation of certain components of the client's control environment
Appreciate the judgment involved in evaluating the overall internal control environment based on interview data
Provide support for your internal control assessments
Ted is a manager in the Business Advisory and Assurance Services division of a national public accounting firm. He has been given the job of managing the audit of Easy Clean, Co., which provides industrial and domestic carpet steam-cleaning services. Easy Clean has never been audited. Thus, Ted does not have any prior-year working papers to review. Ted recently conducted a preliminary interview with Doug Dosio, who along with his brother, Phil, owns Easy Clean. Ted's objective for the interview was to establish an understanding of the control environment. To prepare for his interview, Ted reviewed professional auditing standards. Those auditing standards (AU 319) indicate that the control environment "sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure." The standards state that control environment factors include the following: 1. Integrity and ethical values
2. Commitment to competence
3. Board of directors or audit committee participation
4. Management's philosophy and operating style
5. Organizational structure
6. Assignment of authority and responsibility
7. Human resource policies and practices
Based on the interview dialogue provided below, you will be asked to evaluate the seven components of the client's control environment noted previously in order for you to make an evaluation of the overall internal control environment. Before reading the interview information, please spend a couple of minutes reviewing the assessments you will make. Based on the information provided in the interview that follows, you are to evaluate Easy Clean's overall control environment. To assist you in making this overall assessment, you will find detailed descriptions of factors noted below that may weaken or strengthen each of the seven components comprising the overall control environment.
INTERVIEW WITH CLIENT
Doug, can you give me a little information on the background of Easy Clean? Doug:
Easy Clean provides both a domestic and industrial carpet steam-cleaning service and sells a relatively small amount of inventory, such as spot removers and carpet fresheners. Our company provides this service throughout three counties, which cover over 40 townships in a densely populated area. Easy Clean is completely owned by Phil and me. Our business has grown steadily over the course of several years after starting out with just one car-pulled trailer over five years ago. Over the years, the business has gradually added 12 fully equipped vans, worth about $30,000 each. Now in our sixth year of business, we plan to purchase approximately one new van each year to meet the growing demand for our services. The company grossed just over $1,650,000 in revenues last year, about half of which was collected in cash. We feel our continuing success is due in large part to "word of mouth." Ted:
Can you tell me something about the day-to-day operations? Doug:
Well, Mr. Day, our office manager, and I are in charge of a small sales force that goes out on leads to give estimates for new jobs. Mr. Day is paid a salary plus a percentage of the total sales each month. My brother, Phil, is usually out in the field managing the 20 employees who work as cleaners for Easy Clean. Phil also helps with managerial and operating decisions. Salespeople are paid on a commission basis, selling both the domestic and industrial jobs based on standard prices...
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