Easy Clean, Co: Evaluation of Internal Control Environment Essay

LEARNING OBJECTIVESEvaluate a new audit clients control environment.Provide an initial military rating of certain comp adeptnts of the clients control environmentAppreciate the judgment involved in evaluating the overall internal control environment based on interview dataProvide support for your internal control assessmentsTed is a manager in the Business Advisory and Assurance Services division of a national public bill dissolute. He has been given the job of managing the audit of Easy fairly, Co., which provides industrial and domestic carpet steam-cleaning gains. Easy Clean has never been audited. Thus, Ted does not shoot 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. Teds objective for the interview was to establish an perceptiveness of the control environment. To prep be 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 stack. It is the foundation for all other components of internal control, providing discipline and structure. The standards pass on that control environment factors include the following1. Integrity and ethical values2. Commitment to competence3. Board of directors or audit committee participation4. counsellings philosophy and operating style5. Organizational structure6. Assignment of authority and responsibility7. Human resource policies and practicesBased on the interview communication provided below, you will be asked to evaluate the seven components of the clients 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 fol lows, you argon to evaluate Easy Cleans overall control environment. To assist you in making this overall assessment, you will find expatiate descriptions of factors noted below that may weaken or streng so each of the seven components comprising the overall control environment.INTERVIEW WITH CLIENTTedDoug, 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 conjunction 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 occupancy has grown steadily over the course of several age after starting out with just one car-pulled trailer over five years ago. Over the years, the business has gradually added 12 teemingy render vans, worth about $30,000 each. Now in our sixth year o f business, we plan to purchase approximately one new van each year to cooperate 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 receivable 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 perfect sales each month. My brother, Phil, is normally out in the field managing the 20 employees who work as cleaners for Easy Clean. Phil also suffices with managerial and operating decisions. Salespeople are paid on a commission basis, selling both the domestic and industrial jobs based on standard prices established by the owners. Salespeople may sometimes negotiate special cut rates during the slower spring and fall seasons. Of cou rse, these are almost always subject to approval by me or Mr. Day. macroscopic industrial jobs are typically booked comfortably in advance of the actual work. The job commitments obtained by the salespeople are normally submitted to Mr. Day, who signs them to indicate his approval and then returns them to the salespeople.Sales people then forward job commitments to one of two data input clerks for handleing. The computer processes each commitment by extending the number of jobs by the standard price stored on the pricing file, or in specially negotiated situations, by the price on the input document. The sales, accounts receivable, and commitment files are updated and invoices are produced. An ejection report of special prices is produced and sent to the salespeople to ensure that the specially negotiated commitments to jobs were processed correctly. Mr. Day developed this sales system himself and its working rather well. Hes currently in the process of creating the user manual for the system. Ive also noticed that he sometimes makes adjustments to improve the system, which makes the account system process more efficient.Weve concur that hell reevaluate the process at least(prenominal) once every eight weeks. Ted And how about your accounting department? How big is it, and who oversees the accounting process? Doug The accounting department of Easy Clean consists of seven part-time clerks, including the two data input clerks, who are all paid an hourly wage. All except one are college students working toward their accounting degrees. Mr. Day trains all new accounting help when they are hired. Typically, they stay on with us until they graduate, which usually covers two full years. We keep them somewhat busy around here, but everyone helps each other out and they always get the job done. Ted What are your brother Phils responsibilities?Doug Phil manages the service component of the business. He usually trains all newly hired cleaning employees and expla ins their specific duties and responsibilities. When he feels sure that the employee is ready, the new hire is teamed up with a more experienced worker and assign to a truck unit. When additional help is needed, Phil places ads in the topical anesthetic newspaper. Phil is the expert at test that end of the business. Ted What about employee employee turnover?Doug We seaportt had a problem with employee turnover. Phil expects some turnover in this type of business and knows how to deal with it. We try to prevent any employee concerns by maintaining an on the fence(p) door policy and encouraging employees who have questions or concerns about their responsibilities to ask for help or to come talk with us. If a problem should arise that great power affect others, Phil or I will immediately address the problem at the periodic office meeting, making all employees aware of the issue. Both Phil and I work hard to ensure that any problem is resolved promptly. Doug leaves to give an est imate and Ted continues his observations of the business.Later that day, after spending time with the accounting staff, Ted has a import to ask Mr. Day a few questions. TedMr. Day, Im wondering if you could help me clarify some things regarding my brief observations of the accounting staff? Mr. DaySure, Id be glad to. What can I do for you?Ted I got the impression from the staff that theyre not always certain about their assigned functions. Are job responsibilities clearly defined? Mr. Day In assigning office responsibilities, Doug says the main considerations are that work should be done by the people who are familiar with a task and who are capable of doing it. But, he also admits that availability has to be a consideration. Although this does lead to some overlap in duties, it doesnt create any confusion in responsibilities.I carefully assign the daily duties and overview each days accounting records. This keeps the office running smoothly and in a well-organized manner. Ted The staff mentioned that theyve occasionally had problems processing collections of trade receivables. Do you pre sway cash receipts forwards theyre recorded? Mr. Day Well, we havent really experienced any need to. The system is set up so that we collect all of the checks at the end of the day, making it potential to record them all at one time. This way, we can be more efficient by avoiding the need to write them down twice. On those rare cause when there is a collection processing problem, we resolve it immediately. Ted Do you ever run into accounting policy problems?Mr. Day Not very often. I usually handle any policy problems that do arise, although Doug will handle the situation if he feels strongly about the issue. Ted Well, thank you Mr. Day. I need to talk to Doug before he leaves for the day. A few moments later, in Dougs officeTed Are you satisfied with the processing of trade receivables? Doug Yes, definitely. Mr. Day is meticulous in his clerical operations, which is well systematized. He has excellent control over the trade receivables. In fact, its been over a year and a half since the bank accepted a list of pledged receivables as security for a loanword. From then on, weve had access to a continually renewable loan based on a list thats updated weekly. The loan is relatively small, and the contract allows the bank to access Easy Clean s checking account in the unlikely event that collection of the loan seems doubtful. Perhaps I should add that although Phil and I have no formal accounting training and we have given Mr. Day full responsibility for the accounting duties, Phil and I are the only people allowed to sign company checks. Ted star of the accounting clerks mentioned that youre thinking about making a change in the accounting system. Doug As a matter of fact, Mr. Day has been looking into using a new accounting software package that should make the bookkeeping process an easier task for the clerks.This package includes a budgeting system that should help control costs and identify those areas that need attention. Although Ive always monitored the companys expenses, I didnt previously see the need for a formal budgeting system. If something didnt seem right, Phil or I would bring the problem up at the informal monthly office meeting between all the employees and try to resolve the issue. Given our current success, the implementation of a more sophisticated budgeting system seems like a wise investment. Ted Im also quested in your security measures. How do you protect your accounting records and physical assets? Doug After hours, the office door and windows are heavily bolted. Only Phil, Mr. Day, and I have keys to open the office. Although there havent been any problems, were considering locking up the file cabinets where the hard copies of the accounting records and data disks are stored at night. Ive also been meaning to see about having the computers bolted down to the desks. As for the vans, theyre kept in a fe nced-in distribute behind our office.Each driver gets a key to the gate lock so they can let themselves in or out for work. We have to do this because a lot of the commercial cleaning is done after hours, when the office is closed. As a precautionary measure, we change the lock regularly. Ted That should about do it for now, until I can get in to do some preliminary audit work. But before I leave, Id like to ask you a few more general questions. To start with, can you tell me what you feel is responsible for Easy Cleans recent success? Doug Well, Ted, because Easy Clean is using the newest steam-cleaning procedure, we provide a much better result than the traditional rotary shampoo methods used by our competitors. And, our customers can tell. Plus, Phil and I understand the business well, we are personable, and we pride ourselves on doing good work.Ted Having an audit performed by our firm is a big step. Why did you decide to have an audit now? deliver you ever been audited before ? Doug Phil and I are confident that Easy Clean is a truly viable concern. We feel that audited financial statements will corroborate our claim. Were eager to learn what suggestions your firm can give us regarding the most professional way to record and present our financial statements. We also have an interest in learning how to increase the companys credibility with the local business and banking community. Both Phil and I are excited about the success of our company and were motivated to continue strengthening the organization with the eventual goal of pursuing additional business opportunities and endeavors. Weve never been audited before, although we have used a local tax preparer to fill out our tax returns ever since Easy Clean has been in business. We did ask another firm, about two years ago, to come in to do an audit.We decided not to have the audit performed, though, because the companys fees were too high. Although Id have to look up the audit firms name, Phil and I deci ded that Easy Clean would have to wait for an audit until we could reasonably afford the fees. Weve come to the decision that now is the time. Ted Are there any issues of concern that you have regarding the audit? Doug Not really. Im proud of Easy Clean. The company has had no record of serious problems and has rarely had a problem with bad debts, since most of our receivable balances are collected within two to three weeks. Ted I understand that Easy Clean does not have an audit committee, which is typical of an organization this size.Can you tell me if Easy Clean has a board of directors and, if so, who serves on the board and how active the board is in overseeing central issues at Easy Clean? Doug We do have a board of directors. It is somewhat informal, but Phil, I, and our wives function as directors. We do have at least one regularly scheduled meeting each year and we have met on other occasions as necessary. Obviously, Phil and I have a pretty good idea of what is happening at Easy Clean on a daily basis. We do not believe our company is yet at a stage that could effectively support a separate board comprised of outside directors. Maybe well do that in a couple of years, if we keep growing.Ted One final thing Id like to askhave you and your brother Phil set out any goals for the future? Doug Phil and I have washed-out a lot of time talking about our goals and objectives, but weve never formally recorded them anywhere. Our long-term goals are fairly uncertain, but were hoping to frame our nest egg to the point where we can potentially retire early. We both agree that our future plans include expanding our sales territory, increasing advertising, investing more help and additional equipment, and, I have to admit, taking a well-deserved vacation in Hawaii.