You are on page 1of 14

EarthWear Hands-on Mini-case

Chapter 6 - Control Environment and Internal Control Documentation


The McGraw-Hill Companies, Inc., 2012

In this mini-case you will complete questionnaires for evaluating the corporate governance and internal
control environment of EarthWear Clothiers, Inc.
INSTRUCTIONS:

Double-click on the following icons (documents will open in Microsoft Word) and read the memos on
Corporate Governance and Control Environment Issues and Internal Control Components. Refer back
to these memos as you answer the questionnaires.

The worksheets titled "Control Environ. Questionnaire" and "Internal Control Questionnaires" contain
partially completed copies of the questionnaires you are to finish. Scan through the questions that have
already been completed.

Using the information outlined in the memos above and answers to other questions in the
questionnaires, complete questions 1, 7, 12, 17, 19, and 21 of the Control Environment Questionnaire
and questions 1, 3, 9, 12, 14, and 15 of the Internal Control Questionnaire.
Fields you are to complete on the questionnaire are colored yellow. The color will disappear when the field is completed.

When the questionnaires are completed, enter your initials in the yellow boxes with title "Initial Here".

Print the "Print Out" worksheet unless your instructor indicates to submit the completed file
electronically. The "Print Out" worksheet contains only those questions you have completed and is
formatted to print on two pages.

Control Environment Questionnaire


Client: EarthWear Clothiers
PARTICIPATION OF THE BOARD OF DIRECTORS AND AUDIT COMMITTEE

Balance Sheet Date: 12/31/2012


Initial
Here

Reviewed by: _____ Date: _______

An entitys control consciousness is influenced significantly by the entitys board of directors or audit committee. Attributes include the board or audit committees independence from
management, the experience and stature of its members, the extent of its involvement and scrutiny of activities, the appropriateness of its actions, the degree to which difficult questions
are raised and pursued with management, and its interaction with internal and external auditors.
Yes,
No, N/A

Question

Are there regular meetings of the board of directors (or comparable bodies) to set
Respond
policies and objectives, review the entitys performance, and take appropriate action,
Here
and are minutes of such meetings prepared and signed on a timely basis?

Does an audit committee exist?

Yes

Does the audit committee adequately assist the board in maintaining a direct line of
communication with the entitys external and internal auditors?
Does the audit committee have adequate resources and authority to discharge its
responsibilities?

Yes

Is this evidenced by

Yes

Regular meetings?

The appointment of qualified members?

Comments
Provide Any Additional Comments Here

The audit committee meets with the external and internal auditors on a
quarterly basis.

Yes
The audit committee also meets quarterly, just prior to the quarterly board of
directors meeting. Minutes are maintained of each meeting. The audit
committee consists only of individuals who are not part of management.

Minutes of meetings?

MANAGEMENTS PHILOSOPHY AND OPERATING STYLE


Managements philosophy and operating style significantly influence the control environment particularly when management is dominated by one or a few individuals. Managements
philosophy and operating style should create a positive atmosphere that reduces the risk of misstatement and that is conducive to the effective operation of internal control.
Yes,

Question

No, N/A
No

Are management and operating decisions dominated by one or a few individuals?

Are business risks adequately monitored?

Is management willing to adjust the financial statements for misstatements that


approach a material amount?
Does management adequately consult with its auditors on accounting issues?

Yes

Has management been responsive to prior recommendations from its auditors?

Yes

9
10

Respond
Here

Yes

Comments
Provide Any Additional Comments Here

11

Is a high priority given to internal control?

Yes

ORGANIZATIONAL STRUCTURE
An entitys organizational structure provides the framework within which its activities for achieving entity-wide objectives are planned, executed, controlled, and monitored. Establishing a
relevant organizational structure includes considering key areas of authority and responsibility and appropriate lines of reporting.
Question

12
13

Yes,
No, N/A Comments
Is the organization of the entity clearly defined in terms of lines of authority and Respond
Here
responsibility?
Are controls for authorization of transactions established at an adequately high level?
Yes

14
15

Are such controls adequately adhered to?

Yes

Is the organizational structure appropriate for the size and complexity of the entity?

Yes

16

Has management established policies for developing and modifying accounting


Yes
systems and control activities?
Respond
Is data processing centralized or decentralized?
Here

17

Provide Any Additional Comments Here

Provide Any Additional Comments Here

ASSIGNMENT OF AUTHORITY AND RESPONSIBILITY


The methods of assigning authority and responsibility should result in clear understanding of reporting relationships and responsibilities established within the entity.
Question

18
19
20
21
22

Is there a clear assignment of responsibility and delegation of authority to deal with


such matters as organizational goals and objectives, operating functions, and
regulatory requirements?

Yes,
No, N/A
Yes

Are employee job responsibilities, including specific duties, reporting relationships, and Respond
Here
constraints, clearly established and communicated to employees?
Has management clearly communicated the scope of authority and responsibility to
Yes
data processing management?
Does adequate computer systems documentation indicate the controls for authorizing Respond
Here
transactions and approving systems changes?
Is there adequate documentation of data processing controls?
Yes

Comments

Provide Any Additional Comments Here

Provide Any Additional Comments Here

HUMAN RESOURCE POLICIES AND PROCEDURES


Human resource policies and practices relate to hiring, orientation, training, evaluating, counseling, promoting, compensating, and remedial actions. The entitys human resource policies
and practices should positively influence the entitys ability to employ sufficiently competent personnel to accomplish its goals and objectives.
Question

23
24
25
26
27
28

Do client accounting personnel appear to have the background and experience for
their duties?
Do client accounting personnel understand the duties and procedures applicable to
their jobs?
Is the turnover of accounting personnel relatively low?

Yes,
No, N/A
Yes
Yes
Yes

Does the entity adequately train new accounting personnel?

Yes

Does the workload of accounting personnel appear to permit them to control the
quality of their work?
Does previous experience with the client indicate sufficient integrity on the part of
personnel?

Yes

The McGraw-Hill Companies, Inc., 2012

Comments

Yes

There has been no turnover in the last three years.

Risk Assessment Questionnaire


Client: EarthWear Clothiers

Balance Sheet Date: 12/31/2012


Initial
Here

Reviewed by: _____ Date: _______

A risk assessment process should consider external and internal events and circumstances that may occur and adversely affect its ability to initiate, record, process, and report financial
data consistent with managements assertions. Management should initiate plans, programs, or actions to address significant, identified risks or accept the risk because of cost
considerations.
Question

Yes,
No, N/A
Does the entity set entity-wide objectives that state what the entity desires to achieve, Respond
Here
and are they supported by strategic plans?
Does the entity have a risk analysis process that includes estimating the significance
of the risks, assessing the likelihood of their occurring, and determining the actions
needed to respond to the risks?

Yes

Does the entity have mechanisms to identify and react to changes that may Respond
Here
dramatically and pervasively affect the entity?
Control Procedures Questionnaire
Client: EarthWear Clothiers

Comments
Provide Any Additional Comments Here

The companys business plan and budgeting process includes analyzing


risks that might affect the company. Monthly meetings are held by senior
management to discuss recent events and how they may affect the company.
Provide Any Additional Comments Here

Balance Sheet Date: 12/31/2012


Initial
Here

Reviewed by: _____ Date: _______

Control procedures include the policies and procedures that ensure that managements directives are effective in processing and preparing financial statements. Control activities ensure
that the entitys financial reporting objective is carried out.
Yes,
No, N/A

Question

Does management have clear objectives in terms of budget, profit, and other financial
and operating goals?

Yes

Are such objectives:

Yes

Clearly written?
Actively communicated throughout the entity?
Actively monitored?

Does the appropriate level of management:


Adequately investigate variances?
Take appropriate and timely corrective actions?

Yes

Comments
EarthWear has a very sophisticated budgeting process that includes
monitoring activities. All significant budget variances are summarized and
explained in a monthly controllers report. See A20 for extracts of significant
items from the controllers report.

Has management established procedures to prevent unauthorized access to, or


destruction of, documents, records, assets, programs and data files?

Yes

See B10 for a description of the IT Departments controls over access to (1)
the computer operations area and (2) data programs and files.

Information and Communication Questionnaire


Client: EarthWear Clothiers
INFORMATION SYSTEMS

Balance Sheet Date: 12/31/2012


Initial
Here

Reviewed by: _____ Date: _______

Information systems initiate, record, process, and report information. Relevant information includes industry, economic, and regulatory information obtained from external sources, as well
as internally generated information.
Yes,
No, N/A

Question

Does the information system give management the necessary reports on the entitys
performance relative to established objectives, including relevant external and internal
information?

Yes

Is the information provided to the right people in sufficient detail and in time to enable Respond
Here
them to carry out their responsibilities effectively?

10

Is the development or revision of information systems over financial reporting based


on a strategic plan?

Yes

Comments
The strategic plan and the budgeting process identify information that is
needed to analyze and monitor the entitys objectives.
Provide Any Additional Comments Here

There is a strategic plan for updating the information systems over financial
reporting that is revised on an annual basis.

COMMUNICATION
Communication includes the extent to which personnel understand how their activities in the financial reporting information system relate to the work of others and the means of reporting
exceptions to an appropriate level within the entity.
Yes,
No, N/A

Question

11

Does management communicate employees duties and control responsibilities in an


effective manner?

12

Are communication channels established for people to report suspected improprieties?

13

Does communication flow across the organization adequately to enable people to


discharge their responsibilities effectively?

Yes
Respond
Here
Yes

Comments
Employees are provided with information regarding their duties during their
initial training.
Provide Any Additional Comments Here

There are good communications channels across departments.

Monitoring Questionnaire
Client: EarthWear Clothiers

Balance Sheet Date: 12/31/2012


Initial
Here

Reviewed by: _____ Date: _______

Management should monitor internal control in the ordinary course of operations. This monitoring includes regular management and supervisory activities and other actions personnel
take in performing their duties that assess the quality of internal control.
Question

14
15
16

Yes,
No, N/A
Respond
How many customer complaints are received about billings?
Here
Are complaints investigated for underlying causes and any internal control deficiencies Respond
Here
corrected?

Comments
Provide Any Additional Comments Here
Provide Any Additional Comments Here

Does the entity have an internal audit function?

Yes

17

Are internal control recommendations made by internal and external auditors


implemented?

Yes

Recommendations that management and the board feel are cost beneficial are
implemented.

18

Does the entity conduct separate evaluations of internal control?

Yes

The board of directors focuses on the control environment and monitoring


activities. The audit committee meets regularly with the internal and external
auditors about control related activities.

The McGraw-Hill Companies, Inc., 2012

Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSES
Client: EarthWear Clothiers

1
7
12
17

Yes,
No, N/A
CONTROL ENVIRONMENT QUESTIONNAIRE
Are there regular meetings of the board of directors (or comparable bodies) to set
Incomplet
policies and objectives, review the entitys performance, and take appropriate action,
e
and are minutes of such meetings prepared and signed on a timely basis?
Are business risks adequately monitored?

Incomplet
e

Is the organization of the entity clearly defined in terms of lines of authority and Incomplet
responsibility?
e
Are accounting and data processing centralized or decentralized?

Incomplet
e

19

Are employee job responsibilities, including specific duties, reporting relationships, and Incomplet
constraints, clearly established and communicated to employees?
e

21

Does adequate computer systems documentation indicate the controls for authorizing Incomplet
transactions and approving systems changes?
e

Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSES
Client: EarthWear Clothiers

Yes,
No, N/A
INTERNAL CONTROL QUESTIONNAIRES
Does the entity set entity-wide objectives that state of what the entity desires to Incomplet
achieve, and are they supported by strategic plans?
e

Does the entity have mechanisms to identify and react to changes that may Incomplet
dramatically and pervasively affect the entity?
e

Is the information provided to the right people in sufficient detail and in time to enable Incomplet
e
them to carry out their responsibilities effectively?

12

Are communication channels established for people to report suspected improprieties?

Incomplet
e

14

How many customer complaints are received about billings?

Incomplet
e

15

Are complaints investigated for underlying causes and any internal control deficiencies Incomplet
e
corrected?

Name:
Class:

Balance Sheet Date: 12/31/2012


Reviewed by: _____ Date: _______
Comments

RONMENT QUESTIONNAIRE
Please Complete Control Environment Questionnaire

Please Complete Control Environment Questionnaire


Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire

Name:
Class:

Balance Sheet Date: 12/31/2012


Reviewed by: _____ Date: _______
Comments

ONTROL QUESTIONNAIRES
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire