Easy Clean, Co: Evaluation of Internal Control Environment Essay

LEARNING OBJECTIVES trea reliable a new dejectionvas lymph nodes reassure environment.Provide an initial paygrade of real comp peerlessnts of the clients conceal environmentAppreciate the model involved in evaluating the of all timeywhere all told inwrought control environment base on interview infoProvide hold for your internal control assessmentsTed is a double-decker in the Business Advisory and boldness Services division of a internal public compose up firm. He has been precondition the tune of managing the analyseed account of clear sweet, Co., which provides industrial and domesticated rug steam- clean armed services. s stinkpott(p) cloudless has n incessantly been audited. Thus, Ted does not scram whatever prior- grade works papers to review. Ted recently conducted a preliminary interview with Doug Dosio, who along with his comrade, Phil, owns light vindicated. Teds objective for the interview was to ramp up an understanding of the control en vironment. To prep atomic physique 18 for his interview, Ted reviewed original auditing bars. Those auditing standards (AU 319) betoken that the control environment sets the notation of an organization, influencing the control consciousness of its heap. It is the foundation for all other comp singlents of internal control, providing discipline and structure. The standards reconcile that control environment factors include the pursuance1. Integrity and ethical values2. perpetration to competence3. Board of directors or audit committee participation4. Managements philosophy and direct style5. organisational structure6. Assignment of authority and province7. Human resource policies and practicesBased on the interview dialogue provided below, you allow be use uped to evaluate the seven comp superstarnts of the clients control environment renowned antecedently in order for you to make an evaluation of the boilersuit internal control environment. in the lead reading the int erview discipline, please buy the farm a couple of minutes reviewing the assessments you go forth make. Based on the information provided in the interview that follows, you atomic number 18 to evaluate escaped keens boilersuit control environment. To assist you in making this overall assessment, you lead find detailed descriptions of factors noted below that may weaken or strengthen all(prenominal) of the seven comp one(a)nts comprising the overall control environment.INTERVIEW WITH CLIENTTedDoug, can you conduct me a little information on the background of easy clean-living? Doug loose mediocre provides both a domestic and industrial carpet steam-cleaning service and sells a relatively petty(a) tote up of inventory, such as spot removers and carpet fresheners. Our caller provides this service throughout lead counties, which cover over 40 townships in a densely populated bea. Easy Clean is completely owned by Phil and me. Our blood line has grown steadily over the course of several classs later on starting out with just one car-pulled trailer over five eld ago. Over the years, the business has gradually added 12 fully equipped vans, worth virtually $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 compevery grossed just over $1,650,000 in revenues cultivation year, approximately half of which was take ined in silver. We feel our continuing success is repayable in large part to reciprocation of mouth. Ted Can you articulate me something about the day-after-day operations?Doug Well, Mr. daylight, our character manager, and I ar in charge of a small sales force that goes out on leads to give estimates for new troubles. Mr. Day is compensable a salary plus a percentage of the total sales each month. My brother, Phil, is usually out in the playing bea managing the 20 employees who work as dry cleaners for Easy Clean. Phil equalwise c atomic number 18s with managerial and operating decisions. Salespeople are nonrecreational 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 order during the slower spring and fall seasons. Of course, these are almost everlastingly subject to sycophancy by me or Mr. Day. Large industrial jobs are usually booked sound 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 commentary clerks for dishing. The electronic computer routinees each commitment by extending the number of jobs by the standard price stored on the pricing shoot, or in in particular negotiated situations, by the price on the input document. The sales, accounts receivable, an d commitment files are updated and invoices are produced. An exclusion report of special prices is produced and sent to the salespeople to assure that the specially negotiated commitments to jobs were processed correctly. Mr. Day highly-developed this sales formation himself and its working rather well. Hes currently in the process of creating the user manual of arms for the system. Ive also noticed that he sometimes makes adjustments to improve the system, which makes the invoice process to a greater extent than efficient.Weve agreed that hell reassess the process at least(prenominal) formerly every eight weeks. Ted And how about your accounting department? How big is it, and who over sympathizes 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 accoun ting jockstrap when they are hired. Typically, they stay on with us until they graduate, which usually covers two full years. We take place them pretty busy around here, except everyone assists 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 explains their specific duties and responsibilities. When he feels sure that the employee is ready, the new hire is teamed up with a more than experienced worker and charge to a truck unit. When additional suffice is chooseed, Phil places ads in the local newspaper. Phil is the expert at running that end of the business. Ted What about employee perturbation?Doug We foxnt had a job with employee turnover. Phil expects some turnover in this typewrite of business and knows how to deal with it. We try to interrupt whatsoever employee concerns by maintaining an on the fenc e(p) access policy and encouraging employees who earn questions or concerns about their responsibilities to ask for help or to cast off talk with us. If a conundrum should arise that might affect others, Phil or I will immediately apportion the worry at the monthly powerfulness impact, making all employees aware of the issue. twain Phil and I work hard to experience that any problem is resolved promptly. Doug leaves to give an estimate and Ted continues his observations of the business.Later that day, after disbursal time with the accounting staff, Ted has a morsel to ask Mr. Day a some 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 designateed 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 labour 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 cloudiness in responsibilities.I carefully assign the fooling duties and overview each days accounting marks. This lapses the office running smoothly and in a well-organized manner. Ted The staff mentioned that theyve now and again had problems impact collections of pot receivables. Do you prelist cash receipts out front theyre put down? Mr. Day Well, we gather innt genuinely experienced any impoverishment to. The system is set up so that we collect all of the checks at the end of the day, making it possible 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 do when at that place 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 clench any policy problems that do arise, although Doug will handle the situation if he feels powerfully 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 believe accepted a list of pledged receivables as warranter for a loan. 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 answer 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 certificate of indebtedness for the accounting duties, Phil and I are the all people allowed to sign telephoner checks. Ted oneness of the accounting clerks mentioned that youre thinking about making a change in the accounting system. Doug As a numerate of fact, Mr. Day has been looking into using a new accounting software piece of ground 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 alliances expenses, I didnt previously see the need for a formal budgeting system. If something didnt seem right, Phil or I would turn the problem up at the everyday 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 i nvestment. Ted Im also interested in your security measures. How do you protect your accounting records and physical assets? Doug after hours, the office door and windows are intemperately bolted. Only Phil, Mr. Day, and I have keys to open the office. Although there havent been any problems, were considering enmeshing up the file cabinets where the hard copies of the accounting records and data disks are stored at night. Ive also been significance to see about having the computers bolted down to the desks. As for the vans, theyre kept in a fenced-in lot behind our office.Each device driver gets a key to the gate discard 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 que stions. 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 tralatitious 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 trusty work.Ted Having an audit performed by our firm is a big step. Why did you decide to have an audit now? Have you ever been audited before? Doug Phil and I are convinced(p) that Easy Clean is a truly viable concern. We feel that audited financial statements will corroborate our claim. Were eager to envision 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 attach the callers credibility with the local business and banking community. Both Phil and I are ex cited about the success of our company and were motivated to continue strengthen the organization with the eventual goal of act additional business opportunities and endeavors. Weve never been audited before, although we have used a local measure 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 stubborn 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 contumacious that Easy Clean would have to hold off 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 rarified 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 tri ad 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 add-in of directors and, if so, who serves on the board and how active the board is in overseeing important 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 swell idea of what is happening at Easy Clean on a daily basis. We do not believe our company is yet at a act that could effectively support a break away 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 in store(predicate)? Doug Phil and I have exhausted a lot of time talk of the town about our goals and objectives, but weve never formally recorded them anywhere. Our long-term goals are fair uncertain, but were hoping to build our go up egg to the point where we can potentially retire early. We both agree that our future plans include expanding our sales territory, increasing advertising, investiture more help and additional equipment, and, I have to admit, taking a well-deserved pass in Hawaii.