Read the comprehension case and answer the questions that follow. BACKGROUND: Au
ID: 2418105 • Letter: R
Question
Read the comprehension case and answer the questions that follow.
BACKGROUND:
Auditors need to use a top-down approach to identify controls to test. This approach starts at the top of an organization (financial statements and entity-level controls) and helps to link the financial statements to significant accounts, relevant assertions, and major classes of transactions. Entity-level controls are included in the control environment or via monitoring components. Examples that have a pervasive effect on internal control include tone at the top, assignment of authority and responsibility, and corporate codes of conduct.
Haun, CPAs, has been asked to do an integrated audit for Gemini Industries, a manufacturer of watches. During the course of its audit, Haun, CPA, auditors have noted various issues and items. They have observed the Gemini company's CEO walking around checking on production and productivity, as she is very concerned about meeting goals and output quantity, seemingly at any cost. Additionally, Haun, CPA, auditors noted that a new Gemini employee started in accounting during the course of the audit. The manager of the accounting staff asked the employee to sign a form stating that he had reviewed the code of conduct—and then indicated that he would "find" one for the employee to sign later. Also, Haun, CPA, auditors observed that in the board minutes, the Gemini IT chair indicated that many employees were collaborating on making changes to their internal software, and as such, their passwords have been removed for the interim until the changeover. The Haun, CPA, auditors discussed these items in their closing meeting.
1.What could the constant observation of production and productivity by the Gemini CEO indicate?
2.Why would the auditors be concerned about Gemini's HR policy regarding its code of conduct?
3.Why would Gemini's change of passwords in the IT department affect the audit?
Explanation / Answer
1) The Chief Executive Officer (the top manager) of the organization has overall responsibility for designing and implementing effective internal control. More than any other individual, the chief executive sets the "tone at the top" that affects integrity and ethics and other factors of a positive control environment. In a large company, the chief executive fulfills this duty by providing leadership and direction to senior managers and reviewing the way they're controlling the business. Senior managers, in turn, assign responsibility for establishment of more specific internal control policies and procedures to personnel responsible for the unit's functions. In a smaller entity, the influence of the chief executive, often an owner-manager, is usually more direct. In any event, in a cascading responsibility, a manager is effectively a chief executive of his or her sphere of responsibility. Of particular significance are financial officers and their staffs, whose control activities cut across, as well as up and down, the operating and other units of an enterprise.
In the given case,the internal control seems to be weak which is why the CEO is constantly checking on production and productivity.
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