FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
Name: Alexandra Ester S. Mangalindan Section: 2
Student No.: 2018046161 Grade:
Air Clean Express, Inc. Reference:
Control Environment Evaluation Form Prepared by:
December 31, 2020 Date:
Reviewed by:
Greatly Neither Greatly
Weakens Weakens nor Strengthens
Control Strengthens Control
1. Communication and enforcement of integrity and 1 2 3 4 5 6 7
ethical values
In evaluating this component of the control
environment, consider whether:
there appears to be sufficient integrity on the part of
management and employees
1. Commitment to Competence 1 2 3 4 5 6 7
In evaluating this component of the control
environment, consider whether:
management has specified the competence level
needed for particular skills and translated the
desired levels of competence into requisite
knowledge and skills
evidence exists indicating that employees appeal to
have the requisite knowledge and skills
2. Participation by those charged with governance 1 2 3 4 5 6 7
In evaluating this component of the control
environment, consider whether:
a board exists and is sufficient in membership to
deal with important issues adequately
directors or committee members have sufficient
knowledge, industry experience and time to serve
effectively
some directors or committee members are
independent of management
frequency and timeliness with which meetings are
held with accounting officers and external auditors
the board oversees and takes action as needed
3. Management's Philosophy and Operating Style 1 2 3 4 5 6 7
In evaluating this component, consider whether:
business risks are adequately monitored
management is willing to undertake relatively low
levels of business risk
management places a high priority on internal
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
control
management explicitly attempts to reduce the risk
of misstatements
4. Organizational Structure 1 2 3 4 5 6 7
In evaluating this component, consider whether:
the organization’s lines of authority and
responsibility are clearly defined
operating policies are determined centrally by senior
management
transaction policies and procedures are clearly
established and strictly followed
the organization is adequately structured given its
complexity and size
management is actively involved in the supervision
of data processing
5. Assignment of Authority and Responsibility 1 2 3 4 5 6 7
In evaluating this component, consider whether:
appropriate policies for acceptable business
practices, conflicts of interest, and codes of conduct
have been established and have been
communicated to employees
there Is a clear assignment of responsibility and
delegation of authority for goals and objectives,
operating functions, and regulatory requirements
employee job responsibilities and specific duties are
clearly established and communicated
computer system documentation clearly indicates
the procedures for authorizing transactions and for
approving system changes
data processing policies and procedures are
adequately documented
6. Human resource policies and practices 1 2 3 4 5 6 7
In evaluating this component, consider whether:
employees have the background and experience
necessary for their job duties
employees understand the duties and procedures
applicable to their jobs
the organization provides for adequate training of
new personnel
the workloads of accounting personnel permit them
to adequately control the quality of their work
the turnover rate of accounting personnel is low
the turnover rate of non – accounting personnel is
low
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
Overall Evaluation of the Control Environment: Based on all of the evidence gathered in the interview, please circle
the number which best represents your assessment of the control environment at Air Clean Express, Inc.
Very Weak Control Weak Control Intermediate Control Strong Control Very Strong Control
Environment Environment Environment Environment Environment
1 2 3 4 5 6 7 8 9 10
Please list a few of the key pieces of information that influenced your decision:
Areas Strengths Weaknesses
1. Communication and enforcement Carl was strongly emphasizing how
of integrity and ethical values. they value the opinions of the
employees and workforce
environment. He indicated that
concerns can be openly raise to him
and May which will then be raised
during the company’s monthly
meeting. The discussion would be
conducted in front of the all
employees to fully address the issue
and resolve it immediately. The
entity’s open-door policy shows a
great sign of their enforcement of
ethical values.
The entity is mostly run by a set of
systems and regulations, like in their
job commitment and accounting
system. The regulations are
constantly being monitored and
supervised by Reymark and Carl.
Everything is thoroughly checked
before approval of the management.
Reymark has also indicated if any
problem arises with the accounting
system, they would immediately
resolve it.
2. Commitment to Competence The lack of auditing committee and
certified public accountants has
influenced me to give a low rating in
this component of their control
environment. The accounting
department is mostly composed of
part time working students taking
accounting and business-related
programs. They are not competent
enough, in terms of skills and
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
knowledge. It would be better if
apart from the part time workers,
they would hire at least two or three
CPA for it will increase the credibility
of the department. Employing a CPA
could help provide appropriate
actions and matters concerning
financial and non-financial
information.
Additionally, the management is
mostly concerned on getting the job
done rather than having someone
competent to get it done. Reymark
has mentioned that there are certain
times an overlapping of duties is
encountered by the employees. This
could indicate that the entity is short
in manpower. Skills and competence
of an employee does not seem to be
a priority of the management. It
seems like, as long as the managing
partners like Carl, Reymark and May,
are competent they could just assign
duties to anyone with an adequate
amount of skill since they know what
to do. All they need is someone who
will listen and follow their
instructions.
3. Participation by those charged Carl and May have the sufficient The board of directors are composed
with governance knowledge and skills to serve of Carl, May and their other partners.
efficiently in the company. They both They do not have an independent
oversee the operations and issues director and they met at least once a
that may be encountered by the year in the absence of an accountant
company. They are both heavily and/or external auditor. Any other
involved with the employees. meetings are only conducted when
deemed necessary. No specific
indication on the number of other
partners, but I can assume that it is
not sufficient in membership since
Carl and May are the only directors
who mostly deals with the issues in
the company.
4. Management’s Philosophy and The systems and regulations of the The have no security measures when
Operating Style entity indicates the dedication of the it comes to their hardcopy of
management to prevent and detect accounting records and important
any business risk they might files in their computers.
encounter. Frequent monitoring of
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
Reymark on the accounting system Since there is no certified public
also helps mitigate risk. accountant nor auditing committee in
the company, risk of material
The management also gives an misstatements in the financial
adequate assurance in regards with statements is highly probable.
their security measures. It was
mentioned that keys to the office are
only available to Carl, May and
Reymark. The keys the drivers of the
truck have can only access the gate.
The lock on the gate is said to be
changed every once in a while.
5. Organizational Structure The overall organizational structure
of the company shows a strictly
followed systems and regulations.
The senior managers are all heavily
involved with the operations and
each plays a vital role in their
respective department of command.
Each is actively managing the ins and
out of the company and they also
coordinate with one another, if
important actions are needed to be
taken care of. The management
monitors and supervises the systems
they have and how their employees
are doing.
6. Assignment of Authority and The management has several The brief interview with the
Responsibility systems and regulations which helps employees of the company
them have a smooth process mentioned their concerns regarding
regarding their accounting systems. job duties. It has been confirmed that
The systems they have are there are instances when an
continuously being improved by employees’ duties overlap with other
Reymark and everything are tasks and responsibilities due to the
documented since the management employee’s availability.
are fully aware of the events that
takes places. The flow of the systems
and any changes within are openly
communicated to its employees.
7. Human Resource Policies and The management conducts necessary The employees in the accounting
Procedures training of new personnel. As they department does not have adequate
train their employees, they also experiences for their job duties. They
indicate their specific duties and lack skills and competence since all of
responsibilities. When the personnel them are still undergraduates.
have accomplished their training, Confusion regarding their duties
they are sent off to work with an seems to be quite evident since the
experienced employee. The turnover management uses other personnel to
rate for accounting and non- do to other tasks.
FAR EASTERN UNIVERSITY
INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE
ACT1202 – Auditing and Assurance Principles
Case Study No. 3 Answer Sheet
accounting personnel is low.
