Question

1. Henry Bailey, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Bailey has decided that he will assess control risk at the highest level for all assertions and not restrict audit procedures in any area. Under these circumstances, may Bailey omit the consideration of internal control in this engagement? Explain.

2. How does separation of the record-keeping function from custody of assets contribute to internal control?

3. What consideration, if any, may external auditors give to the work of a client’s internal audit staff?

4. Describe the relationship between corporate governance and internal control.

Answer 1

1. Henry Bailey, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Bailey has decided that he will assess control risk at the highest level for all assertions and not restrict audit procedures in any area. Under these circumstances, may Bailey omit the consideration of internal control in this engagement? Explain.

2.How does separation of the record-keeping function from custody of assets contribute to internal control?

3. What consideration, if any, may external auditors give to the work of a client’s internal audit staff?

4. Describe the relationship between corporate governance and internal control.

Refer to the below images for more detailed explanation.

We diyernet Since Bailey's consideration of internal control shows that controls are very weak, he may ornit performing telt of controls. He must, however, have an adequate understanding of internal control to assess the risks of material misstatements. At a minimum, Bailey should obtain a basic understanding of the control environment, sro assessment information and Commwnication, monitoring an important control activities . He should dowment this understanding and also docement that control risk is assessed at the makina level. - --- Requirement Separating record keeping from custody of the related assets provides an independently maintained record that may periodically be reconciled with assets on hond. this independent record holds the personnel of a custodial department accountable. for assets entrusted to thar care. If the costodial department main taned the accounting records opportunity would exist for that department to conceal its errors con Shortages by manipulating the records. 3) Deals the independent auditors should consider the work of the interal auditors as o portion of the Control environment of internal control. After evaluating the competence and relative independence at the internal auditors, the independent auditors will determine the extent to which the work of the internal auditors may be relied upon in determining the nature , timing and extent of their testing -

n e Requirement i Internal control is a process, effected by the entity's board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categories: - Reliability of financial reporting - Effectiveness is efficiency of operations. - compliance with applicable laws e regulations. The concept of corporate governance is broader than internal control in that it is not only concerned with the effectiveness of financial reporting, but it also encompasses ethical treatment of all major Stance holders, compliance with laws, regulations, costomary business practius and effective risih management. Since management plays the major role in determining how various Stakeholders are treated , corporate governance is primarily concerned with controlling management and providing incentives for appropriate management behavior