Lew Pherson and Vera Collier are friends whoare employed by different CPA firms. One day during lunch they are discussing theimportance of internal control in determining the amount of audit evidence requiredfor an engagement. Pherson expresses the view that internal control must be evaluatedcarefully in all companies, regardless of their size or whether they are publicly held,in a similar manner. His CPA firm requires a standard internal control questionnaireon every audit as well as a flowchart of every transaction area. In addition, he says thefirm requires a careful evaluation of the system and a modification in the evidenceaccumulated based on the controls and deficiencies in the system.Collier responds by saying she believes that internal control cannot be adequate inmany of the small companies she audits; therefore, she simply ignores internal controland acts under the assumption of inadequate controls. She goes on to say, “Why should Ispend a lot of time obtaining an understanding of internal control and assessing controlrisk when I know it has all kinds of weaknesses before I start? I would rather spend thetime it takes to fill out all those forms in testing whether the statements are correct.”a. Express in general terms the most important difference between the nature of thepotential controls available for large and small companies.b. Criticize the positions taken by Pherson and Collier, and express your own opinionabout the similarities and differences that should exist in understanding internalcontrol and assessing control risk for different-sized companies.c. Discuss whether Collier’s approach is acceptable under existing auditing standardsfor either public or nonpublic companies.d. Describe what additional procedures Pherson must perform if auditing the financialstatements of a public company.
Lew Pherson and Vera Collier are friends who
are employed by different CPA firms. One day during lunch they are discussing the
importance of internal control in determining the amount of audit evidence required
for an engagement. Pherson expresses the view that internal control must be evaluated
carefully in all companies, regardless of their size or whether they are publicly held,
in a similar manner. His CPA firm requires a standard internal control questionnaire
on every audit as well as a flowchart of every transaction area. In addition, he says the
firm requires a careful evaluation of the system and a modification in the evidence
accumulated based on the controls and deficiencies in the system.
Collier responds by saying she believes that internal control cannot be adequate in
many of the small companies she audits; therefore, she simply ignores internal control
and acts under the assumption of inadequate controls. She goes on to say, “Why should I
spend a lot of time obtaining an understanding of internal control and assessing control
risk when I know it has all kinds of weaknesses before I start? I would rather spend the
time it takes to fill out all those forms in testing whether the statements are correct.”
a. Express in general terms the most important difference between the nature of the
potential controls available for large and small companies.
b. Criticize the positions taken by Pherson and Collier, and express your own opinion
about the similarities and differences that should exist in understanding internal
control and assessing control risk for different-sized companies.
c. Discuss whether Collier’s approach is acceptable under existing auditing standards
for either public or nonpublic companies.
d. Describe what additional procedures Pherson must perform if auditing the financial
statements of a public company.
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