Erin Riley

ACCT-409-01

Case Study #1

Date

Easy Clean Internal Control Environment

Evaluation Form Notes:

Interview with Client (Doug)

- Half of revenues collected in cash (total = $1.65 M)

- Office manager (Mr. Day) paid a salary plus a percentage of the total sales each month
- Doug and Mr. Day in charge of small sales force that goes out on leads to give estimates for new
jobs
- Phil works in the field usually managing 20 employees who work as cleaners
- Phil also helps with managerial and operating decisions
- Salespeople paid on commission basis
- Standard prices established by owners (Doug and Phil)
- Salespeople may sometimes negotiate special cut rates during slow season which are “almost
always” approved by Mr. Day or Doug
- Large industrial jobs are booked well in advance to actual work
- Job commitments obtained by salespeople are submitted to Mr. Day, signed by him for
approval, and returned to the salespeople; then, salespeople forward jobs to one of two data
input clerks for processing
- The computer processes each commitment by extending the number of jobs by the standard
price stored on the pricing file, or in specially negotiated situations, by the price on the input
document. The sales, accounts receivable, and commitment files are updated, and invoices are
produced. An exception report of special prices is produced and sent to the salespeople to
ensure that the specially negotiated commitments to jobs were processed correctly.
- Mr. Day developed the sales system himself and is in the process of creating the user manual for
the system
- Mr. Day sometimes makes adjustments to improve the system, which makes the accounting
process more efficient. He and Doug agreed that he’ll reevaluate the process at least once every
eight weeks.
- Accounting department consists of seven part-time clerks including the two data input clerks
who are paid hourly wages—all except one are college students working towards degrees
- Mr. Day trains all new accountants; they typically stay for two years
- Phil handles the service component of business; trains all newly hired cleaning employees,
explains duties and responsibilities, when they are ready he assigns them to a truck with a more
experienced worker, when additional help is needed Phil puts ads in the local paper
- No problems with employee turnover but if there should be Phil knows how to handle it
 - Maintain an open door policy and encourage employees to voice their concerns; concerns are
addressed at monthly office meetings so all employees are aware of the issue

Interview with Mr. Day

Accounting staff not always certain about their assigned functions

- Work is done by people who are familiar with the task and because of limited availability this
leads to some overlap in duties
- Mr. Day carefully assigns daily duties and reviews each day’s accounting records
- Problems processing collections of trade receivables
- Mr. Day says they do not prelist cash receipts before they are recorded because the system is
set up so that they can collect all of the checks at the end of the day and record them all at one
time—more efficient because they don’t have to write it down twice
- Mr. Day says they do not run into accounting policy problems often and when they do either Mr.
Day or Doug handles the situation

Interview with Doug

- Doug is satisfied with the processing of trade receivables; Mr. Day has excellent control over it,
it has been over a year and a half since the bank accepted a list of pledged receivables as
security for a loan
- Since then, they have had access to a continually renewable loan based on a list that is updated
weekly; loan is relatively small, contract allows bank to access company’s checking account in
unlikely event that collection of the loan seems doubtful
- Phil and Doug have no accounting training; Mr. Day is fully responsible for accounting duties
- Phil and Doug are the only people allowed to sign company checks
- Mr. Day is looking into new accounting software package to make bookkeeping easier and help
control costs through its budgeting system
- Doug has always monitored company expenses so didn’t see the need for a budgeting system
- If expenses didn’t align, Phil and Doug would bring the issue up at the informal office meeting to
try to resolve the issue
- Company protects its accounting records and physical assets by:
o Locking doors and windows
o Only Doug, Phil, and Mr. Day have keys to office
o Vans kept in fenced in lot behind office; each drivers has key to gatelock
o Change the gate lock regularly as a precaution
- Company does not lock file cabinets where hard copies of accounting records and data disks are
stored
- Company does not have computers bolted down to desks
- Company success is due to using the newest steam-cleaning procedure compared to
competitors and Phil and Doug are personable
- Company is having audit done because Doug and Phil feel there might be a going concern and
that the audited financial statements will corroborate this and they are eager to learn
suggestions regarding the most professional way to records and present F/S
- Sal
- Company has used a local tax preparer to fill out tax returns since start of business
 - Company was going to have an audit done two years ago but auditor’s fees were too high but
decided now is the time
- Doug does not have concerns about the audit because the company has rarely had a problem
with bad debts
- Most receivable balances are collected within two to three weeks
- Company does not have an audit committee which is typical of company this size
- Company does have a BOD; Phil, Doug, and their wives
- Have at least one regularly schedule BOD meeting each year
- Doug and Phil have goals for the future of:
o Retire early
o Expanding their sales territory
o Increasing advertising
o Investing in more help and additional equipment
o Taking a vacation to Hawaii

A memo addressing the following:

a. State the purpose of what you are doing

b. Describe the procedures you are performing

c. Describe findings

d. Discuss implications for the preliminary assessment of control risk

a. Describe the procedures you are performing

- Control environment (interviews with BOD members, walkthrough)

- Risk Assessment (Management’s identification and analysis of relevant risks to achieve its objectives;
does BOD implement COSO’s Enterprise risk management framework to assess long-term risk of
insolvency)

- Control activities (policies and procedures that help ensure management directives are carried out;
check physical controls over security of assets, evaluate segregation of duties, check information
processing system for approvals and authorization/verifications and reconcilliations, conduct
performance reviews of budget v. actual and exception reports for special cut rates, evaluate preventive
controls v. detective controls)

 A lack of segregation of duties enables employees to process a fraudulent

transaction

 Testing information and communication systems for prenumbered documents

(Helps identify incomplete or missing transactions due to missing document in
the sequentially numbered documents) and preformatted documents/screens
(Helps capture relevant information within limits of authority granted a
particular employee (e.g., $ limits on purchases).