Accounting Information Systems

7-1 CHAPTER 7 CONTROL AND ACCOUNTING INFORMATION SYSTEMS SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

7.1 Answer the following questions about the audit of Springer's Lumber & Supply

a. What deficiencies existed in the internal environment at Springer's?

The "internal environment" refers to the tone or culture of a company and helps determine how risk consciousness employees are. It is the foundation for all other ERM components, providing discipline and structure. It is essentially the same thing as the control environment in the internal control framework.

The internal environment also refers to management's attitude toward internal control, and to how that attitude is reflected in the organization's control policies and procedures. At Springer's, several deficiencies in the control environment are apparent:

1. Management authority is concentrated in three family members, so there are few, if any, checks and balances on their behavior. In addition, several other relatives and friends of the family are on the payroll.

2. Since the company has a "near monopoly" on the business in the Bozeman area, few competitive constraints restrain prices, wages, and other business practices.

3. Lines of authority and responsibility are loosely defined, which make it difficult to identify who is responsible for problems or decisions.

4. Management may have engaged in "creative accounting" to make its financial performance look better, which suggests a management philosophy that could encourage unethical behavior among employees.

b. Do you agree with the decision to settle with the Springers rather than to prosecute them for fraud and embezzlement? Why or why not?