Control Environment
1. Assess Internal Control Environment. Using the COSO criteria for assessing the internal control environment. describe a company with an effective control environment.

7.21 Control Environment.

Hasse Nilsson, Statautoriseret, is in charge of the audit of a new client, US Clothing Store. It is owned by three men, Messrs. Simpson, Andersson, and Ding. Only one of the owners, Mr. Simpson, is active in the business - the other two live and work in another city.

Mr. Simpson operated the business as a proprietorship until a few years ago, when he incorporated it and obtained additional capital for store improvements by selling to Ding and Andersson 24 percent of his equity.

In addition to Mr. Simpson, the store employs three sales clerks and Miss Tearsson, the cashier-book- keeper. Miss Tearsson has worked for Mr. Simpson for many years. Nilsson and the partner in his firm responsible for the US Clothing Store audit have agreed that one of the first things Nilsson should do when he starts work on the audit is to consider the internal control environment.

A. Why is it important to consider the internal control environment of even a small company such as US Clothing Store?

B. What particular features of the internal control environment would Nilsson inquire into in the circumstances described above?