Control Environment. The board of directors of CD Mania, BV, a chain of retail music stores in the Netherlands, has just issued policies specifying standards of ethical behaviour for employees toward customers, suppliers, and even competitors. Furthermore, each employee has a formal job description describing what is expected. All new employees are given tests to measure their knowledge of music and if they pass, a thorough background check is carried out on them.

Eight of the ten directors of CD Mania are independent of the company. The directors meet four times a year and their agenda includes talks with company financial and accounting personnel who provide the board members with monthly operating reports, copies of all important contracts, and information about litigation or government investigations. It is known that the board members may be approached by anyone in the organization who suspects controls are being circumvented.

Required

A. How would you evaluate the control environment of CD Mania? Explain.

B. List the positive aspects of CD Mania’s control environment.

C. Suggest four ways that CD Mania can improve their control environment.