EarthWear Clothiers
Memo on
Internal Control Components
The following information was gathered through inquiry with EarthWears Risk Management Officer, Chief Financial Officer, Chief Information Officer, and Chief Internal Auditor.
The Entitys Risk Assessment Process:
EarthWear has established broad objectives. Management has prepared a five-year business plan that includes goals about the companys products, responsibilities, and growth plans. The company uses a business plan and budgeting process to monitor decisions. Monthly meetings are held by senior management to discuss recent events and how they may affect the company. Management relies heavily on its Risk Management Department to identify risks that may affect the company, and to recommend appropriate actions.
Control Procedures:
ErthWear has a very sophisticated budgeting process that includes monitoring activities. All significant budget variances are summarized and explained in a monthly controllers report.
Information System and Communication:
The strategic plan and the budgeting process identify information that is needed to analyze and monitor the entitys objectives. All department groups within EarthWear are required to provide timely and adequate financial reporting. Actual performance is reported on a weekly and monthly basis. Performance is monitored by the controllers office. There is a strategic plan for updating the information systems over financial reporting that is revised on an annual basis.
Employees are provided with information regarding their duties during their initial training. EarthWears employee manual states that suspected violations of company policies should be reported to a vice president. There are procedures that allow such suspected violations to be reported anonymously. There are good communications channels across departments.
Monitoring:
Customer complaints are generally very low (1 out of every 5,000 invoices). Most complaints relate to delays in receiving goods that are on order by the company or minor billing discrepancies. All complaints are investigated for underlying causes and any internal control deficiencies are corrected. Recommendations made by customers and auditors that management and the board feel are cost beneficial are implemented. The board of directors focuses on the control environment and monitoring activities. The audit committee meets regularly with the internal and external auditors about control related activities.
1 Risk Assessment Questionnaire Client: Earth Wear Clothiers 2 Balance Sheet Date: 31/12/2014 Initial Here Reviewed by: Date: 3 4 5 6 7 Arisk assessment process should consider external and intemal events and circumstances that may occur and adversely affect its ability to initiate. record process, and report fnancial data consistent with management's assertions. Management should initiate plans programs, or actions to address signifcant, Identifed risks or accept the risk because of cost considerations. Yes, No, NA Comments Does the entity set entity-wide objectives that state what the entity Respon desires to achieve, and are they supported by strategic plans? d Here Provide Any Additional Comments Here Question B 1 9 Yes 2 70 Does the entity have a risk analysis process that includes estimating the significance of the risks, assessing the likelihood of their occurring, and determining the actions needed to respond to the risks? Does the entity have mechanisms to identity and react to changes that may dramatically and pervasively a tect the entity? Control Procedures Questionnaire Client: Earth Wear Clothiers The company's business plan and budgeting process includes analyzing risks that might affect the company. Monthly meetings are held by senior management to discuss recent events and how they may affect the company Provide Any Additional Comments Here Respon 11 3 d Here 12 13 Balance Sheet Date: 31/12/2014 nitial Here Reviewed by Date: 14 15 16 Control procedures include the policies and procedures that ensure that management's directives are efective in processing and preparing fnancial statements. Control activities ensure that the entity's fnancial reporting objective is carried out. Yes. No. NA Comments T7 18 Question 19 Yes 4 Does management have clear objectives in terms ofbudget proft. and other fnancial and operating goals? 20 Earth Wear has a very sophisticated budgeting process that includes monitoring activities. All significant budget variances are summarized and explained in a monthly controller's report See A20 for extracts of significant items 21 Yes 5 23 24 Are such objectives Clearly written? Actively communicated throughout the entity? Actively monitored? 25 26 27 Yes 6 28 29 Does the appropriate level of management: Adequately investigate variances? - Take appropriate and timely corrective actions? 30 7 Yes 31 Has management established procedures to prevent unauthorized access to or destruction of documents, records. assets, programs See B10 for a description of the IT Department's controls over access to (1) the computer operations arez and (2) data 36 INFORMATION SYSTEMS 37 38 utomation systems initiate, record, process, and report information. Relevant information includes industry, economic, and regulatory information obtained fom extemal sources, as well as intemally generated information Yes No, NA Comments Question 39 40 41 8 Yes 42 Does the information system give management the necessary reports on the entity's performance relative to established objectives, including relevant extemal and internal information ? is the information provided to the right people in suficient detail and in time to enable them to carry out their responsibilities effectively? The strategic plan and the budgeting process identify information that is needed to analyze and monitor the entity's objectives. Provide Any Additional Comments Here 43 9 Respon d Here 44 10 Yes 45 is the development or revision ofinformation systems over inancial reporting based on a strategic plan? There is a strategic plan for updating the information systems over financial reporting that is revised on an annual basis. 46 47 COMMUNICATION 48 49 Communication includes the extent to which personnel understand how their activities in the francial reporting information system relate to the work of others and the means of reporting exceptions to an appropriate level within the entity Yes No, NA Comments 50 51 Question 52 11 Yes 53 Does management communicate employees' duties and control responsibilities in an effective manner? Are communication channels established or people to report suspected improprieties? Employees are provided with information regarding their dudes during their initial training Provide Any Additional Comments Here 54 12 Respon d Here 55 13 Yes 56 There are good communications channels across departments 57 58 Does communication fow across the organization adequately to enable people to discharge their responsibilities etctively? Monitoring Questionnaire Client: EarthWear Clothiers 59 Balance Sheet Date: 31/12/2014 Initial Here Reviewed by: Date: 60 61 62 63 64 Question Management should monitor internal control in the ordinary course of operations. This monitoring includes regular management and supervisory activities and other actions personnel take in performing their duties that assess the quality of internal control. Yes, No, NA Comments Respon How many customer complaints are received about billings? Provide Any Additional Comments Here d Here Are complaints investigated for underlying causes and any intemal Respon Provide Any Additional Comments Here control de ciencies corrected? d Here 65 14 66 15 67 16 68 Does the entity have an intemal audit function? Yes 69 17 Yes 70 Are internal control recommendations made by internal and external auditors implemented? Recommendations that management and the board feel are cost beneficial are implemented 71 18 Yes Does the entity conduct separate evaluations of internal control? 72 The board of directors focuses on the control environment and monitoring acvities. The audit committee meets regularly with the internal and extemal auditors about control 1 Risk Assessment Questionnaire Client: Earth Wear Clothiers 2 Balance Sheet Date: 31/12/2014 Initial Here Reviewed by: Date: 3 4 5 6 7 Arisk assessment process should consider external and intemal events and circumstances that may occur and adversely affect its ability to initiate. record process, and report fnancial data consistent with management's assertions. Management should initiate plans programs, or actions to address signifcant, Identifed risks or accept the risk because of cost considerations. Yes, No, NA Comments Does the entity set entity-wide objectives that state what the entity Respon desires to achieve, and are they supported by strategic plans? d Here Provide Any Additional Comments Here Question B 1 9 Yes 2 70 Does the entity have a risk analysis process that includes estimating the significance of the risks, assessing the likelihood of their occurring, and determining the actions needed to respond to the risks? Does the entity have mechanisms to identity and react to changes that may dramatically and pervasively a tect the entity? Control Procedures Questionnaire Client: Earth Wear Clothiers The company's business plan and budgeting process includes analyzing risks that might affect the company. Monthly meetings are held by senior management to discuss recent events and how they may affect the company Provide Any Additional Comments Here Respon 11 3 d Here 12 13 Balance Sheet Date: 31/12/2014 nitial Here Reviewed by Date: 14 15 16 Control procedures include the policies and procedures that ensure that management's directives are efective in processing and preparing fnancial statements. Control activities ensure that the entity's fnancial reporting objective is carried out. Yes. No. NA Comments T7 18 Question 19 Yes 4 Does management have clear objectives in terms ofbudget proft. and other fnancial and operating goals? 20 Earth Wear has a very sophisticated budgeting process that includes monitoring activities. All significant budget variances are summarized and explained in a monthly controller's report See A20 for extracts of significant items 21 Yes 5 23 24 Are such objectives Clearly written? Actively communicated throughout the entity? Actively monitored? 25 26 27 Yes 6 28 29 Does the appropriate level of management: Adequately investigate variances? - Take appropriate and timely corrective actions? 30 7 Yes 31 Has management established procedures to prevent unauthorized access to or destruction of documents, records. assets, programs See B10 for a description of the IT Department's controls over access to (1) the computer operations arez and (2) data 36 INFORMATION SYSTEMS 37 38 utomation systems initiate, record, process, and report information. Relevant information includes industry, economic, and regulatory information obtained fom extemal sources, as well as intemally generated information Yes No, NA Comments Question 39 40 41 8 Yes 42 Does the information system give management the necessary reports on the entity's performance relative to established objectives, including relevant extemal and internal information ? is the information provided to the right people in suficient detail and in time to enable them to carry out their responsibilities effectively? The strategic plan and the budgeting process identify information that is needed to analyze and monitor the entity's objectives. Provide Any Additional Comments Here 43 9 Respon d Here 44 10 Yes 45 is the development or revision ofinformation systems over inancial reporting based on a strategic plan? There is a strategic plan for updating the information systems over financial reporting that is revised on an annual basis. 46 47 COMMUNICATION 48 49 Communication includes the extent to which personnel understand how their activities in the francial reporting information system relate to the work of others and the means of reporting exceptions to an appropriate level within the entity Yes No, NA Comments 50 51 Question 52 11 Yes 53 Does management communicate employees' duties and control responsibilities in an effective manner? Are communication channels established or people to report suspected improprieties? Employees are provided with information regarding their dudes during their initial training Provide Any Additional Comments Here 54 12 Respon d Here 55 13 Yes 56 There are good communications channels across departments 57 58 Does communication fow across the organization adequately to enable people to discharge their responsibilities etctively? Monitoring Questionnaire Client: EarthWear Clothiers 59 Balance Sheet Date: 31/12/2014 Initial Here Reviewed by: Date: 60 61 62 63 64 Question Management should monitor internal control in the ordinary course of operations. This monitoring includes regular management and supervisory activities and other actions personnel take in performing their duties that assess the quality of internal control. Yes, No, NA Comments Respon How many customer complaints are received about billings? Provide Any Additional Comments Here d Here Are complaints investigated for underlying causes and any intemal Respon Provide Any Additional Comments Here control de ciencies corrected? d Here 65 14 66 15 67 16 68 Does the entity have an intemal audit function? Yes 69 17 Yes 70 Are internal control recommendations made by internal and external auditors implemented? Recommendations that management and the board feel are cost beneficial are implemented 71 18 Yes Does the entity conduct separate evaluations of internal control? 72 The board of directors focuses on the control environment and monitoring acvities. The audit committee meets regularly with the internal and extemal auditors about control
