Luqman and Vilma are friends who are employed by different CA firms. One day, during lunch, they are discussing the importance of internal control in determining the amount of audit evidence required for an engagement. Luqman expresses the view that internal control must be evaluated carefully in all companies, regardless of their size or whether they are publicly held, in a similar manner. His CA firm requires a standard internal control questionnaire on every audit as well as flowchart of every transaction area. In addition, he says the firm requires a careful evaluation of the system and a modification in the evidence accumulated based on the controls and deficiencies in the system.

Vilma responds by saying she believes that internal control cannot be adequate in many of the small companies she audits; therefore, she simply ignores internal control and acts under the assumption of inadequate controls. She goes on to say, Why should I spend a lot of time obtaining an understanding of internal control and assessing control risk when I know it has all kinds of weaknesses before I start? I would rather spend the time it takes to fill out all those forms in testing whether the statement is correct.

Required:

i. Explain in general terms the FOUR (4) most important difference between the nature of potential control available for large and small companies. (12 marks)

ii. Explain FOUR (4) of your opinion about the similarities and differences that should exist in understanding internal control and assessing control risk for different sized companies taken by Luqman and Vilma. (12 marks)

iii. Discuss whether Vilmas approach is acceptable when auditing a public companys financial statement.