Question 6 (7 marks)

John is the owner of a small manufacturing company. In prior years, your firm has conducted a review engagement of the company. However, this year, John obtained a loan from the federal business development bank, and is required to have an audit of his financial statements. When you started asking about controls and procedures at the company, John got pretty upset.

"All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staff to answer these questions! Just check the numbers and let us get on with our work!"

You calmed him down a bit, and reminded him about the general discussion that occurred with the engagement letter. You invited him for coffee to briefly explain the following items:

1. Why auditors are both i.) Concerned about internal controls and ii.) Required to audit internal controls. (3 marks)

2. What you need to do to understand internal controls (2 marks)

3. What you will do once you have documented your understanding of internal controls (2 marks)

Required

Explain what you would say to John.