Required information

Processes, Significant Accounts, and Transaction Types

Read the comprehension case and answer the questions that follow.

Auditors use a top-down approach to identify controls to test, "top-down" meaning that the controls start at the top of an organization with the financial statements, as well as entity-level controls.

CONCEPT REVIEW:

Entity-level controls are included in the control environment, sometimes specifically in monitoring. Examples include tone at the top, assignment of authority and responsibility, and corporate codes of conduct.

Read the comprehension case and answer the questions that follow.

BACKGROUND:

Auditors need to use a top-down approach to identify controls to test. This approach starts at the top of an organization (financial statements and entity-level controls) and helps to link the financial statements to significant accounts, relevant assertions, and major classes of transactions. Entity-level controls are included in the control environment or via monitoring components. Examples that have a pervasive effect on internal control include tone at the top, assignment of authority and responsibility, and corporate codes of conduct.

Haun CPAs has been asked todo integrated audit for Gemini Industries, a manufacturer of watches. During the course of its audit, the auditors have noted various issues and items. They have observed the Gemini company's CEO walking around checking on production and productivity, as she is very concerned about meeting goals and output quantity, seemingly at any cost. Additionally, the auditors noted that a new Gemini employee started in accounting during the course of the audit. The manager of the accounting staff asked the employee to sign a form stating that he had reviewed the code of conduct--and then indicated that he would "find" one for the employee to sign later. Also, the auditors observed that in the board minutes, the Gemini IT chair indicated that many employees were collaborating on making changes to their internal software, and as such, their passwords have been removed for the interim until the changeover. The auditors discussed these items in their closing meeting.

1. What could the constant observation of production and productivity by the Gemini CEO indicate?
2. Why would the auditors be concerned about Gemini's HR policy regarding its code of conduct?
3. Why would Gemini's change of passwords in the IT department affect the audit?