Required Information

The Control Environment as it Relates to inventory

Read the case and answer the question that follows:

The control environment reflects a company's overall attitude, awareness, and actions of both management and the Board of Directors concerning the importance of control and how it's used in the company.

CONCEPT REVIEW:

It is important in testing any cycle to consider the control environment, especially when testing inventory given its weight in a manufacturing environment.

BACKGROUND:

The control environment reflects the company's attitude, awareness, and actions of management and the board concerning the importance of control and how it is used. This is very relevant to an auditor's consideration of inventories and should include; a) commitment to competence and HR policies and practices; b) integrity and ethical values; c) organizational structure and assignment of authority and responsibility.

Central Park Associates CPAs is conducting an audit of a US manufacturing company. When reviewing the company's inventory policy and physical inventory policy, the auditors noted the following facts: 1) Physical inventory will be conducted this year by temporary workers, at a wage cheaper for management than the "regular" workers; 2) Approvals for purchase orders with discounts are not required any longer; 3) The shop manager is no longer responsible for the physical inventory, it is now the responsibility of the CFO; 4) The physical inventory will be held four days after year end.

Consider these facts in answering the following questions.

1. What aspect of the control environment is affected by the company's decisions to hire temporary workers?

2. What aspect of the control environment is affected by the company's decision to no longer require approvals for purchase order discounts?

3. What aspect of the control environment is affected by the company's decision to no longer have the shop manager in charge of inventory?

4. What aspect of the control environment is affected by the company's decision to hold the physical inventory four days after year end?