You are an audit supervisor assigned to a new client which is listed on a Stock Exchange. You visited the corporate headquarters to become acquainted with key personnel and to conduct a preliminary review of the company's accounting policies, controls, and systems. During this visit, the following event occurred:

(a)You were told that the performance of division and department managers is evaluated on a subjective basis, because top management believes that formal performance evaluation procedures are counterproductive.

Required :

1. Identify the problem above and explain it in relation to the internal environment.