Auditing Cases.pdf

5 instructor resource Manual do not coPy or redistribute internal control over financial reporting 5.1 Simply Steam, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Evaluation of Internal Control Environment 5.2 Easy Clean, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Evaluation of Internal Control Environment 5.3 Red Bluff Inn any similarity to existing companies or persons is purely coincidental. easy clean/simply steam, co. evaluation of internal control environment Mark S. Beasley Frank A. Buckless Steven M. Glover Douglas F. Prawitt To reinforce aspects relevant to the internal con- 1 trol environment. To illustrate the degree of judgment involved in 2 making internal control environment evaluations. To provide students experience in making 3 subjective evaluative judgments. To provide a forum to discuss inquiry techniques 4 as well as inquiry as a form of audit evidence. To provide students direct experience with, and 5 discovery of, issues surrounding the control environment, making inquiries, and the framing (e.g., positive or negative) of information provided by management. To illustrate the potentially inappropriate effects 6 of information “framing.” inStructional objectiveS KEY FACTS The instructor has the option of using two versions (i.e., negative and positive) of the case. Simply Steam provides the negative tone or frame while then next case, Easy Clean, provides the positive frame. The cases are identical except for the tone of the interview and some name changes. Easy Clean/Simply Steam (EC/SS), Co. is in the business of providing industrial and domestic carpet steam-cleaning services. EC/SS is a privately-held company and has never been audited. The audit manager recently conducted an interview with management in order to obtain an understanding of EC/SSs control environment. This interview dialogue is what students rely on to assess EC/SSs control environment. EC/SS has grown rapidly since it began operations less than six years ago. The case indicates that the instructor will notify the students whether to make all the component assessments or only the overall control environment assessment. USE OF CASE1 The rich content of the EC/SS case can be used to promote interesting discussions of a wide variety of topics relating to the assessment of a clients control environment. The EC/SS exercise actively involves students in issues that call for professional judgment. This is a crucial part of their audit education that is not often covered by traditional methods. Involving students in this active learning experience should help develop their competence, heighten their sense of professional skepticism and enhance their ability to exercise professional judgment. This case exercise provides an opportunity 1 This case and the teaching notes have been adapted from the “Steam-Vac, Inc.” case included in the article “Instructional Case: Using Profes- sional Judgment in Control Environment Evaluation,” by R.E. Marden, S.L. Schneider, and G.L. Holstrum, published in Issues in Accounting Educa- tion, Vol. 11, No. 2, Fall 1996. 5.1-2 c a s e 156 section 5: internal control over financial reporting instructor resource Manual do not coPy or redistribute to practice making difficult judgments and to critically evaluate the issues surrounding professional judgment. The exercise involves the evaluation of the control environment (CE). Prior to Sarbanes- Oxley and PCAOB Auditing Standard No. 2 (superseded by Auditing Standard No. 5), the evaluation of CE rarely received the attention it deserved in the professional literature and auditor training. However, a proper understanding of CE is one of the most important aspects of the audit. Lack of attention to CE is a potential contributor to several known alleged audit failures. Increased sensitivity to the CE may improve students ability to recognize those conditions in which the risks of fraud and material misstatements are high. The EC/SS exercise is intended to demonstrate some of the difficulties that auditors, as well as students, can have in using professional judgment when evaluating the oral assertions of management. The primary function of the exercise is to encourage students to engage in critical thinking about audit judgment and to begin developing a sense of professional skepticism. This case is designed for use in-class. Students should already be familiar with the concepts covered in a textbook chapter covering internal control and/or concepts in AU Section 314, “Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained,” and PCAOB Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.” In other words, the case exercise is not intended to introduce students to the control environment. Rather, it is intended to allow them to apply what they have already learned.。