Chapter 06 Problem 6-26 LO 6-5, 6-6

Johnson, CPA, has been engaged to audit the financial statements of Rose, Incorporated, a publicly held retailing company. Before assessing control risk, Johnson is required to obtain an understanding of Roses control environment.

Required:

1. Identify principle of internal control (in addition to the factors illustrated in the following example) that set the tone of an organization, influencing the control consciousness of its people.

   Note: You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.

   check all that apply
   • The organization considers the potential for fraud in assessing risks to the achievement of objectives.
   • The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
   • The organization holds individuals accountable for their internal control responsibilities in pursuit of objectives.
   • Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.
   • The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control.
   • The organization demonstrates a commitment to integrity and ethical values.
   • The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives.

2. For each control environment factor identified in part (a), describe the components and why each component would be of interest to the auditor. Use the following format:

   Integrity and Ethical Values

   The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them. Integrity and ethical values are essential elements of the control environment, affecting the design, administration, and monitoring of other components. Integrity and ethical behavior are the products of the entitys ethical and behavioral standards, how they are communicated, and how they are reinforced in practice.