Office Extreme Inc. (OEI) has been your audit client for five years. OEI designs and sells office furniture such as desks, cabinets, and couches used in office reception areas. OEI has sales in Canada and the U.S., with five distribution locations where furniture is available to prospective purchasers to try out before purchasing. These locations are in Toronto, Montreal, Vancouver, New York, and Los Angeles. The company uses custom-designed software for its order processing and sales, which is kept current by one of the five information systems personnel.

The Vice President of Finance is new. Executive management is paid a salary and a bonus based on the annual net income of OEI. Unfortunately, the accounting staff at the head office (in Montreal) has been downsized from ten people to six due to a recent slowdown in sales. Your review of the aged accounts receivable trial balance revealed that one third of the accounts have been outstanding for more than one year. OEI\'s profits have declined substantially from last year. Its line of credit and bank loans are at their maximum and the company is considering selling its U.S. operations to provide cash flow.

Prior year working papers revealed few errors and indicate that you considered management integrity to be good. However, due to segregation issues, you did not rely on the internal controls in the prior year.

Required:

A) What issues in corporate governance and in the control environment affect your assessment of internal controls for revenue? How does this affect the decision to conduct substantive testing (i.e. exclusion of tests of controls)?

B) What is the likely assessment of computer general controls? How does this affect the type of audit testing conducted at OEI?

Answer rating: 100% (QA)

Answer A Issues in corporate governance and control environment those affect assessment of internal controls for income are The hand crafted software ... View the full answer