The professional standards emphasize that auditors need be concerned with any controls that are designed to prevent or detect misstatements in the financial statements. The professional standards use the Committee of Sponsoring Organizations' (COSO) five internal control components (the control environment, risk assessment, the information and communication system, control activities, and monitoring).

You may find internal control concepts difficult to understand. It may be helpful to apply your knowledge to a real-world case situation:

During your first audit of a medium-size manufacturing company, the owner, John Bell, explains that in order to establish clear-cut lines of responsibility for various aspects of the business, he has made one employee responsible for the purchasing, receiving, and storing of merchandise. A second employee has full responsibility for maintenance of accounts receivable records and collections from customers. A third employee is responsible for personnel records, timekeeping, preparation of payrolls, and distribution of payroll checks.

Bell asks your opinion concerning this plan of organization. Explain fully the reasons supporting your opinion. Substantive responses count toward participation points.