You are an audit supervisor assigned to a new client, Go-Go Corporation, which is listed on the New York Stock Exchange. You visited Go-Go’s 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 events occurred:

a. You met with Go-Go’s audit committee, which consists of the corporate controller, treasurer, financial vice president, and budget director.

b. You recognized the treasurer as a former aide to Ernie Eggers, who was convicted of fraud several years ago.

c. Management explained its plans to change accounting methods for depreciation from the accelerated to the straight-line method. Management implied that if your firm does not concur with this change, Go-Go will employ other auditors.

d. You learned that the financial vice president manages a staff of five internal auditors.

e. You noted that all management authority seems to reside with three brothers, who serve as chief executive officer, president, and financial vice president.

f. You were told that the performance of division and department managers is evaluated on a subjective basis, because Go-Go’s management believes that formal performance evaluation procedures are counterproductive.

g. You learned that the company has reported increases in earnings per share for each of the past 25 quarters; however, earnings during the current quarter have leveled off and may decline.

h. You reviewed the company’s policy and procedures manual, which listed policies for dealing with customers, vendors, and employees.

i. Your preliminary assessment is that the accounting systems are well designed and that they employ effective internal control procedures.

j. Some employees complained that some managers occasionally contradict the instructions of other managers regarding proper data security procedures.

k. After a careful review of the budget for data security enhancement projects, you feel the budget appears to be adequate.

l. The enhanced network firewall project appeared to be on a very aggressive implementation schedule. The IT manager mentioned that even if he put all of his personnel on the project for the next five weeks, he still would not complete the project in time. The manager has mentioned this to company management, which seems unwilling to modify the schedule.

m. Several new employees have had trouble completing some of their duties, and they do not appear to know who to ask for help.

n. Go-Go’s strategy is to achieve consistent growth for its shareholders. However, its policy is not to invest in any project unless its payback period is no more than 48 months and yields an internal rate of return that exceeds its cost of capital by 3%.

o. You observe that company purchasing agents wear clothing and exhibit other paraphernalia from major vendors. The purchasing department manager proudly displays a picture of himself holding a big fish on the deck of a luxury fishing boat that has the logo of a major Go-Go vendor painted on its wheelhouse.

Required

The information you have obtained suggests potential problems relating to Go-Go’s internal environment. Identify the problems, and explain them in relation to the internal environment concepts discussed in this chapter.