This is one of those questions where YOU have to exercise your professional judgement! The suggested solution will not provide an answer for you. Cline’s questions are those listed as * points immediately above the Discussion Questions.
Instead some guidance about matters you might consider in your judgement to ensure you have considered all the material above in your assessment. Of course, the question is somewhat rhetorical in the context of the case study since you will still be directed to do other audit work in later activities, irrespective of your judgement at this point. The next question explores those options.
You might consider, in addition to all the foregoing information you have documented, the particular discussion in ASA 315.A78-A87. You have in the evidence documented above information about the control environment and certain control procedures. You need to judge the effectiveness of these in your preliminary assessment of the control risk for Lakeside. The information would allow you to make an assessment for the internal control structure as a whole, or for the revenue and cash receipts cycle only. In choosing your approach, be sure to read ASA 315.A78-A87 and see how it affects (if at all) your judgement.
Remember, that you have variously gathered and documented certain internal control questionnaires, flowcharts, documented other oral evidence and considered the requirements of the relevant ASA. As you use this information, also remember ASA 315.32, A153-A156 and notice you will be further referred through to ASA 330 … welcome to interwoven nature of the ASAs.
Good Luck!
Here are some suggestions for you to compare your judgements against … note that the references to ASA 315 can be supplemented by more detailed explanation in the relevant Appendix to that standard – up to you to find it and use it – the one that discusses the internal control components! The intent here is to show how you apply the requirements of the standards are illustrated in the case. Your challenge is to make the connection.
An evaluation of the overall control environment is not possible from Exhibits 4-3 and 4-4 alone (hopefully material from earlier cases might also inform some of your judgements). However, the auditors can see that responsibilities have been developed and divided within the company. Each individual or department seems to have a well-defined job within the two systems. Thus, some evidence exists to indicate that management is aware of the importance of internal control. Such systems simply cannot be created without adequate support by the company's management.
In terms of risk assessment, Lakeside does not appear (from Cases 2 through 4) to have a formal method of systematically assessing risks (Weakness) – see ASA 315.15-17. The auditors should recommend a system of identifying risks, their significance, their likelihood of occurrence, and how they might be managed. This is especially true with Lakeside's growth of stores, concentration of suppliers (Cypress only), and initiation of a bonus system.
In addressing control activities (ASA 315.20-21), the auditors can see that the company seems to use adequate documents and authorization procedures (Strength). In addition, although the Assistant to the President has many different duties (Weakness), the company seems to have made an attempt to segregate responsibilities in an appropriate manner.
Both of the information systems (ASA 315.18-19) that are presented also seem well designed especially for a small but growing company (see Limitations ASA 315.A54-A56 and especially noted in the relevant Appendix for smaller entities J). However, the company still uses some manual systems that can be slow and offer the opportunity for many human mistakes to be made (Weakness). The answer to Exercise (2) goes into more detail concerning control strengths and weaknesses in this area (see later question).
The monitoring activities (ASA 315.22-24) seem to be somewhat lax. However, with Lakeside still being relatively small, Rogers' oversight somewhat compensates for the lack of monitoring (again, see Limitations ASA 315.A54-A56 and especially noted in the relevant Appendix for smaller entities J). With the growth of Lakeside, this is becoming less true.