Control Environment and Fraud Risk at Acme Industries
In order to assess the likelihood of misappropriation of assets and the likelihood of fraudulent financial reporting, various fraud risk factors are considered in the Acme audit such as the possibility of ineffective monitoring of management as a result of an ineffective board of directors or audit committee oversight over the financial reporting process and internal controls
One of the strengths of Acme is an effective board of directors. For example, the board seems to play an appropriate role in monitoring Acme's business operations. With respect to item #1 listed above, the board meets five to six times a year, and an adequate number are independent directors. Also, the board actively discusses and debates decisions, strategic initiatives and major business transactions during these meetings. Members of the board appear to pay close attention to issues that require their attention. For example, the audit committee meets privately with the company's chief accounting officer and its external auditors on a regular basis. The only weakness noted is the fact that the board's audit committee reviews the scope of activities of the internal and external auditors only once a year, and one would prefer the committee to review the scope as required rather than on a fixed schedule. Also, under the Sarbanes Oxley Act, members of the board and in particular members of the audit committee of Acme are required to have specific knowledge and expertise. The preliminary assessment did not determine if the members of the board met the requirements of Sarbanes Oxley.
With respect to item #2, there is no doubt that Acme is a complex organization. A company with both domestic and international manufacturing operations that does business in over fifty countries and with an average annual sales increase of 26 percent is a complex business. The preliminary analysis suggests this comple...