Auditing Principles & Practice
You are required to work on this assignment individually.
Any suspicious activities or cheating will result in zero grade in this assignment.
1. Case Study (4 Points)
You are an audit manager for the Alder Auditing Bureau, a firm that has recently gained
two new audit clients of a similar size. Your audit staff has completed their preliminary
investigations of the two clients. You are reviewing their notes which can be summarized as
Client 1 – Feyaty-Al-Madinah
Feisty-Al-Madinah is an old-fashioned family company that has been in business for over
thirty years and trades as wholesalers of fruit and vegetables. Its management structure is divided
into five layers ranging from a supervisor, deputy manager, manager, senior manager, and director.
The senior managers and directors have been with the company for many years. Each level of
management has clear authority limits set down in the company manual, which also sets out
detailed written procedures for every job. Management at all levels generally has an unforgiving
attitude to errors and inefficiencies. Most of the systems are paper-based, although the
accounting ledgers are maintained on a computer and there are rigid systems of authorization
before transactions can be processed. Staff turnover in clerical posts and at the supervisor and deputy
manager level is high.
Client 2 - Alkhalij Agency For Advertising
Alkhalij Agency for Advertising is a new company set up six months ago. It trades as a website
design business and as an advertising agency. Alkhalij Agency for Advertising is run by two
brothers who manage the business jointly. Alkhalij Agency for Advertising mostly employs
creative people but it does have a small clerical staff to deal with billing and time recording. The
approach to work is casual, spontaneous and rather uncontrolled. Error detection is not seen as a
priority. The management’s view is that they will deal with errors and problems when they arise.
Staff is happy and so staff turnover is low.
In your review of the control environment for each of these clients, what conclusions would you
draw about the risk of error arising in the accounts?
2. What are the Components of Internal Control? (3 Points)