Assessing control risk

The CPA firm of Abernethy and Chapman was hired during the summer of 2012 to
audit the financial statements of the Lakeside Company for the year ending
December 31, 2012. Even though the year-end was nearly six months away, the
firm began its preparation almost immediately.
Wallace Andrews, a manager, and Art Heyman, a staff accountant, both with
Abernethy and Chapman, spent a number o days doing preliminary analyses at
Lakesides headquarters. During this time, they also visited King and Company to
review the audit documentation created during previous audits. Andrews and
Heyman were looking for information that would assist in the assessment of both
inherent risk and control risk.
In looking at the predecessor auditors documentation, Heyman was assigned to
study the permanent file to learn more about the various accounting systems and
internal control features that were in place at the Lakeside Company. While
examining these document, Heyman discovered an organization chart that King and
Company had drawn to represent the clients internal control (see Exhibit 4-1). He
also found the symbols used by previous auditors in flowcharting the companys
various systems (see Exhibit 4-2).
Heyman next came to a section of the permanent file entitled Revenue and Cash
Receipts Cycle-Distributorship. Apparently, two people performed this portion of
the audit work originally. The Revenue Recognition function had been described in
narrative form (see Exhibit 4-3); whereas, the Cash Receipts section of the