Prelim Question # 2

An organization may adopt a closed-system or open-system model. Answer the following:

1. Discuss the pro's and con's of each model.

Answer:
Pros and cons: These salary models are essentially worry-free for young physicians, so they offer a sense of security. But without the bonus component, which is usually based on the group’s total earnings, they offer little long-term financial incentive if there is no “ownership track,” and may ultimately either discourage entrepreneurship or support minimum-effort work standards.

2. Cite a company that uses any of this model. Describe briefly how this chosen model affect the entire company.

3. Evaluate how an environment affects the organization and its management. Discuss the pro's and con's of not responding to the demands of the environment.

Answer:Beginning with the first yearend on or after November 15, 2004, many companies will have to comply with the internal control reporting requirements of the Sarbanes-Oxley Act of 2002. The control environment is one of the key components of an entity's internal control; it sets the tone of an entity, influences the control consciousness of people within all organization and is the foundation for all other components of the internal control system. In this article management and independent auditors will find some suggestions for addressing one of the most challenging requirements of assessing internal control: evaluating the effectiveness of the control environment. Management has always been responsible for the design and maintenance of the company's internal control. Now, because of Sarbanes-Oxley, management has the added responsibility to annually evaluate, test and report on the entity's internal control over financial reporting. The external auditors are responsible for auditing management's assertion as to the effectiveness of this internal control and coming to their own, independent conclusions. They must evaluate management's assessment and perform their own, independent tests of controls, including the control environment. Thus, the suggestions provided in this article on testing the control environment may be helpful to management and auditors alike. As opposed to an activity-level control (for example, checking the mathematical accuracy of a vendor invoice), which is limited to one processing stream, the control environment has a pervasive structure that affects many business activities.