THE CONTROL ENVIRONMENT OF A COMPANY (五)

　　5 Organisational structure

　　ISA 315 describes a company’s organisational structure as being ‘the framework within which an entity’s activities for achieving its objectives are planned, executed, controlled and reviewed’. The appendix to the ISA then explains ‘that the appropriateness of an entity’s organisational structure depends, in part, on its size and the nature of its activities’. It follows from this that an international consulting company with offices and operations in several countries has different priorities in terms of organisational structure to a national car sales company with several offices and a number of sales branches in a single country. Similarly, the organisational structure deemed suitable for such a car sales company would not be appropriate for a single site manufacturing company. Generally, an auditor may reasonably expect there to be a positive correlation between the level of inherent risk and the size and complexity of a company’s operations. In assessing, the level of the risk of material misstatement the auditor should consider as to whether the company’s organisational structure in terms of authority, responsibility and lines of reporting meet desired objectives.

　　6 Assignment of authority and responsibility

　　Normally, the larger a company’s scale of operations, then the larger the size of the workforce and, inevitably, the larger the amount of assignment of authority and responsibility that is required. Consequently, companies need to deal not only with ensuring that appropriate levels of authority and responsibility are assigned to appropriately qualified and experienced individuals. They also need to ensure that adequate reporting relationships and authorisation hierarchies are in place.

　　Additionally, individuals need to be properly resourced and made fully aware of their responsibilities and of how their actions interrelate with the actions of others and contribute to the objectives of the company. If a company is not successful in meeting each of these needs, then there is an increased probability of ineffective decisions, errors and oversights by employees leading to an increased risk of material misstatement in its financial statements. For example, where a wages clerk is authorised to process the wages payroll and is then assigned the (inappropriate!) authority to enter new employee details into the wages master file.