1. The adequacy of internal controls is said to be a function of the organization’s “control environment”. Describe what is meant by the “control environment”.
2. Ajax Company is a large retail Company that sells clothing, shoes and other apparel. It has 40 retail outlets located in 22 states. All of its merchandise is purchased by a centralized Procurement Organization located at the company’s headquarters in Fairfax, Virginia. There are six purchasing agents with each agent assigned to purchase various types of goods. Each agent works independently with suppliers to get the best deals for the company. The six agents report to a purchasing manager. The manager oversees the department and among other things, approves purchase orders for more than $1,000,000. Otherwise, each agent is able to do his/her own deals. Based on the above, answer the following:
a. What is the difference between a preventive control and detective control?
b. How would a preventive control be applicable to the activities in the Procurement Organization? How would detective control be applicable?