Question

Which of the following suggests a weakness in the internal control environment?

1) the firm has an up-to-date organizational chart
2) monthly reports comparing actual performance to budget are distributed to managers
3) performance evaluations are prepared every three years
4) the audit committee meets quarterly with the external auditors

Answer 1

Performance evaluations prepared every three years indicate a weakness in the internal control environment, as infrequent evaluations may delay the detection of internal issues.

Step-by-step explanation:

Among the given options, performance evaluations being prepared every three years suggests a weakness in the internal control environment. Frequent performance evaluations are crucial for ensuring that employees remain aligned with the company's goals and regulatory requirements. By only conducting evaluations every three years, the company may not detect internal issues or areas that require improvement in a timely manner, potentially leading to significant oversight failures, similar to what occurred in the case of Lehman Brothers.