”
ACCT 436 SECTION 7380
INTERNAL AUDITING

INSTRUCTIONS

You are allowed to use any of the course materials.
Make sure you take your time and provide complete answers. Two or three
sentence answers to any of these questions will not be adequate! Your logic,
thought processes and quality of your responses are what will determine your
grade. Questions 1-2 are worth 15
points. Questions 3-4 are worth 10
points each. Please submit your
responses in a Word document. Be sure to
put your name on each page. Good
luck!

1) ABCs capital-asset
procurement policy requires the Board of CAEs (BOD) approve any single
acquisition over $150,000. If the board approves a project, then the treasurer
will transfer the funds to the respective plant. Within one year, the internal
auditing function is charged with reviewing each acquisition to check the
propriety of the purchase and disbursal of funds.

ABCs Plant Controller prepared the
first proposal for a DEK cutting machine. Other plants were told to wait until internal
auditing could inspect the documentation associated with the acquisition, and
evaluate the projects operating effectiveness and efficiency. The plants proposal
was the second largest proposal ever submitted in the companys history and it
totaled $1.3 million dollars. The cost of the new machine by itself was listed
in the proposal at $1.1 million. Labor and other costs necessary to remove the
old machine and install the new machine totaled $200,000.

The internal auditor assigned to the
investigation was Phil Ramone. Phil had been with ABC four years performing
mostly production operational audits (on existing processes) and internal
control payroll audits. Phils considerable experience in these areas led him
to believe that the procedures associated with this capital-asset audit would
be as simple and routine. This was not Phils first visit to the plant. In fact
Phil had performed an audit on the plants payroll system only a year ago. Phils
recollection of the experience was not a pleasant one. He had several
confrontations with the plant controller, mostly as a result of personality
clashes. While all the payroll issues were easily resolved, Phil felt there was
still an adversarial relationship between him and the controller and was on
guard for any preemptive strikes this time around by the controller.

It was a long drive to the plant so when Phil arrived a little late the
day of his audit he was greeted by the controller with a perceived air of
indifference and promptly led to a secluded office. The controller calmly
explained that he was extremely busy and would answer any questions at the end
of the day. Phil merely nodded his head and sat down in front of several tall
piles of invoices, which the controller stated was the documentation supporting
the purchase, set up, and testing of the new machine. Phil was somewhat
surprised, fully expecting to see only a handful of invoices, but did not ask
for any explanations. As Phil began looking through the myriad of statements
and canceled checks he soon found one particular invoice near the top of the
first pile that indicated the actual price paid for the machine itself was only
$850,000.

Phils first reaction was to call the CAE
of auditing. When he found that the CAE was out for the day and could not be
reached he then decided to call the VP of Operations at corporate headquarters.
Phil was critical of the plant controller when describing the seriousness of
his suspicions based on this preliminary information. Phil didnt know that
there was a BOD meeting that day and that the news would be passed on to them.
The members of the Board were outraged, screaming over the alleged misuse of
the funds and possible fraud.

ACCT 436 SECTION 7380
INTERNAL AUDITING
SUMMER 2015

Phil
was unaware that in a private conference call the Chair of the Board of CAEs
would soon lambast the plant controller. Seconds after the call, the controller
walked up to Phil and had only two words to say get out. Phil was
flabbergasted; he called back to headquarters, only to receive a rather icy
response from the Chair of the BODs secretary suggesting that he return
immediately.

Three days later Phil was called in to
the CAEs office. The CAE described how he personally went to the plant the next day after Phils visit and
performed the capital-asset audit himself. The CAE found that there were a
number of reasonable explanations for the differences between the original
proposal and the actual expenditure. To begin with, the company that sold the
machine would not discount the price until the BOD approved the contract. Competing bids drove the cost of the machine
from $1.1 million to $850,000. However, there were several factors that offset
these savings.

Originally, the setup of the new
machine was projected to take a week and a half but ended up taking a month. No
one really knew how difficult it was going to be to remove the old machine that
was embedded in the concrete floor (to minimize vibration). This removal took
additional time and outside labor. Also, the new machine was to be put in the
same area where the old machine was located. Since the plant could not afford
to shut down for any extended length of time, the old machine was moved over
the Thanksgiving Day holiday when labor rates were doubled. In addition, while
the new machine was being tested, the old machine had to be kept running in its
temporary location. During the time that both machines were running, machine
operators and supporting personnel (e.g., those loading and unloading the
conveyors) worked double shifts in order to test the new machine. This parallel
process took longer than expected because the
plant engineers were not familiar enough with the new machine to deal
with minor problems. Also, special outside consultants were hired for the first
two weeks to set up the machine.

Another unexpected cost arose because
the new machine put out a greater number of larger pieces of wood requiring
required an additional conveyor belt to accept and carry the larger pieces. The
savings from the discount was used to purchase this necessary piece of
equipment. In sum, all of these additional and unexpected outlays were very
expensive and brought the total to just under the original proposed cost of
$1.1 million.

The CAE went on to explain to Phil that
the reason for the abnormally large number of invoices was an endless stream of
trips to the local electrical and hardware stores to buy the necessary parts
and supplies to keep the transition from the old to the new machine moving
smoothly. As it turned out, the Controller of the plant actually did a commendable job in
overseeing the project and keeping accurate records of the disbursements. In
fact, the controller created a specialized installation guide that will
probably save ABC hundreds of thousands of dollars when the remaining plants
order more of these machines.

Required

1.
Comment on Phils preparation for and conduct
of the audit. What should Phil have done differently?

2.
Discuss the possible violations of the IIA Code
of Ethics and/or International Standards for the Professional Practice
of Internal Auditing that Phil committed.

ACCT 436 SECTION 7380
INTERNAL AUDITING
SUMMER 2015

2)Recently, several states
have outsourced some of the services traditionally provided by government
employees. In one state, the Department of Health and Human Services
(Department) has outsourced its electronic benefit transfer services to eFunds
Inc. Under the contract, eFunds Inc. handles the electronic distribution of
food stamp programs, including transaction processing, reporting, contract
management, contract settlement, operations support, help desk services, and
project management. For cost reasons, eFunds Inc. sent the work to five
offshore service centers it owns in India.

a)
Describe the three most significant risks that this offshore outsourcing
arrangement introduces to the states Department of Health and Human Services.

b)
What are the key controls you would recommend to mitigate the risks cited in
part a.

c)
What role should the Departments internal audit function take to assist the
Department in dealing with these risk and control issues? Be specific.

3) On March 4, 2013 the NASDAQ Stock Market LLC filed
a proposed rule change that would require listed companies to establish and
maintain an internal audit function. Specifically:

Each
Company must establish and maintain an internal audit function to provide
management and the audit committee with ongoing assessments of the Companys
risk management processes and system of internal control. The Company may
choose to outsource this function to a third party service provider other than
its independent auditor. The audit committee must meet periodically with the
internal auditors (or other personnel responsible for this function) and assist
the Board in its oversight of the performance of this function. The audit
committee should also discuss with the outside auditor the responsibilities,
budget and staffing of the internal audit function.

Some of these comments supported the
rule change but a significant number, particularly from smaller companies,
argued against the change. A common theme of those against the change is
reflected in the following from the CFO of Perceptron, Inc.:

There already exists a
requirement for public companies to review, maintain and report on internal
controls under Federal securities law. Rules 13a-15 and 15d-15 specifically
require a certification by the Chief Executive Officer and the Chief Financial
Officer. This proposed rule by NASDAQ adds a second layer of regulation that is
not necessary and would not provide value. Perceptron maintains internal
controls with management oversight and already engages outside, independent
firms to perform SOX 404 testing of its internal controls. Management provides
a report of the results of its independent firms testing every quarter to the
Audit Committee. Further, the Companys independent auditor meets with the
Audit Committee regularly, including in private sessions without managements
presence.

Most companies listed on NASDAQ have
an internal auditing function. However according to an article by Richard
Chambers, .navigant.com/services/financial_advisory/financial-risk-management/””>research
by the consulting firm Navigantindicates that 40 percent of NASDAQ-listed companies with
market capitalization between US $75 million and US $250 million do not
have internal audit functions. Chambers,
R. (2013, June 3). NASDAQ Hesitates in Its Quest to Mandate Internal Audit.
Retrieved July 30, 2015.

Ultimately NASDAQ withdrew the
proposed rule. If you agree with the
logic of the critics of the proposed rule, explain how SOX 404 and CEO/CFO
certification removes the need for an internal audit function. If you dont
agree with the critics as well as the decision of NASDAQ, explain what an
internal audit function adds beyond SOX 404 and CEO/CFO certification.

ACCT 436 SECTION 7380
INTERNAL AUDITING
SUMMER 2015

4) a) When and in what ways do audit engagement communications occur?
b)
What actions regarding audit engagement observations must the internal
audit function take after the final engagement communication is
disseminated?

ACCT 436 SECTION 7380INTERNAL AUDITING You
are allowed to use any of the course materials.
Make sure you take your time and provide complete answers. Two or three
sentence answers to any of these questions will not be adequate! Your logic,
thought processes and quality of your responses are what will determine your
grade. Questions 1-2 are worth 15
points. Questions 3-4 are worth 10
points each. Please submit your
responses in a Word document. Be sure to
put your name on each page. Good
luck! 1) ABCs capital-asset
procurement policy requires the Board of CAEs (BOD) approve any single
acquisition over $150,000. If the board approves a project, then the treasurer
will transfer the funds to the respective plant. Within one year, the internal
auditing function is charged with reviewing each acquisition to check the
propriety of the purchase and disbursal of funds. ABCs Plant Controller prepared the
first proposal for a DEK cutting machine. Other plants were told to wait until internal
auditing could inspect the documentation associated with the acquisition, and
evaluate the projects operating effectiveness and efficiency. The plants proposal
was the second largest proposal ever submitted in the companys history and it
totaled $1.3 million dollars. The cost of the new machine by itself was listed
in the proposal at $1.1 million. Labor and other costs necessary to remove the
old machine and install the new machine totaled $200,000.The internal auditor assigned to the
investigation was Phil Ramone. Phil had been with ABC four years performing
mostly production operational audits (on existing processes) and internal
control payroll audits. Phils considerable experience in these areas led him
to believe that the procedures associated with this capital-asset audit would
be as simple and routine. This was not Phils first visit to the plant. In fact
Phil had performed an audit on the plants payroll system only a year ago. Phils
recollection of the experience was not a pleasant one. He had several
confrontations with the plant controller, mostly as a result of personality
clashes. While all the payroll issues were easily resolved, Phil felt there was
still an adversarial relationship between him and the controller and was on
guard for any preemptive strikes this time around by the controller.It was a long drive to the plant so when Phil arrived a little late the
day of his audit he was greeted by the controller with a perceived air of
indifference and promptly led to a secluded office. The controller calmly
explained that he was extremely busy and would answer any questions at the end
of the day. Phil merely nodded his head and sat down in front of several tall
piles of invoices, which the controller stated was the documentation supporting
the purchase, set up, and testing of the new machine. Phil was somewhat
surprised, fully expecting to see only a handful of invoices, but did not ask
for any explanations. As Phil began looking through the myriad of statements
and canceled checks he soon found one particular invoice near the top of the
first pile that indicated the actual price paid for the machine itself was only
$850,000. Phils first reaction was to call the CAE
of auditing. When he found that the CAE was out for the day and could not be
reached he then decided to call the VP of Operations at corporate headquarters.
Phil was critical of the plant controller when describing the seriousness of
his suspicions based on this preliminary information. Phil didnt know that
there was a BOD meeting that day and that the news would be passed on to them.
The members of the Board were outraged, screaming over the alleged misuse of
the funds and possible fraud. ACCT 436 SECTION 7380INTERNAL AUDITING Phil
was unaware that in a private conference call the Chair of the Board of CAEs
would soon lambast the plant controller. Seconds after the call, the controller
walked up to Phil and had only two words to say get out. Phil was
flabbergasted; he called back to headquarters, only to receive a rather icy
response from the Chair of the BODs secretary suggesting that he return
immediately. Three days later Phil was called in to
the CAEs office. The CAE described how he personally went to the plant the next day after Phils visit and
performed the capital-asset audit himself. The CAE found that there were a
number of reasonable explanations for the differences between the original
proposal and the actual expenditure. To begin with, the company that sold the
machine would not discount the price until the BOD approved the contract. Competing bids drove the cost of the machine
from $1.1 million to $850,000. However, there were several factors that offset
these savings. Originally, the setup of the new
machine was projected to take a week and a half but ended up taking a month. No
one really knew how difficult it was going to be to remove the old machine that
was embedded in the concrete floor (to minimize vibration). This removal took
additional time and outside labor. Also, the new machine was to be put in the
same area where the old machine was located. Since the plant could not afford
to shut down for any extended length of time, the old machine was moved over
the Thanksgiving Day holiday when labor rates were doubled. In addition, while
the new machine was being tested, the old machine had to be kept running in its
temporary location. During the time that both machines were running, machine
operators and supporting personnel (e.g., those loading and unloading the
conveyors) worked double shifts in order to test the new machine. This parallel
process took longer than expected because the
plant engineers were not familiar enough with the new machine to deal
with minor problems. Also, special outside consultants were hired for the first
two weeks to set up the machine.Another unexpected cost arose because
the new machine put out a greater number of larger pieces of wood requiring
required an additional conveyor belt to accept and carry the larger pieces. The
savings from the discount was used to purchase this necessary piece of
equipment. In sum, all of these additional and unexpected outlays were very
expensive and brought the total to just under the original proposed cost of
$1.1 million.The CAE went on to explain to Phil that
the reason for the abnormally large number of invoices was an endless stream of
trips to the local electrical and hardware stores to buy the necessary parts
and supplies to keep the transition from the old to the new machine moving
smoothly. As it turned out, the Controller of the plant actually did a commendable job in
overseeing the project and keeping accurate records of the disbursements. In
fact, the controller created a specialized installation guide that will
probably save ABC hundreds of thousands of dollars when the remaining plants
order more of these machines. 1.
Comment on Phils preparation for and conduct
of the audit. What should Phil have done differently? 2.
Discuss the possible violations of the IIA Code
of Ethics and/or International Standards for the Professional Practice
of Internal Auditing that Phil committed.ACCT 436 SECTION 7380INTERNAL AUDITING 2)Recently, several states
have outsourced some of the services traditionally provided by government
employees. In one state, the Department of Health and Human Services
(Department) has outsourced its electronic benefit transfer services to eFunds
Inc. Under the contract, eFunds Inc. handles the electronic distribution of
food stamp programs, including transaction processing, reporting, contract
management, contract settlement, operations support, help desk services, and
project management. For cost reasons, eFunds Inc. sent the work to five
offshore service centers it owns in India.a)
Describe the three most significant risks that this offshore outsourcing
arrangement introduces to the states Department of Health and Human Services.b)
What are the key controls you would recommend to mitigate the risks cited in
part a. c)
What role should the Departments internal audit function take to assist the
Department in dealing with these risk and control issues? Be specific.3) On March 4, 2013 the NASDAQ Stock Market LLC filed
a proposed rule change that would require listed companies to establish and
maintain an internal audit function. Specifically:Each
Company must establish and maintain an internal audit function to provide
management and the audit committee with ongoing assessments of the Companys
risk management processes and system of internal control. The Company may
choose to outsource this function to a third party service provider other than
its independent auditor. The audit committee must meet periodically with the
internal auditors (or other personnel responsible for this function) and assist
the Board in its oversight of the performance of this function. The audit
committee should also discuss with the outside auditor the responsibilities,
budget and staffing of the internal audit function.Some of these comments supported the
rule change but a significant number, particularly from smaller companies,
argued against the change. A common theme of those against the change is
reflected in the following from the CFO of Perceptron, Inc.:There already exists a
requirement for public companies to review, maintain and report on internal
controls under Federal securities law. Rules 13a-15 and 15d-15 specifically
require a certification by the Chief Executive Officer and the Chief Financial
Officer. This proposed rule by NASDAQ adds a second layer of regulation that is
not necessary and would not provide value. Perceptron maintains internal
controls with management oversight and already engages outside, independent
firms to perform SOX 404 testing of its internal controls. Management provides
a report of the results of its independent firms testing every quarter to the
Audit Committee. Further, the Companys independent auditor meets with the
Audit Committee regularly, including in private sessions without managements
presence.Most companies listed on NASDAQ have
an internal auditing function. However according to an article by Richard
Chambers, .navigant.com/services/financial_advisory/financial-risk-management/””>research
by the consulting firm Navigantindicates that 40 percent of NASDAQ-listed companies with
market capitalization between US $75 million and US $250 million do not
have internal audit functions. Chambers,
R. (2013, June 3). NASDAQ Hesitates in Its Quest to Mandate Internal Audit.
Retrieved July 30, 2015.Ultimately NASDAQ withdrew the
proposed rule. If you agree with the
logic of the critics of the proposed rule, explain how SOX 404 and CEO/CFO
certification removes the need for an internal audit function. If you dont
agree with the critics as well as the decision of NASDAQ, explain what an
internal audit function adds beyond SOX 404 and CEO/CFO certification.ACCT 436 SECTION 7380INTERNAL AUDITING 4) a) When and in what ways do audit engagement communications occur? b)
What actions regarding audit engagement observations must the internal
audit function take after the final engagement communication is
disseminated?”