Session IAP 9

A page from an internal auditor’s workpapers contains notes made in the prior period. They specify which controls are relevant in the current period and which controls will soon be obsolete. The notes relate to

• Review for adequacy of control processes.

• Review for effectiveness of control processes.

• Review of results.

• Preliminary survey.

The preliminary survey indicates that severe staff reductions at the engagement location have resulted in extensive amounts of overtime among accounting staff. Department members are visibly stressed and very vocal about the effects of the cutbacks. Accounting payrolls are nearly equal to prior years, and many key controls, such as segregation of duties, are no longer in place. The accounting supervisor now performs all operations within the cash receipts and posting process and has no time to review and approve transactions generated by the remaining members of the department. Journal entries for the last 6 months since the staff reductions show increasing numbers of prior-month adjustments and corrections, including revenues, cost of sales, and accruals that had been misstated or forgotten during month-end closing activity. The internal auditor should

• Proceed with the scheduled engagement but add personnel based on the expected number of observations and anticipated lack of assistance from local accounting management.

• Suspend further engagement work and issue the final communication of results because the conclusions are obvious.

• Research temporary help agencies and evaluate the cost and benefit of outsourcing needed services.

• Discuss these observations with management of the internal audit activity to determine whether further work would be an efficient use of internal auditing resources at this time.

In planning an engagement, the internal auditor establishes objectives to address the risk associated with the activity. Risk is the

• Possibility that the balance or class of transactions and related assertions contains misstatements that could be material to the financial statements.

• Uncertainty of the occurrence of an event that could affect the achievement of objectives.

• Failure to adhere to organizational policies, plans, and procedures or to comply with relevant laws and regulations.

• Failure to accomplish established objectives and goals for operations or programs.

The audit committee has raised a few issues that the internal audit activity will examine during an operational audit for the current year. When performing the preliminary survey, which of the following is not an appropriate technique?

• All of the answers are appropriate techniques.

• Performing interviews.

• Determining the largest risk of financial statement misstatement.

• Developing questionnaires.

If an auditor’s preliminary evaluation of internal controls results in an observation that controls may be inadequate, the next step is to

• Prepare a flowchart depicting the internal control system.

• Expand audit work prior to the preparation of an engagement final communication.

• Note an exception in the engagement final communication if losses have occurred.

• Implement the desired controls.

Documentation required to plan an internal audit engagement includes information that

• Internal audit activity resources are efficiently and effectively employed.

• Planned engagement work will be completed on a timely basis.

• Resources needed to complete the engagement were considered.

• Intended engagement observations have been clearly identified.

During which phase of the engagement does the internal auditor identify the objectives and related controls of the activity being examined?

• Staff selection.

• Final communication of results.

• Work program preparation.

• Preliminary survey.

Internal auditors must make a preliminary assessment of risks when conducting an assurance engagement. This assessment may involve quantitative (objective) and subjective factors. The least subjective factor is

• Changes in the auditee’s business forecast.

• The evaluation of internal control.

• The auditor’s assessment of management responses.

• The organization’s recognized losses on derivatives.

During an operational engagement, an internal auditor compares the inventory turnover rate of a subsidiary with established industry standards to

• Test the subsidiary’s controls designed to safeguard assets.

• Assess the performance of the subsidiary and indicate where additional engagement work may be needed.

• Determine if the subsidiary is complying with organizational procedures regarding inventory levels.

• Evaluate the accuracy of the subsidiary’s internal financial reports.

In planning an assurance engagement, a survey could assist with all of the following except

• Evaluating the adequacy and effectiveness of controls.

• Obtaining engagement client comments and suggestions on control problems.

• Identifying areas for engagement emphasis.

• Obtaining preliminary information on controls.