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BÀI TẬP LỚN KIỂM TOÁN NỘI BỘ ĐẠT 9,6 ĐIỂM. QUESTION 1: For each internal control deficiency identified, explain the potential misstatements that may arise in the financial statements of Mckess as a result of the deficiency and describe one audit procedure to address the potential misstatement. QUESTION 2: a) State the matters that you would consider when evaluating the work of Mumboo''''s internal audit function. QUESTION 3: a) IPPF requires internal auditors to assess and give recommendation to company’s activities. Provide 3 examples (1 example per area) to improve: corporate governance, risk management and internal control of a company.

UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY OF ACCOUNTING AND AUDITING

FINAL ASSIGNMENTCOURSE: INTERNAL AUDITING

TABLE OF CONTENTS

THANK YOU LETTER 2

LIST OF ABBREVIATIONS 3

ASSIGNMENT 4

QUESTION 1 4

QUESTION 2 9

QUESTION 3 12

APPENDIX 1 24

REFERENCES 29

LIST OF ABBREVIATIONS

ISA International Standard on Auditing

IPPF The International Professional Practices Framework

IIA The Institute of Internal Auditors

QUESTION 1: For each internal control deficiency identified, explain the potential misstatements that may arise in the financial statements of Mckess as a result of the deficiency and describe one audit procedure to address the potential misstatement.

Internal control

deficiency identified misstatements The potential Audit procedures

Mckess's procedures were

limited to inquiries of

company personnel and

analytical procedures

+ Inaccuracies in valuing the inventory, resulting in an overstatement or understatement of assets.

+ There is a risk of errors in recognizing the existence and

inventory, leading to misstatements in both the balance sheet and cost of goods sold.

+ Physically observe and participate in the counting process of selected inventory items.

+ Verify that the counting is conducted

by independent and competent personnel + Confirm the accuracy

of counting methods and adherence to established procedures.

Mckess failed to perform

a physical inventory count

+ Misstatements in the calculation of COGS, affecting the accuracy

of the income statement.

+ Schedule a physical inventory count as soon as possible after the year-end date (30 June 20X9 in this case).

+ Recalculate the amount of inventory + Compare the observed quantities to the recorded amounts

in the perpetual inventory system as of the year-end date.

+ Adjust the financial

statements for any material misstatements identified during the post-year-end

inventory observation.

Mckess's inventory

records were last updated

three weeks before the

year end.

+ The outdated inventory records may not reflect the most current information on the quantity and condition of inventory items.

+ Outdated inventory records can affect financial ratios, such as inventory turnover, liquidity ratios, and profitability ratios.

+ The financial statements may lack adequate disclosure regarding the reliance

on outdated records for inventory valuation, leading to a lack of transparency, and users

of the financial statements may not

information to assess the reliability of the reported inventory figures.

+ Evaluate the

controls in place for updating inventory records.

+ Inspect about any significant changes or

inventory after the last update three weeks before the year end + Examine relevant documentation, such as purchase orders, sales records, and shipping

transactions occurring between the last update and the year-end date.

The inventory figure in

Mckess's financial

statements was estimated

by the warehouse

manager using the

delivery notes and

despatch notes he had

kept since the last count;

however, he has not

retained these => Mark

+ Increases the risk of inaccuracies in valuing the inventory, the carrying amount of inventory in the financial statements may be misstated.

+ Reduces substantive evidence available for the audit For example,

+ Select a sample of inventory items for

contacting external third parties, such as suppliers or customers,

to corroborate the quantities on hand + If the warehouse manager's estimates

has been unable to verify

the quantity of inventory

through any other means.

Mark, as the auditor, may face challenges in obtaining sufficient and appropriate audit evidence to support the reported inventory figure.

+ Misstatements may arise if inventory items

included or omitted due to the inability to confirm their existence and ownership.

+ Depending solely on

manager's estimates introduces subjectivity into the inventory valuation process.

+ Users of the financial statements may not

information to assess the reliability of the reported inventory figures.

were used, seek alternative methods to

information, such as reviewing purchase orders, sales records, or

documentation.

+ Compare the independently

observed quantities and third-party

confirmations with the estimated figures provided by the warehouse manager + Investigate any significant

discrepancies and adjust the reported inventory figure accordingly.

A significant number of

temporary employees are

paid each day in cash

+ The financial statements may not accurately reflect the true extent of labor expenses, leading to an understatement of costs and distortion of the income statement.

+ If cash payments are not appropriately recorded, there may be inconsistencies in cash flow reporting.

+ If the company does not transparently disclose the cash

+ Select a sample of cash disbursements related to payments made to temporary employees in cash + Examine supporting documentation, such as payroll records, time sheets, and cash disbursement vouchers,

to verify the legitimacy and accuracy of the cash payments.

+ Reconcile the total cash disbursements for temporary employee

payments made to temporary employees, financial reporting lacks transparency.

payments to the payroll records and ensure consistency with the company's financial statements.

These cash payments are

recorded in the

accounting records under

'cleaning costs' but the

employees in question do

not undertake cleaning.

+ Leading to an inaccurate

representation of the company's actual costs, impacting the accuracy

of the income statement.

+ Decision-makers relying on financial information may make inappropriate

operational decisions due to a distorted understanding of actual costs associated with cleaning.

+ Stakeholders may be unaware of the actual costs incurred by the company, leading to a lack of transparency in financial reporting.

classification under 'cleaning costs.'

+ If employees' salaries

recorded as cleaning costs, verify their job

responsibilities through interviews or other means to confirm their actual functions within the company.

+ Adjust the accounting records if misclassifications are

reclassify expenses to accurately reflect the nature of the costs.

None of the legally

required income taxes or

other mandatory taxes

have been paid to the

authorities in respect of

these employees

+ Not paying legally required income taxes may lead to an understatement of the company's tax liability.

+ Failure to account for income taxes may distort the accuracy of the profit and loss statement.

+ Failure to fulfill legal tax obligations may

+ Verify the payment

of income taxes for these employees by inspecting payroll

withholding statements, and any communication with tax authorities.

+ Confirm with tax

company's compliance

result in

accounting standards.

+ Inconsistencies in financial reporting.

with tax regulations and ensure that all required taxes have been remitted.

+ Evaluate the adequacy of provisions made for income taxes

in the financial

compare them to the actual tax payments made.

The directors are

reluctant to recognise any

liability in the financial

statements, as they are

concerned it will mean the

tax authorities will ask

them to pay the taxes due.

+ There is a risk of understating the liabilities This can result in a distortion of the company's financial position, as the true amount of obligations owed to the tax authorities is not reflected.

+ By not recognizing the tax liability, the company's profit for the period may be overstated.

+ The failure to recognize the tax liability may lead to the production of financial statements that are misleading.

Misleading financial statements can damage

+ Independently verify the accuracy and completeness of the tax liability schedule by reconciling it with relevant supporting documentation, such as

correspondence with tax authorities, and financial records.

management's justification for not recognizing certain tax liabilities and assess the impact on the financial statements + If there are material

concerns, discuss them with management and obtain legal opinions if necessary.

material misstatements

in the financial statements Moreover,

independence might be compromised if there is pressure to overlook the material tax liability.

QUESTION 2:

a) State the matters that you would consider when evaluating the work of Mumboo's internal audit function

To answer this question, I relied on International Standard on Auditing ISA

610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming

Amendments, in sections 15 and 16.

 The matters that I would consider when evaluating the work of Mumboo's

internal audit function are:

1 I shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following:

a) The extent to which the internal audit function’s organizational status andrelevant policies and procedures support the objectivity of the internalauditors; (Ref: Para A5–A9)

b) The level of competence of the internal audit function; and (Ref: Para A9)

A5-c) Whether the internal audit function applies a systematic and disciplinedapproach, including quality control (Ref: Para A10–A11)

2 I shall not use the work of the internal audit function if I determine that:

a) The function’s organizational status and relevant policies and procedures donot adequately support the objectivity of internal auditors;

b) The function lacks sufficient competence; or

c) The function does not apply a systematic and disciplined approach,including quality control (Ref: Para A12–A14)

In addition, I also relied on PCAOB AS 2605: Consideration of the Internal

Audit Function; to evaluate the work of Mumboo's internal audit function

Firstly, I may evaluate the Competence and Objectivity of the Internal

Auditors

1 Competence of the Internal Auditors

Updating information from prior years about such factors as:

 Educational level and professional experience of internal auditors

 Professional certification and continuing education

 Audit policies, programs, and procedures

 Practices regarding assignment of internal auditors

 Supervision and review of internal auditors' activities

 Quality of working-paper documentation, reports, and recommendations

 Evaluation of internal auditors' performance

2 Objectivity of the Internal Auditors

Obtaining or updating information from prior years about such factors as:

 The organizational status of the internal auditor responsible for the internalaudit function

 Policies to maintain internal auditors' objectivity about the areas audited

Secondly, in developing the evaluation procedures, I will consider such factors

as whether the internal auditors:

 Scope of work is appropriate to meet the objectives

 Audit programs are adequate

 Working papers adequately document work performed, including evidence ofsupervision and review

 Conclusions are appropriate in the circumstances

 Reports are consistent with the results of the work performed

Finally, in making the evaluation, I will test some of the internal auditors' work

related to the significant financial statement assertions These tests may beaccomplished by either (a) examining some of the controls, transactions, or balancesthat the internal auditors examined or (b) examining similar controls, transactions, orbalances not actually examined by the internal auditors In reaching conclusions about

the internal auditors' work, I will compare the results of my tests with the results of theinternal auditors' work

b) Do you agree or disagree with the following statement: “External Auditors can rely on the work of internal auditors to reduce the workload performed during statuary external audit” Give some explanation to clarify your opinion.

I do not completely agree with this point of view I partly agree with this

view that much of the work performed by a company’s internal audit function canoverlap with the work conducted by the external auditor, specifically in areas dealingwith the assessment of control processes It is likely that in carrying out detailed workevaluating and reviewing the company’s internal control framework internal auditperform procedures on financial controls relevant to the external audit As such, theexternal auditor, rather than duplicating these procedures, may be able to placereliance on the work carried out by the internal auditor

However, external auditors can only rely on the work of internal auditors in

appropriate circumstances where such use is not prohibited by law or regulation, not inall cases to reduce the workload performed during statuary external audit becauseinternal auditors are the employees of the entity, which could result in threats toindependence (either in fact or perceived) if direct assistance is provided by theinternal auditors

In detail, the external auditor, in the course of discharging their responsibilitiesmust decide if it is appropriate in the circumstances to use internal audit to providedirect assistance The ISA identifies a number of steps that the external auditor shouldwork through when determining to what extent, if any, direct assistance can beprovided

Step 1: Whether it is prohibited by law or regulation to obtain direct assistancefrom internal auditors?

Step 2A: Evaluate the existence and significance of threats to objectivity of theinternal auditors who will be providing such assistance

Step 2B: Evaluate the competence of the internal auditors who will beproviding such assistance

In addition, the external auditor needs to determine whether the work of theinternal auditor can be relied upon.

According to ISA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments, in sections 28:

28 The external auditor shall not use an internal auditor to provide directassistance if:

a) There are significant threats to the objectivity of the internal auditor; or

b) The internal auditor lacks sufficient competence to perform the proposed work.(Ref: Para A32–A34)

ISA 610 (Revised 2013) also states that the following should not be assigned to

or involve internal auditors providing direct assistance:

a) discussion of fraud risks

b) determination of unannounced (or unpredictable) audit procedures as addressed

in ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit ofFinancial Statements, and

c) maintaining control over external confirmation requests and evaluation ofresults of external confirmation procedures

In conclusion, the external auditor has to exercise professional judgment when

determining whether the internal auditors, subject to law and regulation, can be used toprovide direct assistance in the financial statement audit of an entity Candidates areexpected to understand (i) how the external auditor makes such evaluations and (ii) forwhich processes or tasks the internal auditors can provide direct assistance to theexternal auditor The crucial principle is that, under all circumstances, the externalauditor must have substantial involvement in the audit, as they bear sole responsibilityfor the expressed audit opinion

QUESTION 3 :

a) IPPF requires internal auditors to assess and give recommendation to company’s activities Provide 3 examples (1 example per area) to improve: corporate governance, risk management and internal control of a company

1 Corporate Governance: Enhancing Communication and Transparency

In the pursuit of fortifying corporate governance, a meticulously crafted

initiative is proposed to implement a structured and strategic communication plan

between the Chief Audit Executive and the Board of Directors This initiative aims

to transcend conventional communication norms by providing a systematic frameworkthat ensures consistent updates on the audit plan, findings, and recommendations

Integral to this initiative is the establishment of a comprehensive quarterly

report or presentation, meticulously tailored for the Board This detailed

documentation serves as more than just a routine reporting mechanism; it is designed

to be an insightful resource that emphasizes key audit outcomes, sheds light onemerging risks, and outlines recommended actions The goal is not only to keep theBoard well-informed but to provide them with a nuanced understanding of the intricateworkings of the internal audit function

Beyond being a reporting mechanism, the initiative envisions fostering an

open dialogue It actively engages the Board in discussions that extend beyond routine

updates, aiming to shape the strategic direction of internal audit activities Thisparticipatory approach ensures that the Board not only receives information passivelybut also actively contributes to the ongoing development of the internal audit function

To conclude, this multifaceted communication plan is a proactive andcollaborative strategy It is not merely about reporting; it's about creating an interactiveforum for meaningful discussions By doing so, it significantly contributes to theoverall efficacy of corporate governance within the organization, promotingtransparency, understanding, and active engagement at the highest levels of leadership

2 Risk Management: Strengthening Risk Identification and Response

In adhering to a robust risk management framework, the proposal is to create a

thorough risk assessment structure that actively involves key stakeholders in regular risk workshops These workshops will include participation from the Board

and executive management, aiming to go beyond conventional risk managementapproaches The goal is to develop a dynamic framework that adapts to the ever-evolving risk landscape

An integral part of this advanced approach is the implementation of a

state-of-the-art risk reporting mechanism This system is carefully designed to provide

real-time updates on emerging risks, offering a detailed understanding of their potentialimpact By enabling quick and informed decision-making, this mechanism ensures thatthe organization remains agile and responsive in the face of evolving risk scenarios

Moreover, a cornerstone of this strategy involves the proactive implementation

of a risk response plan This anticipatory approach seeks to equip the organization withthe necessary tools and strategies to promptly address identified risks It transcendsmere reaction and establishes a proactive stance, fostering a culture where riskmitigation is not merely a reactive measure but an integral part of the organizationalethos

By embracing this comprehensive risk management approach, the organizationnot only enhances its ability to identify and respond to risks effectively but alsocultivates a proactive risk management culture Ultimately, this contributes to theresilience and sustainability of the business, equipping it to navigate the challengespresented by an ever-changing risk landscape

3 Internal Control: Optimizing Reporting Structure and Independence

We recommend a comprehensive examination of the reporting structure within

the internal audit department, accompanied by a strong endorsement for instituting a

direct reporting line from the Chief Audit Executive to the Board of Directors or the Audit Committee This proposed organizational change is strategically designed

to elevate the independence of the internal audit function and proactively address anypotential conflicts of interest

The essence of this recommendation lies in establishing a more direct andtransparent line of communication between the CAE and the governing bodies, such asthe Board of Directors or the Audit Committee By fostering a reporting structurewhere the CAE reports directly to entities with oversight responsibilities, the companyaims to fortify its internal controls, cultivate an environment of objectivity, and elevatethe overall efficacy of the audit function

This proposed adjustment goes beyond mere structural refinement; it alignswith best practices in corporate governance by emphasizing accountability and clear