• 20 Marks

AAA – Nov 2015 – L3 – Q2 – Internal audit and outsourcing

Considerations for appointing an internal auditor, expected briefing issues, and comparing assurance and consulting activities.

The Afigya Sekyere District Assembly has appointed Ms. Afi Kakrabah as the Internal Auditor. She was appointed by the District Chief Executive (DCE) after he attended a seminar at GIMPA for newly appointed DCEs, where the importance of pre-auditing of all payments by Internal Auditors for expenditures incurred by all Government Ministries, Departments, Municipal, and District Assemblies (MMDAs) was stressed.

Ms. Kakrabah has just completed National Service at the Internal Audit Agency, holds an HND in Accounting, and is a native of the same village as the DCE of Afigya Sekyere District.

Ms. Kakrabah will report to the District Finance Officer.

At the first meeting after the appointment of the DCE, the District Assembly had set up its standing committees, and one of them was the Audit and Finance Sub-Committee. The first meeting of the sub-committee requested Ms. Kakrabah to prepare briefing notes to show her vision and approach to the Internal Audit function at the District Assembly and to discuss how she will maintain her independence as well as her knowledge and understanding of Internal Audit Practices recommended by the Institute of Internal Auditors (IIA) as in the IIA’s International Professional Practices Framework (IPPF).

You are an Auditor in Public Practice, and the Auditor General of Ghana has appointed you to perform the statutory audit of the Afigya Sekyere District Assembly. The Audit and Finance Sub-Committee of the District Assembly has requested that you attend the meeting at which the Internal Auditor will brief them and help them in assessing the Internal Auditor’s briefing.

Required:

a) Comment on the matters that you will consider on the appointment of Ms. Kakrabah and her reporting lines as discussed above. (5 marks)

b) State the issues that you should expect Ms. Kakrabah to discuss in her briefing to the Audit and Finance Sub-Committee of the District Assembly. (10 marks)

c) The IIA’s definition of Internal Auditing states, among others, that:
“Internal Auditing is an independent, objective assurance and consulting activity….”
Compare and contrast an Assurance and a Consulting Audit activity.

a) Matters to Consider in the Appointment and Reporting Lines of Ms. Kakrabah:

  1. Appointment by the DCE:
    The appointment of the Internal Auditor by the DCE is not in line with the IIA’s recommendation that the appointment should be done by the Board of Directors or the Audit Committee (in this case, the Audit and Finance Sub-Committee).
  2. Educational Qualification and Experience:
    Ms. Kakrabah’s qualifications and experience may be inadequate for the responsibilities she is expected to shoulder, raising concerns about her ability to perform effectively.
  3. Potential Conflict of Interest:
    The fact that Ms. Kakrabah is from the same village as the DCE may suggest bias or favoritism, undermining her ability to remain objective.
  4. Reporting Lines:
    The IIA recommends that the Internal Auditor should report functionally to the Audit Committee and administratively to the Chief Executive. Reporting both functionally and administratively to the District Finance Officer could hinder her independence in reporting on financial issues.

(2 marks for discussion of any of the issues, up to a maximum of 5 marks)

b) Issues Ms. Kakrabah Should Discuss in Her Briefing:

  1. Independence:
    Importance of maintaining independence in her role, ensuring that her appointment and reporting structure support this.
  2. Internal Audit Charter:
    The need to adopt an Internal Audit Charter consistent with the Definition of Internal Auditing, the Code of Ethics, and the International Standards for the Practice of Internal Auditing (the Standards) of the IIA.
  3. Code of Ethics:
    The significance of adhering to the Code of Ethics recommended by the IIA and ensuring compliance in all internal audit activities.
  4. Adoption of IPPF:
    The need for the Internal Audit function to follow the IIA’s International Professional Practices Framework (IPPF).
  5. Role of Internal Audit:
    How she plans to ensure the Internal Audit activity adds value to the District Assembly and helps it achieve its objectives efficiently, effectively, and economically.
  6. Reporting Lines:
    The importance of reporting functionally to the Audit Committee to maintain independence and objectivity.

(1 mark for any point up to a maximum of 10 marks)

c) Comparison of Assurance and Consulting Audit Activity:

  • Assurance Audit Activity:
    The auditor expresses an opinion on the subject matter, which is intended for reliance by others. The activity may not be performed on a contingent fee basis.
  • Consulting Audit Activity:
    The auditor provides findings or recommendations based on the engagement, with no opinion expressed. Consulting activities may be performed on a contingent fee basis.

(2 marks for each difference and 1 mark for presentation or table format, maximum of 5 marks)

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