Internal Audit – Page 2

AA – L2 – Q57 – Internal Audits

Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

Question

SkyHigh Airlines is an airline. The company owns some of its fleet of aircraft. Other aircraft are leased from third parties. SkyHigh Airlines has an internal audit function that has recently expanded. Your firm is the external auditor to SkyHigh Airlines. Your firm has been asked to investigate the extent to which it may be able to rely on the work of internal Angelfire International

Required:

(a) Explain why the work of internal auditors, in the three areas noted above, is likely to be useful to you as the external auditor. (9 marks)

(b) Explain how the quality of the internal audit function is likely to influence the extent of your reliance on internal audit work. (5 marks)

(c) Describe the audit evidence you will seek relating to internal controls over the outsourced functions (in-flight catering and payroll). (6 marks)

Answer

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Tags: Audit Evidence, Audit Procedures, External Audit, Financial Statement Assertions, Internal Audit, Internal controls, Outsourcing
Level: Level 2

Topic: Internal Audits

AAA – L3 – Q46 – Internal audit

Assess the need for an internal audit function at Adepa Ltd, considering its growth and technology adoption.

Question

Adepa Ltd, a fruit processing company, has been in operation for many years. It has managed to grow the business over the years and now has eight branches, four in rural areas and four in urban towns, in addition to the head office. The management and those charged with governance are looking forward to the company adopting the latest technology in production – Advanced Technology Manufacturing (ATM) and marketing and sales through the internet.
During the last audit of the financial statements of the company, the Managing Director suggested to the Senior Partner an assessment of the need for an internal audit function in the company. You were the audit manager who led the engagement team to do the audit. The Senior Partner has therefore asked you to carry out the assignment to assess the need for an internal audit in Adepa Ltd.
Required:
Draft a report to the Senior Partner on the assessment of the need for an internal audit function for Adepa Ltd., highlighting the factors to be considered in such assessment.

Answer

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Tags: Assessment, Internal Audit, Outsourcing
Level: Level 3

Topic: Internal Audit and Outsourcing

AA – L2 – Q54 – Audit Evidence

Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

Question

Nexis Beverages manufactures and distributes soft drinks. Its inventories are controlled using a real-time system which provides accurate records of quantities and costs of inventories held at any point in time. This system is known within the company as the ‘PureTrack’ system and it is integrated with the purchases and revenue system. Nexis Beverages has an internal audit function whose activities encompass inventories.
No year-end inventory count takes place. Inventories are held in several large warehouses where non-stop production takes place.
Your firm is the external auditor to Nexis Beverages and you have been asked to perform the audit of inventories. Inventories include finished goods and raw materials (water, sugar, sweeteners, carbonating materials, flavourings, cans, bottles, bottle tops, fastenings and packaging materials).
Your firm, which has several offices, wishes to rely on the ‘PureTrack’ system to provide the basis of the figure to be included in the financial statements for inventories. Your firm does not wish to ask the company to conduct a year-end inventory count.

Required:
(a) Describe the audit tests that you would perform on the ‘PureTrack’ system during the year in order to determine whether to rely on it as a basis for the raw materials and finished goods figures to be included in the financial statements. (11 marks)
(b) Describe the audit tests you would perform on the records held by Nexis Beverages at the year end to ensure that raw materials and finished goods are fairly stated in the financial statements. (9 marks)

Answer

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Tags: Computerized Auditing, Internal Audit, Inventory Audit, Real-Time Systems, Substantive Procedures
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q42 – Audit Evidence and Materiality

State audit testing procedures, criteria for using internal audit work, and materiality definition with audit stages.

Question

Required
(a) ISA 500 Audit Evidence identifies the different audit procedures that can be performed in order to obtain audit evidence.
Required
State, and briefly explain, five testing procedures that can be performed to obtain audit evidence.
(b) ISA 610 Using the Work of Internal Auditors explains when the work of the internal audit function can be used.
Required
State TWO criteria that the external auditor shall evaluate when assessing whether the work of the internal audit function can be used for the purposes of the audit.
(c) ISA 320 Audit Materiality provides guidance to the auditor on the concept of materiality and its relationship with audit risk.
Required
State a brief definition of materiality and state the two stages of the audit at which the auditor should consider materiality.

Answer

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Tags: Audit Evidence, Audit Risk, Internal Audit, ISA 320, ISA 500, ISA 610, Materiality, Testing procedures
Level: Level 3

Topic: Audit Evidence, Internal Audit and Outsourcing

AAA – L3 – Q41 – Internal and External Audit

Explain differences between internal and external audit and discuss outsourcing internal audit to external auditors.

Question

Required
(a) Explain the difference between the internal and external audit functions.
(b) List the advantages and disadvantages of a company outsourcing its internal audit function to its external auditors.

Answer

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Tags: Audit functions, External Audit, Internal Audit, Outsourcing, Professional responsibilities
Level: Level 3

Topic: Internal Audit and Outsourcing

AAA – L3 – Q36 – Internal audit

Evaluate use of internal auditors' work on cash sales for Coral Bites audit.

Question

You are the audit manager in charge of the audit of Coral Bites, a company which runs a chain of snack bars operating in a number of beach holiday resorts. Your firm has been the auditor for a number of years and has always had to substantively test cash sales because of a lack of control over the recording of takings. The auditor’s reports to date have been unmodified.
You have recently been informed that the company has taken on a newly qualified chartered accountant as chief internal auditor and an unqualified assistant internal auditor. Since their appointment half way through the year ended 31 December 20X8 the two have spent most of their time carrying out substantive procedures on cash sales.
The directors are hopeful that your audit fee this year will decrease because you will be able to use the work carried out by the internal auditors.
Required:
(a) Explain the issues that will be relevant to your firm in deciding whether you can use the work performed by the internal auditors.

(b) Explain how much reliance to place on that work.

Answer

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Tags: Audit Evidence, Auditor Reliance, Cash sales, Internal Audit, Substantive testing
Level: Level 3

Topic: Internal Audit and Outsourcing

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

Question

The audit manager of Brighton Components has decided that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with the finance director of Brighton Components and this approach has been agreed as a feasible one. Furthermore, the finance director has asked his internal audit function to investigate the possibility of installing embedded software to help the external auditors in their work.

Required:
(a) Describe, giving examples, how audit software in general could assist the audit firm in their audit of revenue and receivables.

(b) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software.

Answer

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Tags: Audit Evidence, Auditor Reliance, Embedded Software, Internal Audit
Level: Level 2

Topic: Audit Evidence

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

Question

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.

Answer

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Tags: Audit Risk, Consignment Inventory, Financial Statement Assertions, Going Concern, Internal Audit, Inventory, Provisions, Related Party Transactions, Retail Audit, Revenue Recognition
Level: Level 3

Topic: Audit Evidence, Planning

AA – L2 – Q26 – Audit of Public Sector Entities

Explain the purpose of a value for money audit in a public sector hospital context. Identify four strengths in Akunka hospital's operations and suggest improvements for value for money. Describe substantive procedures for verifying valuation, completeness, and rights and obligations of PPE at Akunka hospital.

Question

(a) Explain the purpose of value for money audit.

(b) Akunka hospital is located in a country where healthcare is free, as the taxpayers funds are used to finance state owned hospitals. Two years ago, management reviewed all aspects of the hospital’s operations and instigated a number of measures aimed at improving overall “value for money” for the local community. Management have asked you, an audit manager in the hospital’s internal audit function, to perform a review over the measures which have been implemented.
Akunka has one centralized procurement department through which all purchase requisition forms are forwarded to. Upon receipt, the procurement team embarks on market research for the lowest price from suppliers after which a purchase order is raised. The purchased order is then submitted to the procurement director, who authorises all orders. The small procurement team receive in excess of 200 forms a day. The human resource department has had difficulties with recruiting suitably trained staff. Overtime rates have been increased to incentivise permanent staff to fill staffing gaps, this has been popular, and reliance on expensive temporary staff has been reduced. Monitoring of staff hours had been difficult but the hospital has implemented time card clocking in and out procedures and these hours are used for overtime payments as well.
The hospital has invested heavily in new surgical equipment, which although very expensive, has meant that more operations could be performed to ensure faster patient recovery. However, there is shortage of well-trained medical staff. A capital expenditure committee has been established, made up of senior managers, and they plan and authorise significant capital expenditure items.

Required:
(i) Identify and explain FOUR strengths within Akunka’s operating environment; and
(ii) For each strength identified, describe how Akunka might make further improvements to provide best value for money.

(c) Describe TWO substantive procedures the external auditor of Akunka should adopt to verify EACH of the following assertion in relation to an entity’s property, plant and equipment:

(i) Valuation;

(ii) Completeness; and

(iii) Rights and obligations.

(Note: Assume that the hospital adopts International Financial Reporting Standards).

Answer

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Tags: Healthcare, Internal Audit, Public Sector, Value for Money Audit
Level: Level 2

Topic: Audit of Public Sector Entities

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

Question

Your firm has just been appointed the first auditor to the Lagos branch of Pinnacle Furnishings, a Nigerian manufacturer of household furniture. The branch has only been in existence for thirteen months. The branch is involved in importing and distributing the furniture through wholesalers and major retailers in Nigeria. The auditors of the Nigerian company are a medium-sized Nigerian firm. There is no legal requirement for a branch audit, but management has expressed concern about the Lagos operations.

A complex computerised accounting and inventory control system is maintained. You have ascertained that the mainframe installation is in Nigeria. The terminals in Nigeria (Lagos) are linked to the mainframe by private telecommunications lines. All input is performed in Lagos with overnight batch processing and output the following day.

The software used is a Nigerian package and all user manuals are written in Yoruba; there are nine volumes (nine manuals) in total. The IT personnel in Lagos are competent users of the system but none of the staff has a detailed knowledge of the actual software.

The Lagos branch has been expanding rapidly and problems have been experienced because its IT department has been unable to keep pace with developments.

An internal auditor is employed, and he reports directly to the manager of the branch, who has set down his programme of work. The internal auditor is not a qualified accountant and his working papers and reporting are not very formalised. He performs daily checking of certain areas and has an audit programme. The programme of work is structured in such a way that a specific area is examined each month.

Required

Identify and comment on the issues raised as they affect your planning of the audit of the Lagos branch.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Planning, Branch Audit, Computerised Systems, Control Risk, Inherent Risk, Internal Audit, Substantive Approach
Level: Level 3

Topic: Planning

Tag (SQ): Internal Audit

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AA – L2 – Q57 – Internal Audits

Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

AAA – L3 – Q46 – Internal audit

Assess the need for an internal audit function at Adepa Ltd, considering its growth and technology adoption.

AA – L2 – Q54 – Audit Evidence

Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

AAA – L3 – Q42 – Audit Evidence and Materiality

State audit testing procedures, criteria for using internal audit work, and materiality definition with audit stages.

AAA – L3 – Q41 – Internal and External Audit

Explain differences between internal and external audit and discuss outsourcing internal audit to external auditors.

AAA – L3 – Q36 – Internal audit

Evaluate use of internal auditors' work on cash sales for Coral Bites audit.

AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

AA – L2 – Q26 – Audit of Public Sector Entities

AAA – L3 – Q24 – Planning

Identify issues affecting audit planning for the Accra branch of Rosaline, a furniture manufacturer with a complex IT system.

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Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

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Assess the need for an internal audit function at Adepa Ltd, considering its growth and technology adoption.

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Audit tests for Nexis Beverages' PureTrack system and year-end inventory records to ensure accurate financial statement figures.

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State audit testing procedures, criteria for using internal audit work, and materiality definition with audit stages.

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Explain differences between internal and external audit and discuss outsourcing internal audit to external auditors.

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Evaluate use of internal auditors' work on cash sales for Coral Bites audit.

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Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

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Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

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