Bài tập lớn Kiểm Toán Nội Bộ, Đại học Kinh Tế - Đại học Quốc Gia Hà Nội

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<b>UNIVERSITY OF ECONOMICS AND BUSINESSFACULTY OF ACCOUNTING AND AUDITING</b>

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<b>LIST OF ABBREVIATIONS</b>

ISAInternational Standard on Auditing

IPPFThe International Professional Practices Framework

IIAThe Institute of Internal Auditors

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<b>QUESTION 1: For each internal control deficiency identified, explain thepotential misstatements that may arise in the financial statements of Mckess as aresult of the deficiency and describe one audit procedure to address the potentialmisstatement.</b>

<b>Internal control</b>

<b>deficiency identifiedmisstatements^{The potential}^{Audit procedures}</b>

<i><b>Mckess's procedures werelimited to inquiries ofcompany personnel andanalytical procedures</b></i>

+ Inaccuracies invaluing the inventory,resulting in anoverstatementorunderstatement ofassets.

+ There is a risk oferrors in recognizingthe existence and

inventory, leading tomisstatements in boththe balance sheet andcost of goods sold.

+ Physically observeand participate in thecounting process ofselected inventoryitems.

+ Verify that thecounting is conductedby independent andcompetent personnel.+ Confirm the accuracyof counting methodsand adherence toestablished procedures.

<i><b>Mckess failed to performa physical inventory countat 30 June 20X9</b></i>

+ Misstatements in thecalculation of COGS,affecting the accuracyof the incomestatement.

+ Schedule a physicalinventory count assoon as possible afterthe year-end date (30June 20X9 in thiscase).

+ Recalculate theamount of inventory.+ Compare theobserved quantities tothe recorded amountsin the perpetualinventory system as ofthe year-end date.+ Adjust the financial

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statements for anymaterial misstatementsidentified during thepost-year-end

inventory observation.

<i><b>Mckess'sinventoryrecords were last updatedthree weeks before theyear end.</b></i>

+ The outdatedinventory records maynot reflect the mostcurrent information onthe quantity andcondition of inventoryitems.

+ Outdated inventoryrecords can affectfinancial ratios, such asinventory turnover,liquidity ratios, andprofitability ratios.+ The financialstatements may lackadequate disclosureregarding the relianceon outdated records forinventory valuation,leading to a lack oftransparency, and usersof the financialstatements may not

information to assessthe reliability of thereported inventoryfigures.

+ Evaluate the

controls in place forupdating inventoryrecords.

+ Inspect about anysignificant changes or

inventory after the lastupdate three weeksbefore the year end.+ Examine relevantdocumentation, such aspurchase orders, salesrecords, and shipping

transactions occurringbetween the last updateand the year-end date.

<i><b>The inventory figure inMckess'sfinancialstatements was estimatedby the warehousemanager using thedelivery notes anddespatch notes he hadkept since the last count;however, he has notretained these => Mark</b></i>

+ Increases the risk ofinaccuracies in valuingthe inventory, thecarrying amount ofinventory in thefinancial statementsmay be misstated.+ Reduces substantiveevidence available forthe audit. For example,

+ Select a sample ofinventory items for

contacting externalthird parties, such assuppliers or customers,to corroborate thequantities on hand.+ If the warehousemanager's estimates

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<i><b>has been unable to verifythe quantity of inventorythrough any other means.</b></i>

Mark, as the auditor,may face challenges inobtaining sufficientand appropriate auditevidence to support thereported inventoryfigure.

+ Misstatements mayarise if inventory items

included or omitteddue to the inability toconfirm their existenceand ownership.

+ Depending solely on

manager's estimatesintroduces subjectivityinto the inventoryvaluation process.+ Users of the financialstatements may not

information to assessthe reliability of thereported inventoryfigures.

were used, seekalternative methods to

information, such asreviewing purchaseorders, sales records, or

+ Compare theindependently

observed quantities andthird-party

confirmations with theestimatedfiguresprovided by thewarehouse manager.+ Investigate anysignificant

discrepancies andadjust the reportedinventoryfigureaccordingly.

<i><b>A significant number oftemporary employees arepaid each day in cash</b></i>

+ The financialstatements may notaccurately reflect thetrue extent of laborexpenses, leading to anunderstatement of costsand distortion of theincome statement.+ If cash payments arenotappropriatelyrecorded, there may beinconsistencies in cashflow reporting.

+ If the company doesnottransparentlydisclose the cash

+ Select a sample ofcash disbursementsrelated to paymentsmade to temporaryemployees in cash.+ Examine supportingdocumentation, such aspayroll records, timesheets, and cashdisbursement vouchers,to verify the legitimacyand accuracy of thecash payments.

+ Reconcile the totalcash disbursements fortemporary employee

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payments made totemporary employees,financial reportinglacks transparency.

payments to the payrollrecords and ensureconsistency with thecompany's financialstatements.

<i><b>These cash payments arerecorded in theaccounting records under'cleaning costs' but theemployees in question donot undertake cleaning.</b></i>

+ Leading to aninaccurate

representation of thecompany's actual costs,impacting the accuracyof the incomestatement.

+ Decision-makersrelying on financialinformation may makeinappropriate

operational decisionsdue to a distortedunderstanding of actualcosts associated withcleaning.

+ Stakeholders may beunaware of the actualcosts incurred by thecompany, leading to alack of transparency infinancial reporting.+ Inaccurate recordingof expenses can distortprofitability metrics.

+ Compare the actualservices provided orexpenses incurred with

classification under'cleaning costs.'

+ If employees' salaries

recorded as cleaningcosts, verify their job

responsibilities throughinterviews or othermeans to confirm theiractual functions withinthe company.

+ Adjust theaccounting records ifmisclassifications are

reclassify expenses toaccurately reflect thenature of the costs.

<i><b>None of the legallyrequired income taxes orother mandatory taxeshave been paid to theauthorities in respect ofthese employees</b></i>

+ Not paying legallyrequired income taxesmay lead to anunderstatement of thecompany's tax liability.+ Failure to account forincome taxes maydistort the accuracy ofthe profit and lossstatement.

+ Failure to fulfill legaltax obligations may

+ Verify the paymentof income taxes forthese employees byinspecting payroll

statements, and anycommunication withtax authorities.

+ Confirm with tax

company's compliance

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result in

accounting standards.+ Inconsistencies infinancial reporting.

with tax regulationsand ensure that allrequired taxes havebeen remitted.

+ Evaluate theadequacy of provisionsmade for income taxesin the financial

compare them to theactual tax paymentsmade.

<i><b>The directors arereluctant to recognise anyliability in the financialstatements, as they areconcerned it will mean thetax authorities will askthem to pay the taxes due.</b></i>

+ There is a risk ofunderstatingtheliabilities. This canresult in a distortion ofthe company's financialposition, as the trueamount of obligationsowed to the taxauthorities is notreflected.

+ By not recognizingthe tax liability, thecompany's profit forthe period may beoverstated.

+ The failure torecognize the taxliability may lead tothe production offinancial statementsthat are misleading.Misleading financialstatements can damage

reputation and erodetrust with stakeholders.+ The auditor, Mark,may face challenges in

unqualifiedauditopinion if there are

+ Independently verifythe accuracy andcompleteness of the taxliability schedule byreconciling it withrelevant supportingdocumentation, such as

correspondence withtax authorities, andfinancial records.

justification for notrecognizing certain taxliabilities and assessthe impact on thefinancial statements.+ If there are material

concerns, discuss themwith management andobtain legal opinions ifnecessary.

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material misstatementsin the financialstatements. Moreover,

independence might becompromised if there ispressure to overlookthe material taxliability.

<b>QUESTION 2:</b>

<b>a) State the matters that you would consider when evaluating the work ofMumboo's internal audit function. </b>

<b>To answer this question, I relied on International Standard on Auditing ISA</b>

<b>610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming</b>

<b>Amendments, in sections 15 and 16.</b>

 <i><b>The matters that I would consider when evaluating the work of Mumboo's</b></i>

<i><b>internal audit function are:</b></i>

<b>1. I shall determine whether the work of the internal audit function can beused for purposes of the audit by evaluating the following:</b>

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)

<b>2. I shall not use the work of the internal audit function if I determinethat:</b>

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)

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<b>In addition, I also relied on PCAOB AS 2605: Consideration of the Internal</b>

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

<b>Firstly, I may evaluate the Competence and Objectivity of the Internal</b>

Auditors

<i><b>1. Competence of the Internal Auditors</b></i>

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.

<i><b>2. Objectivity of the Internal Auditors</b></i>

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.

<b>Secondly, in developing the evaluation procedures, I will consider such factors</b>

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.

<b>Finally, in making the evaluation, I will test some of the internal auditors' work</b>

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

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

<b>b) Do you agree or disagree with the following statement: “External Auditorscan rely on the work of internal auditors to reduce the workloadperformed during statuary external audit” Give some explanation toclarify your opinion.</b>

<b>I do not completely agree with this point of view. I partly agree with this</b>

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.

<b>However, external auditors can only rely on the work of internal auditors in</b>

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

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

<b>According to ISA 610 (Revised 2013), Using the Work of Internal Auditors andRelated Conforming Amendments, in sections 28:</b>

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)

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

or involve internal auditors providing direct assistance:a) discussion of fraud risks

b) determination of unannounced (or unpredictable) audit procedures as addressedin 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.

<b>In conclusion, the external auditor has to exercise professional judgment when</b>

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.

<b>QUESTION 3: </b>

<b>a) IPPF requires internal auditors to assess and give recommendation tocompany’s activities. Provide 3 examples (1 example per area) to improve:corporate governance, risk management and internal control of acompany. </b>

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<b>1. Corporate Governance: Enhancing Communication and Transparency</b>

In the pursuit of fortifying corporate governance, a meticulously crafted

<b>initiative is proposed to implement a structured and strategic communication plan</b>

<b>between the Chief Audit Executive and the Board of Directors. This initiative aims</b>

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

<b>Integral to this initiative is the establishment of a comprehensive quarterly</b>

<b>report or presentation, meticulously tailored for the Board. This detailed</b>

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

<b>Beyond being a reporting mechanism, the initiative envisions fostering an</b>

<b>open dialogue. It actively engages the Board in discussions that extend beyond routine</b>

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.

<b>2. Risk Management: Strengthening Risk Identification and Response</b>

<b>In adhering to a robust risk management framework, the proposal is to create a</b>

<b>thorough risk assessment structure that actively involves key stakeholders inregular risk workshops. These workshops will include participation from the Board</b>

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.

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<b>An integral part of this advanced approach is the implementation of a </b>

<b>state-of-the-art risk reporting mechanism. This system is carefully designed to provide </b>

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 implementationof 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.

<b>3. Internal Control: Optimizing Reporting Structure and Independence</b>

We recommend a comprehensive examination of the reporting structure within

<b>the internal audit department, accompanied by a strong endorsement for instituting a</b>

<b>direct reporting line from the Chief Audit Executive to the Board of Directors orthe Audit Committee. This proposed organizational change is strategically designed</b>

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

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