ACCOUNTING INTERNAL AUDITING EXAM 2015

INTERNAL AUDITING EXAMINSTRUCTIONSYou are only allowed to use the course materials (readings, discussions, etc.). you will find the book titlewe use for this course the bottom of these pages. Make sure you take your time and provide completeanswers. Two or three sentence answers to any of these questions will not be adequate! Your logic, thoughtprocesses and quality of your responses are what will determine your grade. Questions 1-2 are worth 60points. Questions 3-4 are worth 20 points each. Please submit your responses in a Word document. Be sureto put your name on each page. Good luck!1) ABC’s capital-asset procurement policy requires the Board of CAEs (BOD) approve any single acquisitionover $150,000. If the board approves a project, then the treasurer will transfer the funds to the respective plant.Within one year, the internal auditing function is charged with reviewing each acquisition to check the proprietyof the purchase and disbursal of funds.ABC’s Plant Controller prepared the first proposal for a DEK cutting machine. Other plants were told to waituntil internal auditing could inspect the documentation associated with the acquisition, and evaluate theproject’s operating effectiveness and efficiency. The plant’s proposal was the second largest proposal eversubmitted in the company’s history and it totaled $1.3 million dollars. The cost of the new machine by itself waslisted in the proposal at $1.1 million. Labor and other costs necessary to remove the old machine and installthe new machine totaled $200,000.The internal auditor assigned to the investigation was Phil Ramone. Phil had been with ABC four yearsperforming mostly production operational audits (on existing processes) and internal control payroll audits.Phil’s considerable experience in these areas led him to believe that the procedures associated with thiscapital-asset audit would be as simple and routine. This was not Phil’s first visit to the plant. In fact Phil hadperformed an audit on the plant’s payroll system only a year ago. Phil’s recollection of the experience was nota pleasant one. He had several confrontations with the plant controller, mostly as a result of personalityclashes. While all the payroll issues were easily resolved, Phil felt there was still an adversarial relationshipbetween him and the controller and was on guard for any preemptive strikes this time around by the controller.It was a long drive to the plant so when Phil arrived a little late the day of his audit he was greeted by thecontroller with a perceived air of indifference and promptly led to a secluded office. The controller calmlyexplained that he was extremely busy and would answer any questions at the end of the day. Phil merelynodded his head and sat down in front of several tall piles of invoices, which the controller stated was thedocumentation supporting the purchase, set up, and testing of the new machine. Phil was somewhat surprised,fully expecting to see only a handful of invoices, but did not ask for any explanations. As Phil began lookingthrough the myriad of statements and canceled checks he soon found one particular invoice near the top of thefirst pile that indicated the actual price paid for the machine itself was only $850,000.Phil’s first reaction was to call the CAE of auditing. When he found that the CAE was out for the day and couldnot be reached he then decided to call the VP of Operations at corporate headquarters. Phil was critical of theplant controller when describing the seriousness of his suspicions based on this preliminary information. Phildidn’t know that there was a BOD meeting that day and that the news would be passed on to them. Themembers of the Board were outraged, screaming over the alleged misuse of the funds and possible fraud.Phil was unaware that in a private conference call the Chair of the Board of CAEs would soon lambast theplant controller. Seconds after the call, the controller walked up to Phil and had only two words to say – “getout.” Phil was flabbergasted; he called back to headquarters, only to receive a rather icy response from theChair of the BOD’s secretary suggesting that he return immediately.Three days later Phil was called in to the CAE’s office. The CAE described how he personally went to the plantthe next day after Phil’s visit and performed the capital-asset audit himself. The CAE found that there were anumber of reasonable explanations for the differences between the original proposal and the actualexpenditure. To begin with, the company that sold the machine would not discount the price until the BODapproved the contract. Competing bids drove the cost of the machine from $1.1 million to $850,000. However,there were several factors that offset these savings.Originally, the setup of the new machine was projected to take a week and a half but ended up taking a month.No one really knew how difficult it was going to be to remove the old machine that was embedded in theconcrete floor (to minimize vibration). This removal took additional time and outside labor. Also, the newmachine was to be put in the same area where the old machine was located. Since the plant could not afford toshut down for any extended length of time, the old machine was moved over the Thanksgiving Day holidaywhen labor rates were doubled. In addition, while the new machine was being tested, the old machine had tobe kept running in its temporary location. During the time that both machines were running, machine operatorsand supporting personnel (e.g., those loading and unloading the conveyors) worked double shifts in order totest the new machine. This parallel process took longer than expected because the plant engineers were notfamiliar enough with the new machine to deal with minor problems. Also, special outside consultants werehired for the first two weeks to set up the machine.Another unexpected cost arose because the new machine put out a greater number of larger pieces of woodrequiring required an additional conveyor belt to accept and carry the larger pieces. The savings from thediscount was used to purchase this necessary piece of equipment. In sum, all of these additional andunexpected outlays were very expensive and brought the total to just under the original proposed cost of $1.1million.The CAE went on to explain to Phil that the reason for the abnormally large number of invoices was an endlessstream of trips to the local electrical and hardware stores to buy the necessary parts and supplies to keep thetransition from the old to the new machine moving smoothly. As it turned out, the Controller of the plant actuallydid a commendable job in overseeing the project and keeping accurate records of the disbursements. In fact,the controller created a specialized installation guide that will probably save ABC hundreds of thousands ofdollars when the remaining plants order more of these machines.Requireda) Comment on Phil’s preparation for and conduct of the audit. What should Phil have done differently?b) Discuss the possible violations of the IIACode of Ethics and/or International Standards for theProfessional Practice of Internal Auditingthat Phil committed.2) A summary of an internal audit engagement performed at the request of executive management ispresented below.The claims department of XYZ Insurance Company has instituted new claims procedures for local offices. Thenew procedures have been designed to improve the review of claims and to prevent both overpayment andpayment of false claims. Management mentioned concern about the new procedures at the openingconference of the audit engagement. Management told the internal auditors that 15 complaints had beenreceived recently about the excessive time it took to receive the insurance proceeds for their claims. Thecompany advertises 48-hour claim service. Each of the 15 claims that generated the complaints took sevendays. Management said these were the first complaints of this type and were received only after the newprocedures were implemented. Management feared that if the claims took too long to process, many clientswould switch to another company. The internal auditors decided to find out if processing time had reallyincreased, and if so, whether this was because of the new procedures.The internal auditors decided to test 25 randomly selected claims made since the change in the proceduresand 25 claims from before the procedures and compare them. The tests revealed that the new process hadcaused an increase in the processing time for two reasons. First, there was a learning effect with the newrequired forms. The headquarters claims department often had to correct the forms and request additionalinformation before claims could be processed. Second, the new process required a more extensive reviewthan before, sometimes even including a field visit by one of the claims staff in addition to the regular inquiry byone of the company’s claims adjusters.The internal auditors estimated that the delayed disposition of the claims seriously eroded the marketability ofthe company’s insurance policies, perhaps decreasing sales by as much as 10 percent the first year and up to25 percent in subsequent years. The new procedure also increased the cost of servicing claims by 5 percentto 10 percent, depending on whether an additional inquiry is conducted by one of the claims department staffmembers. The estimated savings on payment of improper claims was equivalent to a maximum of 10 percentof total expenditures in any one year.The internal audit team determined that returning to the previous claims service procedures, with minormodifications, would serve the intended purpose and avoid the problems associated with the revisedprocedures. The additional review procedure recommended by the internal audit team was a computer scan ofcompany records to ascertain any previous claims by the claimant and the nature as well as the amount ofprior claims.Required:A) Write an alternative internal audit recommendation to the one provided. You should include at least twospecific actions in your recommendation.B) Describe some alternative internal audit procedures the audit team might have chosen to those proceduresthe team actually performed. Why do you consider your procedures to be superior to the ones chosen?3) Recently, several states have outsourced some of the services traditionally provided by governmentemployees. In one state, the Department of Health and Human Services (Department) has outsourced itselectronic benefit transfer services to eFunds Inc. Under the contract, eFunds Inc. handles the electronicdistribution of food stamp programs, including transaction processing, reporting, contract management,contract settlement, operations support, help desk services, and project management. For cost reasons,eFunds Inc. sent the work to five offshore service centers it owns in India.a) Describe the three most significant risks that this offshore outsourcing arrangement introduces to thestate’s Department of Health and Human Services.b) What are the key controls you would recommend to mitigate the risks cited in part a.c) What role should the Department’s internal audit function take to assist the Department in dealing withthese risks both prior to signing the contract and after the processing has been transferred? Bespecific.4) a) When and in what ways do audit engagement communications occur?b) What actions regarding audit engagement observations must the internal audit function take after thefinal audit report is disseminated?Below are the E-books we use for this course:Brinnk’s Modern Internal Auditing: A common Body of Knowledge, Seventh Edition By Robert R.Moeller John Wily & Sons 2009COSO Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance, SecondEdition By Robert R. Moeller John Wiley & Sons 2011The Essential Guide to Internal Auditing, Second Edition by K H Spencer Pickett John Wiley & Sons2011

Get a 30 % discount on an order above $ 50
Use the following coupon code :
RESEARCH
Grab a 20% discount for your assignment with code: RESEARCHOrder Now