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Chapter 19
Case Study
What work would the internal audit department do?
In what ways may the external auditors place reliance on their work?
Draw up a checklist which the external auditors could use to assess
the internal auditors as potentially being capable of producing work
on which the external auditors may rely
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xDo the objectives of internal and external auditors coincide?
Are internal audit evaluating internal controls or looking at
system improvements or efficiency gains?
xHas the scope of internal audit been restricted in any way?
Are they constrained by management?
Are they confined to specific aspects of an organisation’s
activities?
xHow competent are the internal auditors?
Does the department contain sufficient numbers of trained,
qualified, competent professional accountants to carry out the
work effectively?
Are there training programmes and a programme of professional
development to keep skills up to date?
xAre they independent of the finance function?
Does the head of internal audit report to the finance director?
Does the finance function control the budget for internal audit
Is there an audit committee to which IA reports?
Does IA decide its own work commitments?
Examination questions
Internal audit
1.Cleanco
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Risk Controls Tests of control
Human resources
xEmploying illegal
immigrants
xEstablishing
identification
xRecruiting suitably
reliable and
competent
individuals
xLevels of supervision
xInadequate
Identification
documents to be seen
for all applicants
Interview all
applicants
Take up references
if in cash or by bank
Review company
procedures for starters
& leavers
Check leavers dates and
check removed from
payroll
Check company
issues
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(ii) Procurement
xPurchase of
protective clothing
– it tends to leave
with staff
xGloves etc required
xAll materials used
to be fit for purpose
Staff to sign for
protective clothing
when issued
Company policies and
procedures re use of
protective clothing
Review health and
safety reports – possible
liabilities
Analytical review of
expenditure on
protective clothing and
Marketing
xCost of campaign
including discounts
may not bring in
increase in business
xInappropriate
marketing
Compliance with
Advertising Code of
Practice
Monitoring advertising
spend v increases in
Inspect minutes of
meetings including
sales/marketing dept
meetings
Enquire of legal advisors
© Cengage Learning 2012
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2. Internal audit
(a) Information in internal audit reports
(i) Cover page: this normally deals with the subject matter, the distribution
(b) Contents of external audit reports
External audit reports include:
(i) A title and addressee, and the signature of the auditor and the date.
(c) Differences – internal and external audit reports
(i) The wording of the external audit report is set out by in ISA 700 The
Auditor’s Report on Financial Statements (and national standards) and
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(d) Common characteristics
(i) Both internal and external auditors draft their reports on the basis of the
findings of their work (in the case of external auditors this will relate to
weaknesses in the structure and operation of controls encountered during the
audit).