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26-9
26-21 (continued)
c. The following certifications are available:
1. CIA (Certified Internal Auditor)
2. CCSA (Certification in Control Self-Assessment)
d. The three parts of the CIA Exam are:
Part 1 – Internal Audit Basics
Like the CPA exam, the CIA is a computerized exam, and
candidates may also sit for individual sections of the exam. Like the
CPA exam, the CIA exam is non-disclosed. Part 1 consists of 125
26-22 a. The U.S. Government Accountability Office (GAO) issues Government
Auditing Standards (GAGAS). The financial auditing standards
Materiality and significance. GAGAS recognize that audit
Quality control. CPA firms that audit government entities must
have appropriate systems of quality control and participate
Compliance auditing. GAGAS also require the audit to be
designed to provide reasonable assurance of detecting
26-10
26-22 (continued)
Reporting. The audit report must state that the audit was
made in accordance with GAGAS and the report must
b. Because the school system receives over $15 million in federal
financial funding, the system would be required to have an audit
conducted in accordance with the Single Audit Act. That would
c. Thresholds related to materiality and audit risk for the school
system may be lower than thresholds in the audit of a commercial
entity due to the sensitive nature and close scrutiny of the school
d. GAGAS would require the auditor to include in its report on
the financial statements a description of the auditor’s tests of
compliance with laws and regulations and internal controls and
auditor to provide the following:
An opinion as to whether the schedule of federal awards
is presented fairly in all material respects in relation to the
financial statements as a whole.
e. If Waggoner and Allen, LLP, accepts this engagement, the
auditors involved in planning, performing, or reporting for the
26-11
26-22 (continued)
each two-year period. At least 24 of these 80 hours must be in
26-23 a. Issues that must be addressed by Haskin’s Internal Audit
ISSUES
1. The criteria used by the Capital Budgeting Group (CBG) need to be
evaluated to determine whether they are consistent with Haskin’s long-
term goals and objectives.
2. The internal controls in the capital budgeting process need to be
evaluated to determine whether the CBG applied the criteria
consistently.
3. The ROI (hurdle rate) must be tested for reasonableness to be sure the
appropriate projects are selected.
4. The IAD must determine how well the project is now doing as compared
to the original analysis.
capital expenditure project include the following:
PROCEDURES
1. Review Haskin’s long-term goals and objectives to determine the
appropriateness of each evaluation criterion being employed by the
CBG.
2. Review, test, and evaluate the internal controls associated with the
capital budgeting process. This would include a review of the capital
budgeting procedures manual, if one exists, and preparing a flowchart
for the capital budgeting process.
3. Review how the hurdle rate is determined now and was determined in
2015. Determine if a risk adjustment was incorporated into the decision
process by such means as increasing the hurdle rate or decreasing
estimated cash flows.
26-23 (continued)
PROCEDURES
4. Interview and evaluate the competence of the available participants in
the decision, including the originator of the CBG. Read the minutes of
the CBG’s meetings and review all status reports for the project from
inception through its completion. Review the quantitative analysis used
by the CBG to determine if data were valid, assumptions and estimates
reasonable, only relevant costs were considered, and cost behavior
(fixed and variable) was correctly perceived.
5. Review Haskin’s internal accounting controls to assure that all
acquisition and installation costs for the machines are capitalized and
that operating and maintenance costs for the machines are recorded
accurately and expensed. Review documents related to the acquisition
of other machines and determine the actual amount of investment.
Review accounting, maintenance, and production records, and other
documentary evidence, to determine actual operating costs and actual
contribution for each machine.
26-24
a.
DEFICIENCIES/
INEFFICIENCIES
b.
RECOMMENDATIONS
1. Quantities of materials
received are not verified
by the materials
manager.
Besides inspecting all incoming goods to ensure that
quality standards are met, the materials manager
should verify quantities received by actual physical
count. All material receipts do not have to be
counted for a verification program to be effective.
Systematically verifying one or several receipts from
each vendor during a given time period can identify
those receipts that are the most troublesome. Once
identified, efforts can be directed to correcting the
problem. The verification process is performed by
comparing receiving document quantities to actual
physical counts to ensure invoice totals are correct.
26-24 (continued)
a.
DEFICIENCIES/
INEFFICIENCIES
b.
RECOMMENDATIONS
2. The materials manager
prepares purchasing
requests based on
production schedules
and not on requisitions
received from operating
departments.
Purchasing requests prepared by the materials
manager are to be based on requisitions received
from operating departments and not production
schedules for a four-month period. Production
schedules could be outdated and not reflect current
sales trends. Operating departments are constantly
adjusting production levels to account for changes.
To improve budgetary control over expenditures, the
controller’s office also should review the requests in
conjunction with forward planning to ensure
expenditures are consistent with company sales
projections. Once an analysis of inventory flows is
complete the economic order quantity can be
applied to determine the reorder point and to
minimize inventories.
3. The majority of
Lecimore’s requirement
for a critical raw material
is supplied by a single
vendor.
It is best to develop alternate sources of supply for
critical materials. The obvious benefits are reduced
reliance on a single vendor, and the reduced
possibility of lost production because of material
shortages and/or other interruptions in the operation
due to a single vendor. Encouragement of
competition by the effective allocation of material
requirements between vendors is also another
benefit that can be expected to materialize if an
effective program is implemented. Other benefits
such as improved vendor services and technical
assistance may also result as vendors attempt to
gain increased shares of the goods provided the
user company.
4. Rush and expedite orders
are made by production
directly to the purchasing
department without
consulting the materials
managers.
Rush and expedite orders should be reviewed by
the materials manager to determine if any of the
orders can be filled using existing inventories.
26-24 (continued)
a.
DEFICIENCIES/
INEFFICIENCIES
b.
RECOMMENDATIONS
5. The purchasing
department is held
responsible for the cost of
special orders, which can
be clearly identified by
requesting departments.
The direct association of special order costs with
responsible departments is necessary in order to
exercise proper control. Responsibility accounting
obligates departments to exercise judgment and
prudence over those costs they are held
accountable for. Through responsibility reporting,
excessive costs are highlighted so that corrective
actions can be implemented.
6. Engineering changes are
not discussed with other
departments before the
materials needed to
implement the change
are ordered.
A general policy outlining the authority and
responsibility for implementing engineering changes
must be established. The proposed changes should
be reviewed thoroughly by various company
departments before an order is placed. The
controller’s office would review the proposal in light
of incremental costs or cost savings that are
expected to result. The manufacturing departments
would review the change from an adaptability point
of view. Before placing an order, purchasing would
have to receive approval from the reviewing
departments. Once approval is obtained, the vendor
selection process can begin.
7. Accounting is not notified
by the materials manager
of the receipt of partial
shipments.
Besides notifying the purchasing department of the
receipt of partial shipments, the materials manager
should also inform the accounting department so
that vendor invoices can be processed correctly.
Receiving reports clearly identifying the receipt as
a partial shipment is the most effective means of
communicating this information. By appropriately
annotating the receiving report, vendors will not be
paid for materials the company has not received.
26-25
DEFICIENCIES
RECOMMENDATIONS
1. An authorization document
that describes the item to be
acquired, indicates the benefits
to be derived, and estimates
its cost is not prepared and
reviewed with management.
To obtain approval for the purchase of
machinery and equipment, an appropriations
request should be prepared, describing the
item, indicating why it is needed, and
estimating its expected costs and benefits.
The document also could include the item’s
accounting classification, expected useful life,
depreciation method and rate, and the names
of approving company executives.
2. There is no control over
authorized acquisitions. The
purchase requisitions and
purchase orders for fixed assets
are interspersed with other
requisitions and purchase
orders and handled through
normal purchasing procedures.
Authorized acquisitions should be processed
using special procedures and purchase
orders. These purchase orders should be
subjected to numerical control. Copies of
purchase orders should be distributed to all
appropriate departments so that the
acquisition can be monitored.
3. Plant engineering does not
appear to be inspecting
machinery and equipment
upon receipt.
Purchases of machinery and equipment should
be subject to normal receiving inspection
routines. In the case of machinery and
equipment, plant engineering is usually
responsible for reviewing the receipt to make
certain the correct item was delivered and
that it was not damaged in transit. All new
machinery and equipment would be assigned
a control number and tagged at the time of
receipt.
4. The lapse schedules are not
reconciled periodically to
general ledger control accounts
to verify agreement.
At least once each year, machinery and
equipment lapse schedules, which provide
information on asset cost and accumulated
depreciation, should be reconciled to general
ledger control accounts. Furthermore, an
actual physical inventory of existing fixed
assets should be taken periodically and
reconciled to the lapse schedules and general
ledger control account to assure accuracy.
5. Machinery and equipment
accounting policies, including
depreciation, have not been
updated to make certain that
the most desirable methods
Machinery and equipment accounting
procedures, including depreciation, must
be updated periodically to reflect actual
experience, and changes in accounting
pronouncements and income tax legislation.
