Question One

a. What is the purpose of the IIA’s Code of Ethics?

ANS/. To promote an ethical culture in the internal audit profession
b. An internal auditor has dual responsibilities — to his or her employer and to the
professional organization(s) of which he or she is a member. How should the
internal auditor balance these two sets of responsibilities?
ANS/ The internal auditor must perform their work with honesty, diligence and responsibility. They must
be objective and independent in their assessments and avoid conflicts of interest or incentives that may
undermines their objectivity in their function. An internal auditor must not assess a specific operation for
which they were previously held responsible.

Question Two
During the management seminar that you attended recently, you heard the following comments
made by Nadia Howerchuk, the president of a major company:
“I do not quite understand what this whole army of internal auditors is doing in the private
sector. They are certainly useful in the public sector, where they must make sure that a whole
multitude of laws, regulations, and directives are followed to the letter. But the situation is quite
different in private business, where profit is an important source of motivation.
After having given it considerable thought, I do not quite see what positive contribution a group
of internal auditors could make to our company, or what management could expect from this
function. I do not see how internal auditing could contribute to improving the quality of
management in our company.
We already spend a fortune on the annual audit of our financial statements, and our external
auditors are very competent; furthermore, in contrast to internal auditors, they are independent
from management. In any event, the work done by our external auditors gives us assurance that
everything is well managed in our company and that we are well protected against fraud.
Otherwise, they would not be able to give an unqualified opinion on our financial statements year
after year.”
Required
Comment on Nadia’s statement and identify arguments that could convince her of the usefulness
of the internal audit function in a large company
ANS/ The objective of external auditors is to give a true and fair view on the financial

statements

 An audit of financial statements does not provide assurance that operations are well

managed because auditors do not review controls aimed at ensuring economy,

efficiency and effectiveness of operations

 External auditors do not have the responsibility to detect fraud (Re Kingston

Cotton Mills) & ISA 240 ®

 An external audit does not provide full assurance that fraud will be discovered.

(NOT ABSOLUTE BUT REASONABLE-4 reasons:

- Perform test on sampling basis

- Inherent limitation of Internal control

- Audit evidence is only persuasive and not conclusive

- Professional judgement of auditor could be flawed

 When external auditors adopt a “substantive testing” approach to their audit, they

do not test the functioning of internal control systems

 The work performed by internal auditors can provide better assurance that

operations are well managed and that the organization is well protected against

fraud

 Key objective of internal auditors is to assist all members of the organizations

(management at all levels and members of the BOD) in the effective discharge of

their responsibilities

 Internal auditors can contribute to the organization by reviewing the systems

established to ensure compliance with those policies, plans, procedures, laws and

regulations that could have a significant impact on operations and reports and

determining whether the organization is in compliance

 Internal auditors can contribute to the organization by reviewing the means of

safeguarding assets and, as appropriate, verifying the existence of such assets

 Internal auditors can contribute to the organization by appraising the economy and

efficiency with which resources are employed

 Internal auditors can be independent if the proper setting is provided which is

affected by the organizational status of the internal audit function, by the authority and responsibilities
given to internal auditors and by the degree of objectivity
maintained by internal auditors in performing their audit.

Question Three

3. Why must internal auditors be conversant with all the functions and principles of management?
ANS/ The internal auditor needs to help the organization accomplish its objectives. In order to do this,
the internal auditors must be familiar with all the functions and principles of management to understand
and assist in the firm’s strategic objectives. The internal auditor provides their services for the benefit of
management and the board of directors. As a result, they need to understand management and their
principles.
Question Four

As you perused the GQC Ltd. Annual Report on the plane ride home from a sales conference in
Calgary, you reflected that 20X1 has been a relatively good year in poor economic times,
everything considered. The financial results for the year showed net income of $14 million on
sales of $151 million and 1,275 employees in four plants in three provinces. However, net income
had grown by only 2% while sales had grown by almost 10%. Employment had actually declined
by 3% compared to the previous year, and there were rumours of possible future layoffs.
Moreover, the forecast for the year 20X2 was not optimistic. Inevitably, in such circumstances,
corporate support services of all kinds were under pressure, and as assistant vice-president of
internal audit, you enjoyed no exemption. Indeed the vice-presidents of the five major operating
divisions seemed to view your department of 20 (10 accountants, six engineers, and four support
staff) as an unnecessary frill, and even a bureaucratic obstacle to innovation and autonomy. The
company was monitoring the operating division’s performance using performance measurement,
but the vice-presidents were aware that your department had not established performance
standards to measure its own performance.
You reflected that 75% of the work of your department in the last year had been devoted to
financial audits, with much of the remainder devoted to compliance auditing. Your department
has been reactive in nature.
You sit down at your computer to draft a presentation to the department’s staff for early next
week. You have decided that it is time to become more proactive. You think that in your
presentation, you will allocate about 10 minutes to a vision statement for a new, proactive
department, building that statement on considerations such as “What business are we in?” and
“Who are our customers?” You will then go on for 10 minutes to consider how to establish,
promote, plan, perform, and report your activities. You will spend the final 15 minutes discussing
how to staff your team and evaluate its performance. This last part of the talk will include the
identification of key success factors for the internal auditing department.
Required
Draft the presentation using the suggested structure and relative emphasis.
ANS/

What Business Are We In? Who are our customers?

GQC Ltd  Our goods and services  Our client’s needs
Internal Auditing Plans  Our industry  Our client’s profiles
 Our history  Prospective sectors

Establishing Internal Promoting Internal Auditing

Planning Internal Audits
Auditing Activities & Consulting

Performing Internal Audits Reporting Staffing

Performance Evaluation
Questions?
 Key Success factors
Question Five

5.Internal auditing has been broadly defined as “the process by which a competent, independent
person accumulates and evaluates evidence about the systems in place to mitigate the risks faced
by a specific entity and/or quantifiable information related to that specific entity to determine and
report on the degree of correspondence between the systems and information of the entity and
established criteria.” With reference to the range of internal audit assignments referred to in
, outline the sources of “established criteria” available to the internal auditor in carrying
out the various types of assignments.

ANS/ The sources of established criteria available to the internal auditor in carrying out assignments
include:

 The IIA’s Standards

 The code of ethics
 Supplemental guides
 Mandate and commitment from the board and senior management

Question Six

6. You have just assumed your duties as chief audit executive of Colser Ltd., a large Canadian
manufacturing firm. During a meeting with the president of the company, William Chong, you are
informed that there is no official mandate governing the function of internal auditing in the
company. William is considering establishing such a mandate, making it a priority to ensure the
effectiveness of your service. Consequently, he asks you to prepare a brief memo for the audit
committee, listing the reasons why such a mandate is important and identifying and describing its
major components.
Required
Prepare the memo requested by William Chong, president of Colser Ltd.

ANS/

MEMORANDUM

Jan 27 2021

To: Audit Committee

Subject: Mandate for Internal Audit Governing

We have come to learn that Colser Ltd has no official mandate governing the function of internal
auditing in the company. This document seeks to outline why such a mandate is important with the
major components of an audit mandate.

Reasons for establishing a mandate governing the function of internal auditing.

1. Risk Management
 a. A mandate to govern the function of internal auditing can assist the company and its
internal auditors in identifying and evaluate significant exposures to risk and contribute
to the improvement of risk management and control systems.
2. Control
a. The mandate can help the firm maintain effective controls by evaluating their
effectiveness and efficiency and by promoting continuous improvement.
3. Governance
a. The mandate will assist the firm’s internal audit team assess and make appropriate
recommendations for improving the governance process in the accomplishment of the
organization’s objectives.

The components of the mandate should align with the objectives of the organization and its
management including:

A. Planning.
a. The development of a clear purpose, long-term objectives, and short term goals of the
organization
B. Organizing
a. Establishing a rule structure to help achieve the goals of the organization
C. Directing
a. The process of inducing members of an organization to perform their roles successfully
D. Controlling
a. The comparison of actual performance with pre-determined standards, plans or
objectives.

We hope that the above are considered in order to assist the internal audit team in the evaluation of the
organizational effectiveness and efficiency of the firm, in assessing and improving the organization’s risk
management, control and governance processes in the firm as well as in promoting ethical culture and
standards in the organization.