QUESTION ONE

Jodi Chang, CGA, provides a variety of consulting services to Big Co., a large organization. Big Co. recently
relocated a number of its administrative activities from scattered office locations throughout Vancouver into its
new office complex. Jodi was hired by one of the smaller administrative groups to provide strategic support
during the move. Her work included cost-benefit analyses, budgeting for the move, and accounting for
variances between actual and budgeted costs. During the course of her work, she formed some firm opinions
about the efficiency and economy of the overall relocation project’s planning and coordination carried out at
the corporate level, and some specific criticisms of some of the activities of the group for which she was
working.
The internal audit department of Big Co. was asked to undertake a review of the effectiveness, efficiency, and
economy of the relocation project. Jodi was approached by the audit manager responsible for the audit and
asked if she would join the audit team as an outside consultant, partly because of her past audit experience,
but mostly because of her specific experience, information, and comments on this relocation project and the
small group that she had been advising.
Question: Should Jodi accept the engagement? Why or why not?

ANS/ She should not accept because she would be auditing her own work which would diminish her objectivity.

QUESTION TWO`

If the internal audit department of a hydro-electric utility conducted an effectiveness audit of the utility’s
management of the risk of breach or failure of any of its major hydro-electric dams, it is unlikely that anyone
within the department would have the competence to evaluate the performance of the utility’s dam safety
efforts. The department would need to obtain outside services from acknowledged experts in the subject
matter of the audit (in this instance, in dam safety). Actual audits of this type use resources from organizations
such as the U.S. Army Corps of Engineers, who are internationally renowned as experts in this subject. The
audit department staff supplies the auditing methodology; the subject matter experts supply the specific
knowledge needed to assess technical performance. The Standards also require that the personnel conducting
the audit be appropriately supervised.

How do auditors comply with proficiency?

ANS/ Auditors comply with proficiency by ensuring that the possess the knowledge, skills and other competencies
needed to perform their individual responsibilities. They can do this by obtaining the appropriate professional
certifications and qualifications such as he Internal Auditor designation and other designation. If the internal
auditors lack the knowledge, skills and other competencies, the chief audit executive must obtain competent
advice and assistance.

QUESTION THREE

Many natural resource companies in Canada have aboriginal relations departments, which provide advice and
manage the companies’ interactions with the country’s various aboriginal groups. If an internal auditor were to
undertake an audit of the effectiveness and efficiency of such a program without prior experience in that area,
the auditor would almost certainly be violating the standards regarding knowledge, skills, and disciplines. The
rapid growth of knowledge provides an obligation for professionals in all fields to maintain their technical
competence through continuing education

QUESTION FOUR

Kenny Incorporated
You have just been promoted to chief audit executive at Kenny Incorporated on the retirement of
the previous incumbent. You are acutely aware of the importance of auditor independence and
objectivity to the internal audit function. In your previous role as senior internal auditor, you
were aware of several activities carried out by internal auditors that you believed could impair the
actual or perceived objectivity and independence of your department. You have decided to write
a memo to the controller on the matter.
Your specific concerns relate to the following activities:
1. The bank statements of the corporation are reconciled each month as a regular
assignment by one of the internal auditors. The corporate controller believes this
strengthens internal controls because the internal auditor is not involved in the
receipt and disbursement of cash.
2. An internal auditor evaluates all budget-to-actual variances each month, along with
the associated explanations provided by the corporate controller’s staff after
consultation with the individuals involved. After completing the review, the auditor
sends a memo to the appropriate staff indicating the action needed to address the
variances.
3. The internal auditors are frequently asked to make accounting entries for nonroutine
complex transactions before the transactions are recorded. The employees
in the accounting department are not adequately trained to handle such
transactions. In addition, this serves as a means of maintaining internal control over
such transactions.
4. One of the auditors has recently been involved in the design, testing, and training
of a new accounts receivable system. The auditor was asked to design the system
because of her strong accounting and systems background and her knowledge of
internal controls.
Required
Prepare the memo to the controller, covering each activity separately.

ANS/

MEMORANDUM

Jan 27 2021

From: Chief Audit Executive, Kenny Incorporated

To: The Controller

Subject: Activities that could impair the objectivity and independence of internal auditors

It has come to our attention that there are a few activities that may impair the objectivity of the audit
department that may need to be rectified. Some of the activities include the following:

1. The bank statements of the corporation are reconciled each month as a regular assignment by one of the
internal auditors. In order to maintain objectivity, the internal auditor should not perform activities that
would be required to be audited as part of an internal control. This activity should be assigned by the
controller to another member of the accounting staff with separation of duties.
2. An internal auditor evaluates all budget-to-actual variances each month, along with
the associated explanations provided by the corporate controller’s staff after
consultation with the individuals involved. After completing the review, the auditor
sends a memo to the appropriate staff indicating the action needed to address the
variances. The internal auditor is taking on management duties by directing the staff on the action
needed to address the variances. The internal auditor could be blurring the objectivity on their duties.
 3. The internal auditors are frequently asked to make accounting entries for nonroutine complex
transactions before the transactions are recorded. The employees in the accounting department are not
adequately trained to handle such transactions. These transactions shouldn’t be performed by the
auditing team as they shouldn’t be auditing the same work they perform.
4. One of the auditors has recently been involved in the design, testing, and training of a new accounts
receivable system. The auditor was asked to design the system because of her strong accounting and
systems background and her knowledge of internal controls. The internal auditor could impair their
objectivity if they are involved in the design and training of the new system.

We recommend that the Controller evaluate the impact the observations have on the objectivity and
independence of the internal auditors and the cost/benefit of implementing corrective action.

QUESTION FIVE

2. You are employed as the internal auditor of Cascadia Chemicals Inc., a company that operates in
Quebec and the northwestern United States as a manufacturer and distributor of chemicals to the
pulp and paper industry in that area. Your company has been in business for 40 years and has a
75% share of its market.
The board of directors has recently approved a proposal from management to enter into a joint
venture with a business in Colombia to manufacture and market the company’s chemical products
in Latin America. Initially, products will be supplied from Canada, but manufacturing facilities will
eventually be built in Colombia. This will be the first venture of its kind for Cascadia.
You have been approached by the president of Cascadia, Mark Downing, who has read with
interest of the increased involvement of internal auditors in the subject of business risk. He has
asked you to consider the risks faced by the company in its new venture. Specifically, he would
like you to identify the specific risks that the company may face in the following areas:
a. technical expertise
b. reputation
c. financial reporting
d. government regulations
e. marketing
f. financial management and treasury
Required
Identify two key risks under each of the areas named by the president. For each risk, indicate
briefly how the risk may be avoided, transferred, shared, or controlled

a. Technical expertise
a. Production quality may not be as effective in Colombia.
i. Research may be required.
b. Technical expertise may not be locally available.
i. Research may be required.
c. What effect does the long distance or higher temperatures have on the product
i. Research may be required.
b. Reputation
a. Business practices may be different and may impact on the firm.
b. Deforestation may bring in environmental impact
c. We’re not aware of the reputation with the joint venture company
c. financial reporting
 a. Need timely financial information
i. need to have an accountant internationally
b. Difference in practices across countries
i. Ensure that financial reporting is consistent using IFRS
c. Maybe hard to obtain accurate information about venture partner
i. Ensure independent accountant to review their financials
d. government regulations
a. We may find ourselves in legal trouble with operations
i. Research required
b. Risks of repatriation income from Colombia
i. Research and consultation required with local lawyer
c. Lack of knowledge on environmental regulation
e. Marketing
a. Market landscape could be very different from Canada’s
i. Research may be required
b. Market may not permit prices to recover costs of operations.
i. Research
f. financial management and treasury
a. Company could be exposed to high inflation rates and loss of investment
i. Hedge risks
b. Company could be exposed to risks in Construction
c. Company may have tax imposed in Colombia
i. Company may be able to take loans
d. Company may be exposed to longer inventory and receivable cycles in latin America
i. Co should based cashflow projections on proper research of the terget markets