QUESTION

Your friend John is considering enrolling in the CPA program, with the career objective of getting an
internal auditor position in a large company. John has contacted his provincial association and received
all the information about the CPA program requirements. However, John would like to know more on
some specific aspects of the work of an internal auditor. He has contacted you hoping that you would
help him by answering a few questions about the practical side of the profession. John would like to
know the importance of communication skills for an internal auditor. Will he have to hold meetings and
carry out interviews on a regular basis? John considers that his skills are adequate but is willing to
improve them if that is going to help him in his future career. John would also like to know the role that
an internal auditor is expected to play in determining risks.

Your 10 years of experience as an internal auditor have convinced you that your friend is making the
right choice. You decide to prepare a memo that will help John to fully understand both the importance
of communications in internal auditing and the role that an internal auditor is expected to play in
determining risks. In the memo, you should describe the different tasks for which internal auditors are
required to communicate with others when planning and carrying out the audit and reporting its results.
This description should include the need for communication skills and the individuals with whom the
auditor communicates.

Required

Write the memo to John.

MEMORANDUM

To: My Friend John

From: Internal Auditor

Subject: CPA and Internal Auditing

Date: Mar 3rd 2021

I recommend this report to help you fully understand the importance of communications in internal
auditing and the role that an internal auditor is expected to play in determining risks. As an internal
auditor, it is your responsibility to provide independent , objective assurance and consulting activities
that add value and improve an organization's operations. It is your job to help the organization
accomplish his objectives bye bringing a disciplined approach to evaluate and improve the effectiveness
of risk management, control and governance processes.
As a result, it is important for the internal auditor to communicate effectively in many different
scenarios. An internal auditor communicates with different levels of the organization from frontline staff
to the board of directors, so it is very important that the internal auditor be objective in their
communications and avoid misleading language.

One of the first types of communications that the internal auditor is required to engage particularly in
writing is the engagement objectives, scope and results. The internal audit function needs to identify
sufficient, reliable, round event, and useful information to achieve the engagement’s objectives. In order
for the internal audit engagements to have value it's very important for communications to be accurate
objective, clear, concise, constructive , complete , and timely. If the objectives of the internal audit are
not clear then the resulting engagement will not add value to the organization, if the scope is not clearly
established by communicating effectively then V internal auditor may not have all the data or tools
available in order to be successful in their engagement. And if the results are not communicated in a
timely an appropriate manner to the appropriate users the outcomes could be misinterpreted . So it is
not enough for the users to receive a report with the results of the audit but the communication would
must be in a form that minimizes the risk of misinterpretation.

Internal auditors often communicate to senior management and the board with respect to governance
assurance activities and evaluating the effectiveness of risk management activities.

I believe that you are making the right choice by looking to the profession of an internal auditor as it
would be suitable to your skills and to your career growth. if you have any questions feel free to contact
me.

Good luck,

Camilo

QUESTION TWO

ERT Ltd. is one of the largest Canadian manufacturers of silicon chips. The company grew quickly but
because of the large amounts of money that it had to invest, its cash reserves were quickly exhausted.
ERT therefore applied for, and obtained, sizable grants from the various levels of government anxious to
foster the development of high-tech companies. However, the grants were accompanied by conditions
that the company must comply with annually for a 5-year period starting January 1, 2006. If, at the end
of a fiscal period, the conditions are not met, ERT will have 5 years to repay all grants obtained.

These conditions, while known and accepted by the board of directors when the agreements were
signed, are a little worrisome to the company’s vice-president of finance. These conditions affect certain
areas of the company’s operations that have always been weak, as identified below.
The following two conditions are especially troubling to the vice-president of finance.

1. Art.15(a)

Inventories

The corporation shall at all times maintain raw material and finished goods inventories at market value
equal to or greater than 50% of the total amount of grants obtained.

2. Art.18(c)

Other expenses

The corporation shall exercise control over its expenses other than those directly related to
manufacturing. These expenses include the salaries of senior executives, all managers except production
managers, and administrative staff. They also include the company’s financial expenses. These expenses
cannot exceed 45% of total expenses and costs of any type incurred by the corporation for a given fiscal
period.

As an internal auditor for the company, you are well aware of the weaknesses that worry the vice-
president of finance and you entirely share his concern regarding the company’s ability to meet the
conditions laid down by the granting agencies.

During the past year, ERT has experienced several stock-outs that resulted in the loss of a number of
large clients. Despite the efforts made by the sales department, the company has not been able to win
back some clients who switched to ERT’s competitors.

You are reviewing the annual audit plan and you realize that the audit of finished goods inventories
might cause you a problem. The most valuable items are generally too small to be counted manually and
you will therefore have to use specialized equipment to determine the value of these inventories.
Another problem is that all the items appear similar, whereas their values may differ considerably.

When questioned on this subject, the vice-president of production tried to reassure you:

“We already have the equipment needed to determine the value of the inventories. In fact, I am
surprised that you were not aware of this, considering that we have been using this equipment for more
than 5 years. You can stop worrying; I know the value of every item produced in this plant.”

As to the reduction of expenses, you have no idea where to begin. The other-expenses-to-total-
expenses ratio is currently 53%, and an 8% reduction seems impossible to you. Also, you have noticed
that since it was announced that grants had been obtained, other expenses have risen substantially.

The chief audit executive (CAE), to whom you have confided your concerns, is well aware of the
problems that could result from a failure to meet the conditions imposed by the different granting
agencies. She considers it essential to amend the annual audit plan to ensure that the conditions
imposed by the granting agencies are met. However, before the plan is amended, she would like you to
write a memorandum proposing a series of criteria and procedures for ensuring that the objective of
complying with the conditions is met. She would first like you to develop the audit criteria and
procedures that would apply to the following:

1. Production 2. Inventory management 3. Purchasing 4. Administrative expenses 5. Treasury

In closing, the CAE reiterates that the criteria and procedures you propose must focus strictly on
elements that relate to compliance with the conditions associated with the grants.

Required

Write the memorandum to the CAE.

QUESTION THREE

You have been granted permission to proceed with an annual recruitment of summer interns from
leading Canadian universities to join the Auditor General’s Office upon graduation. You have decided that
the aptitude of the current flock of accounting and business majors in technology, coupled with their
university research skills, are probably an excellent fit with plans to design and conduct a long overdue
performance audit of the National Research Agency (NRA) this fall. As part of this on-campus recruitment
activity, you will be required to meet with students at several major centres across Canada and make
presentations to them on prospects for a career with the Auditor General. Certainly, the role and
responsibilities of the Auditor General will need to be explained.

Experience with recent graduates has taught you that, while most seem quite knowledgeable about
external auditing in the private sector, public-sector auditing is less well understood. Comprehensive
auditing in comparison to private sector should then likely be discussed. As well, students are often
confused about the variety of terms used: internal auditing, external auditing, comprehensive auditing,
performance auditing, VFM auditing, compliance auditing, and the attest function. Some explanation,
therefore, about the unique nature of the work the Auditor General performs would seem to be useful.

As well, since you will manage the upcoming performance audit of the NRA, to which several of the new
graduates will be assigned, you see an opportunity to engage students in a discussion about this exciting
first engagement and hope to discuss planning, the examination, reporting, and follow-up considerations
for this audit.

Required

Prepare the required presentation for the prospective candidates.

QUESTION FOUR

a) One of the steps in planning an internal audit engagement involves developing staffing plans and time
budgets.

Required

Briefly outline the main considerations in determining the specific audit staff to be assigned to an internal
audit engagement.

ANS/ The main considerations in determining the specific audit staff are:

- Do they have the necessary knowledge, skills and credentials to perform the audit?
- Do they have an objective mental attitude?
- Do they have a conflict of interest in carrying out the engagement?
- Do they have prudency and competency? Have they continually developed their professional
development?

b) To be practical and useful, all plans must be flexible. There are a variety of reasons why the internal
auditor would revise the annual plan after it has been approved.

Required

Why might an annual internal audit plan be revised after it has been approved?