Case Analysis 1

Mark Anecito R.
Perlas, CPA
AUD 1206 Operations Auditing
Members:
Ascaño, Ace Johndel L.
Cabigao, Alyssah Ericka C.
Chua, Charles Matthew L.
Cidro, Kent Keiser G.
Domingo, Liana Paula R.
Enriquez, Erlyn Mae M.
Guinto, Claudette C.
Ocab, Milky Kate V
Riveta, Ashley Mae C.
Santelices, Lance Carlo B.
Velasquez, Nicole Anne D.
CASE ANALYSIS Number 1
Bes Corporation has an internal audit department operating out of the corporate
headquarters. Various types of audit assignments are performed by the department for
the eight divisions of the company. The following findings resulted from recent audits of
Bes Corporation’s Bhiee Division:
1. One of the departments in the division appeared to have an excessive turnover rate.
Upon investigation, the personnel department seemed to be unable to find enough
workers with the specified skills for this department. Some workers are trained on the
job. The departmental supervisor is held accountable for labor efficiency variances but
does not have qualified staff or sufficient time to train the workers properly. The
supervisor holds individual workers responsible for meeting predetermined standards
from the day they report to work. This has resulted in a rapid turnover of workers who
are trainable but not yet able to meet standards.
Members:
Ocab, Milky Kate V
2. The internal audit department recently participated in a computer feasibility study for
this division. It advised and concurred on the purchase and installation of a specific
computer system. Although the system is up and operating, the results are less than
desirable. The software and hardware meet the specifications of the feasibility study,
but there are several functions unique to this division that the system has been unable
to accomplish. Linking of files has been a problem. For example, several vendors have
been paid for materials not meeting company specifications. A revision of the existing
software is probably not possible, and a permanent solution probably requires replacing
the existing computer system with a new one.
3. One of the products manufactured by this division was recently redesigned to

eliminate a potential safety defect. This defect was discovered after several users were
injured. At present, there are no pending lawsuits because none of the injured parties
has identified a defect in the product as a cause of the injury. There is insufficient
information to determine whether the defect was a contributing factor. The director of
internal auditing and assistant controller is in charge of the internal audit department
and reports to the controller in corporate headquarters. Copies of internal audit reports
are sent routinely to Bes’ board of directors.
Members:
Ocab, Milky Kate V
Requirements:
1. What are the procedures to be done in terms of the fieldwork stage of an internal
auditor as a response to audit finding number 1 (excessive turnover)?
As an internal auditor, the procedure to be followed should start with recognizing

the current issue that is causing the problem in the organization. The great reaction to
being performed through an auditor throughout audit fieldwork given the audit finding on
immoderate turnover of personnel is to elevate such issue at once as an internal
manipulates deficiency usually associated with operations instead of monetary reporting
to the management or to the ones charged with governance in the employer being
audited. We ought to make the ones in control or the ones charged with governance
aware of the bad influences of an excessive turnover rate. Ultimately, it can bring about
low worker morale. Its instant results may be excessive due to the fact that it can make
personnel lose self-assurance in the organization. As a result, it's distinctly in all
likelihood that there might be a lack of treasured information and revel in that can't be
effortlessly replaced.
Members:
Ocab, Milky Kate V
In accordance with the fieldwork stage, internal auditors can conduct interviews
with the department personnel while also reviewing the departmental records and
practices and communicating with audit clients at the same time that the audit
evaluation procedure is ongoing so that it can be executed as smoothly as possible.
Communication is very important as it will be the first step in defining the potential issue,
followed by the observations and recommendations on how to eliminate the problem.
During the step of defining the potential issue, it is where the auditor can point out the
root of the problem of the organization. Observation plays the role of examining how the
issue affects the operations of the organization and how it results in having the problem
of having an excessive turnover rate.
As the auditor piled up all the evidence that goes beyond the suitable criteria,
recommendations can now be served and evaluated as to which of them can be the
best way of getting rid of the current issue. In addition, another best course of action for
an auditor to take in light of the audit finding on excessive employee turnover is to raise
this concern right away with management or those in charge of governance in the
company being audited as an internal control issue that is primarily related to operations
rather than financial reporting. An operational audit is most likely to happen when
Members:
Ocab, Milky Kate V
Important staff members depart or when new management takes over an

organization. The business may wish to examine its processes to see if resources may
be used more effectively. During an operational internal audit, the auditor will assess if
present personnel and procedures support a company's values, mission, and goals. We
must convey to management or those responsible for governance the detrimental
effects of a high turnover rate. It might ultimately lead to low employee morale. Its
immediate effects could be severe since it might cause employees to lose faith in the
company. It is quite likely that this would result in the loss of priceless information and
expertise that cannot be quickly replaced. A company's and its employees' well-being
can suffer from high turnover rates in several ways. It is easy to stray from the
organization's genuine mission and vision because there is a constant requirement to
find and train new staff. By keeping personnel, companies may deliver a higher caliber
workforce that has a beneficial impact on the bottom line. Businesses can reduce
employee turnover by giving staff proper training, rewarding them for a job well done,
and fostering a culture of trust within the workplace.
2. What are your possible recommendations as an internal auditor as a response to

audit finding number 1 (excessive turnover)?
Members:
Ocab, Milky Kate V
Every business is affected greatly by excessive turnover rates, which are

determined by how satisfied people are at work. The frequency or quantity of
employees leaving a company and being replaced by new hires is referred to as
employee turnover. If workers are experiencing a lack of opportunities for growth and
development, being undertrained while being overworked, being disengaged from the
company, and having a lack of feedback and recognition, they may be motivated to
leave. As an internal auditor, the possible recommendations are to invest in employees'
potential, such as focusing on their training to improve their workforce and establishing
a proper selection process. Recognize their good work and reward their efforts to
increase employee loyalty, as employees who receive consistent recognition of their
successes by their employers are most likely to stay at the company. Improve current
communication channels and employee engagement to ensure good work-life balance
and a positive environment. Lastly, ensure that these employees are well compensated,
especially for their overtime shifts and night shifts. Providing a great employment
experience can help to reduce the rate of turnover. Workers are more likely to want to
remain with a company if they are exposed to an engaging, encouraging, and
communicative environment.
We recommend getting the qualified workers for the job, as it will boost the company’s
revenue and lessen the liability, as the procedures will be conducted more
Members:
Ocab, Milky Kate V
efficiently rather than training other workers who do not meet the qualifications. In
addition, to avoid an excessive turnover rate, employees must be well compensated,
have great benefits, and also have a healthy workplace environment in order to
eliminate this issue.
3. Based on the case, are there any objectivity problems with Bes Corporation? Explain.
Yes, in almost every facet mentioned in the given statements, all of which have
objectivity problems present in them. First on the list is the increase in the turnover rate
of the company. Auditing objectivity is defined as an unbiased mental attitude that
allows the auditor to perform engagements in a manner that they believe that the
product or service has no quality compromises. Their HR, or those who are in charge of
recruiting, has been lackluster lately and has not provided the workforce with the quality
needed for their line of work, resulting in employees leaving the company, thus
increasing the turnover rate. Recruitment of those who are not ready for the line of work
provided by the company is a big problem because the workforce is the backbone of
every organization and not meeting the standards is a huge blow to the company’s
goals and objectives. With this, an audit committee would be part of the organization in
Members:
Ocab, Milky Kate V
order to directly report to those in charge of governance and be completely

independent of the controllership. By doing this, bias in the audit reports and findings
they present would be reduced, if not entirely eliminated.
Secondly, the software they have been using around the company,
technologically speaking, is also not up to par with today’s standards on what software
to use. As said in the given statements, "the results are less than desirable." The
competency of the people in charge of their technical set-up is very questionable.
Several functions are unique to this division that the system has been unable to
accomplish, thus resulting in transactions that should not happen within the company’s
daily routine. An example of this is the purchase order of materials that do not meet the
company’s specifications. A massive waste of money and time, which are not helpful to
the company’s success at all. Lastly, there is the uncertainty of their division regarding
the redesign of one of their products to address its potential safety defect. These were
discovered after several users got injured using this specific product, although no
lawsuits have been filed yet. As a manufacturer, you should not have to deal with this
type of news if all safety standards are met and your finished product is up to standard,
or much better, exceeds those regulations.
Members:
Ocab, Milky Kate V
4. If the internal audit department is part of the corporation's controllership function, and
copies of the internal audit reports are sent to the board of directors, evaluating the
appropriateness of the location of the internal audit department within Bes’
organizational structure.
The issue would be whether this is a proper function for an internal audit
department. The internal audit function should be performed by independent
professionals who are not directly employed by or responsible for a business entity. In
this case, it may be appropriate to place it within a separate division because it makes
sense to have them report directly to the board rather than through management.
However, in some cases, it may be better to keep them within existing divisions where
they can liaise with other departments on matters such as safety.
The Internal Audit Department is a critical function of any organization. The

internal audit department should be located in the corporate headquarters as it has
direct access to all the information regarding the financial transactions of the
organization, especially those related to assets, liabilities, and operations. The internal
audit department should have access to all the financial records of the corporation and
can perform any type of audit that will help improve the efficiency of operations within
the company. The location of the internal audit department within the Bes’
Members:
Ocab, Milky Kate V
organizational structure is appropriate because it facilitates its operations and helps in

improving its efficiency and effectiveness. In conclusion, the internal audit department is
part of the corporation’s controllership function. Therefore, internal auditors should be
assigned to the corporate headquarters. This will ensure that they are in place to
perform their functions. The location of the internal audit department within the Bes
Corporation’s organizational structure is appropriate.
5. Who are those within Bes should receive the reports of the internal audit department?
An internal audit is necessary to maintain operational effectiveness and

efficiency, financial stability, and asset protection. It provides independent assurance
that an organization's risk management, governance, and internal control procedures
are operating effectively. The internal audit department is necessary to Bes Corporation
because it helps the organization identify the root causes of any issues or problems that
have occurred or may arise in the future. And if they discover such discrepancies, they
offer management process recommendations for improvement.
Members:
Ocab, Milky Kate V
The internal auditor reports to an officer with sufficient authority to ensure

thorough audit coverage, adequate evaluation of the findings and suggestions of the
internal auditors, and appropriate action on those recommendations. The internal audit
has a functional reporting line to the audit committee chair and an administrative
reporting line to the chief executive, who is the most senior executive, which ensures its
independence from executive management. Furthermore, the internal audit department
should render an annual report to the Audit Committee and senior management
regarding the activity, purpose, authority, responsibility, and performance of the internal
audit department that should be in accordance with the standards approved by the Audit
Committee. The chief audit executive must inform the board of any noncompliance with
the Standards for the Professional Practice of Internal Auditing if the internal auditor
finds that the company's operations are not performed in line with those standards. The
Board is accountable to the shareholders of the company. Hence, an annual report that
includes the significant risk exposures, control issues, and corporate governance issues
shall be made available to the stockholders of the company. Moreover, the final audit
report should be presented to the Department Secretary/Head of Agency or Governing
Body/Audit Committee so they can decide if action is needed on the findings of the
Internal Audit Service. Thus, Bes’ Board of Directors, president or another high
Members:
Ocab, Milky Kate V
executive, and controller in corporate headquarters must receive a report from the
internal audit department.
References:
Department of Budget and Management. (2020). Revised Philippine Government

Internal Audit Manual 2020 . Revised PGIAM Approved by SWEA 26 May 2020.
https://dbm.gov.ph/wp-content/uploads/Issuances/2020/Circular-Letter/Revised-
PGIAM-Approved-by-SWEA-26-May-2020.pdf
Marks, N. (2022, April 27). To Whom Should Internal Audit Leaders Report?
https://internalaudit360.com/to-whom-should-internal-audit-leaders-report/
Martinelli K. (2017, October 13). Causes of Employee Turnover and Strategies to

Reduce it. https://www.highspeedtraining.co.uk/hub/causes-of-employee-turnover
Reh J. F. (2019, January 10). How to Avoid Excessive Employee Turnover.

https://www.liveabout.com/employee-turnover-2275788
Securities and Exchange Commission. (2002, April 4). Code of Corporate Governance .
SEC MEMORANDUM CIRCULAR NO. 2. Retrieved September 24, 2022, from
https://www.sec.gov.ph/wp-content/uploads/2019/11/2002MCno02.pdf
Standard Fusion. (2020, March 12). Top Reasons to Conduct Internal Audits.
https://www.standardfusion.com/blog/reasons-to-conduct-internal-audits/
#:~:text=Internal%20audits%20can%20help%20you,mitigating%20them
%20within%20your%20enterprise.
Members:
Ocab, Milky Kate V

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Mark Anecito R.

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.

Chua, Charles Matthew L.

Cidro, Kent Keiser G.

Domingo, Liana Paula R.

Enriquez, Erlyn Mae M.

Ocab, Milky Kate V

Riveta, Ashley Mae C.

Santelices, Lance Carlo B.

Velasquez, Nicole Anne D.

CASE ANALYSIS Number 1

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.

Chua, Charles Matthew L.

Cidro, Kent Keiser G.

Domingo, Liana Paula R.

Enriquez, Erlyn Mae M.

Ocab, Milky Kate V

Riveta, Ashley Mae C.

Santelices, Lance Carlo B.

Velasquez, Nicole Anne D.

3. One of the products manufactured by this division was recently redesigned to

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.

Chua, Charles Matthew L.

Cidro, Kent Keiser G.

Domingo, Liana Paula R.

Enriquez, Erlyn Mae M.

Ocab, Milky Kate V

Riveta, Ashley Mae C.

Santelices, Lance Carlo B.

Velasquez, Nicole Anne D.

As an internal auditor, the procedure to be followed should start with recognizing

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.

Chua, Charles Matthew L.

Cidro, Kent Keiser G.

Domingo, Liana Paula R.

Enriquez, Erlyn Mae M.

Ocab, Milky Kate V

Riveta, Ashley Mae C.

Santelices, Lance Carlo B.

Velasquez, Nicole Anne D.

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.

Chua, Charles Matthew L.

Cidro, Kent Keiser G.

Domingo, Liana Paula R.

Enriquez, Erlyn Mae M.

Ocab, Milky Kate V

Riveta, Ashley Mae C.

Santelices, Lance Carlo B.

Velasquez, Nicole Anne D.

Important staff members depart or when new management takes over an

2. What are your possible recommendations as an internal auditor as a response to

Ascaño, Ace Johndel L.

Cabigao, Alyssah Ericka C.