Chapter 4

Question 1

Internal audit function

Answer 1

a function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management and internal control processes

Question 2

Types of audits that internal auditors perform

Answer 2

Operational audits
Customer experience audits
IT audits
Financial audits
Value for money audits
Fraud investigations
Compliance audits

Question 3

IT audits

Answer 3

internal auditors may be asked to look specifically at controls over the accounting system or over other computer systems that supply data to the accounting system. eg calabash cove booking site is linked to the accounting system and is important in determining when revenue is recorded

Question 4

Financial and operational audits

Answer 4

ensuring controls are operating effectively. Eg, inventory counting or cash counts. This would include observation of controls. Financial audits involve the internal audit function reviewing the financial information produced and gathering evidence to substantiate it. Operational audits aka management or efficiency audits and they involve the internal audit function monitoring managements performance to ensure company policy is adhered to

Question 5

Compliance audits

Answer 5

internal auditors may assist with or review compliance with laws and regulations

Question 6

Fraud investigations

Answer 6

Fraud can range from theft of assets to fraudulent financial reporting. Internal audit may be asked to investigate specificinstances of suspected fraud or to review and test controls to prevent or detect fraud

Question 7

Value for money audits

Answer 7

they may be performed by the internal audit function and try to determine whether the optimal combination of goods/ services have been obtained for the lowest of resources. The focus on the three E’s.

Question 8

The three E’S in VFM audits

Answer 8

Economy - buying the resources needed at the cheapest cost
Effectiveness - doing the right things and meeting the organisation’s objectives
Efficiency - using the resources purchased as widely as possible

Question 9

Best value audits

Answer 9

Audits which are concerned solely with the economy objective

Question 10

How can the internal audit function be provided?

Answer 10

internally by employees or outsourced externally

Question 11

Difference between an external auditor and an internal auditor

Answer 11

Internal auditor assists the board in achieving its corporate objectives
External auditor has statutory duty to give an opinion as to whether the FS present fairly the activities of the business
It is conducted in accordance with ISA’s

Question 12

An internal auditor’s responsibility for fraud and error

Answer 12

1. Directors responsible for prevention and detection
2. Internal audit can assist directors with the prevention of fraud and error by assessing the effectiveness of internal control systems
3. Existence of IA department may act as a deterrent
4. Can contribute to detection by reporting suspicions
5. May be called on to investigate suspected fraud

Question 13

An external auditor’s responsibility for fraud and error

Answer 13

no responsibility for prevention
responsibility to consider the risk of material misstatement in the FS due to fraud and error
provide reasonable assurance that FS are free from material misstatement
responsibility to detect fraud and error which has a material impact on the FS

Question 14

An external auditor may rely on the work of an internal auditor so as to modify the timing, nature or reduce the extent of audit procedures to be performed directly by the external auditor

Answer 14

True

Question 15

Objectives of an auditor when relying on the work of an internal auditor

Answer 15

1. determine whether the work of the internal audit function or direct assistance from internal auditors can be used, in what areas and to what extent
2. determine whether the work is appropriate for the audit
3. if using internal auditors to provide direct assistance, to appropriately direct, supervise and review their work.

Question 16

What should the board consider when considering the need for an internal audit function?

Answer 16

1. Cost of setting up an internal audit department versus the predicted benefit
2. Whether it is more cost effective or desirable to outsource
3. Management’s need for assessing risk and internal control
4. Complexity and scale of an organisation’s activities and the systems supporting those activities
5. pressure from external stakeholders to establish an internal audit dept

Question 17

Why get an external audit if i already have an internal audit department?

Answer 17

external audit is a statutory obligation in many jurisdictions
because it is independent and external auditors are regulated, it enhances the credibility of the underlying subject matter
internal audit presents to management, external audit presents to owners

Question 18

Customer experience audits

Answer 18

internal auditors may be asked to assess the level of customer service. this could be done by phoning in or visiting stores, or reviewing and analysing the results of customer surveys

Question 19

Where the internal audit function is outsourced to the company’s external auditor, there may be a self review threat to the auditor’s independence

Answer 19

True

Question 20

IAS 38

Answer 20

Intangible assets

Question 21

IAS 2

Answer 21

Inventory

Question 22

IAS 16

Answer 22

PPE

Question 23

Why is it the responsibility of the board to create an internal audit function?

Answer 23

As per the UK Corporate Governance code, the board is required to establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long term strategic objectives

Question 24

Who has overall responsibility for the analysis of risk and implementation of internal controls?

Answer 24

the board

Question 25

What does the audit committee do?

Answer 25

monitor and review effectiveness of IA approve appointment/termination of Head of IA review and assess annual IA work plan report on results of IA to board monitor management's responsiveness to IA findings and recommendations

Question 26

role of the internal audit function

Answer 26

provide independent assurance that a company's risk management, governance and internal control processes are operating effectively

Question 27

Qualities internal auditors should possess

Answer 27

Independence - internal auditors must be independent of the activities they audit Objectivity - maintain an independent mental attitude. When they conduct their work, they should consider the facts in front of them without having any preconceived ideas Due skill and care - need for ongoing training, work should be planned, documented, supervised, must adhere to internal audit quality management procedures, need for a multi disciplinary internal audit team, need for internal auditors to have wide ranging skills

Question 28

should an internal auditor report to the finance diretor?

Answer 28

No as this would affect their independence. some of the internal controls and functions that IA review are the responsibility of the finance director who may not act on recommendations that appear to criticise the finance department

Question 29

Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function

Answer 29

True

Question 30

The reason for the absence of an internal audit function should be explained in the relevant section of the annual report

Answer 30

True

Question 31

The internal audit provides assurance to the board to ensure what

Answer 31

assets are safe guarded integrity of financial information effective operation of controls appropriate risk management and mitigation

Question 32

Between the board, audit committee and internal audit function, which section has overall responsibility for the analysis of risk and implementation of controls?

Answer 32

the board

Question 33

What are the two aspects of operational audits

Answer 33

1. Ensure policies are adequate by reading policies, discuss with staff of relevant department, assess adequacy and advise management of improvements required 2. Ensure policies work effectively by identifying controls, observing them, testing them,