Session IAP 13

Fact Pattern:  An internal auditor has submitted a first draft of an engagement communication to an engagement client in preparation for an exit meeting. An excerpt is below.

The engagement was performed to accomplish several objectives:

- Verify the existence of unused machinery being stored in the warehouse.

- Determine whether machinery had been damaged during storage.

- Review the handling procedures being performed by personnel at the warehouse.

- Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.

- Calculate the current fair value of warehouse inventories.

- Compare the total value of the machinery with accounting records.

It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another 5 were on the loading dock ready for conveyance to the production facility. 12 others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but 1 was in good condition. It was confirmed by the internal auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.

At a minimum, the following elements should be included in final engagement communications: purpose, scope, and results. Results include observations, conclusions (opinions), recommendations, and action plans. Which of the following describes all of the elements missing from the engagement communication?

• Scope, conclusion, recommendation.

• Observations, conclusion, recommendation.

• Purpose, result, recommendation.

• Purpose, scope, recommendation.

Fact Pattern:  During an early phase of an extensive engagement to evaluate a manufacturer’s inventory management system, an internal auditor reviewed inventory levels. During this review, the internal auditor discovered that there had been recurring stockouts for some high demand items and that this had led to expensive expediting and work stoppages. Further investigation revealed that the purchasing department had regularly ordered these items based upon purchase orders produced automatically by the computerized inventory system. The quantity orders had been based on an economic order quantity (EOQ) model included in the computerized inventory system. The internal auditor determined that the EOQ model was properly designed and that the problem had resulted from failure to update data in the model concerning the time required for delivery.

If the internal auditor decides that the situation warrants management’s immediate attention and the entire engagement will not be completed for several weeks, communication with management will probably take the form of a(n)

• Oral report to senior management.

• Summary written report to operating management.

• Written interim report to operating management.

• Regular written report to operating management.

Internal auditors discuss results with engagement clients and certain other parties before issuing the final communication. At this exit conference,

• Managers with knowledge relevant to the engagement should be present.

• A disinterested party should lead the discussion.

• The primary purpose is to improve relations with the client(s).

• The primary purpose is to identify management’s actions and responses.

The director of sales asks for a count of customers grouped in descending numerical rank by

(1) the number of orders they place during a single year and

(2) the dollar amounts of the average order.

The visual format of these two pieces of information is most likely to be a

• Pareto diagram.

• Cost of quality report.

• Kaizen diagram.

• Fishbone (Ishikawa) diagram.

A manufacturer mass produces nuts and bolts on its assembly line. The line supervisors sample every nth unit for conformance with specifications. Once a nonconforming part is detected, the machinery is shut down and adjusted. The most appropriate tool for this process is a

• ISO 9000 audit.

• Fishbone (Ishikawa) diagram.

• Cost of quality report.

• Statistical quality control chart.

The internal auditors have completed an engagement in the purchasing department and are preparing their final report. Throughout the engagement, the auditors have shared results with the purchasing manager. Which of the following is not a goal of the final audit report?

• Describe the technical aspects of the methods used during the engagement.

• Assure agreement with the observations and recommendations.

• Resolve conflicts.

• Improve relations between the internal audit activity and the purchasing department.

An internal auditor plans to test the accuracy of recorded quantities-on-hand in an inventory file against the actual quantities-on-hand. Under which of the following conditions is the auditor least likely to use a stop-or-go sampling plan?

• The auditor plans to determine an upper precision limit for the estimated percentage of deviations contained in the population.

• The auditor plans to draw a relatively small sample size.

• The auditor expects the population to contain a high rate of deviations.

• The population to be sampled is very large.

You are conducting an engagement to evaluate the organization’s marketing effort. You agreed to keep the marketing vice president informed of your progress on a regular basis. What method should be used for those progress reports?

• Briefing by the appropriate marketing first-line supervisor.

• Written reports signed by the chief audit executive.

• Copies of working paper summaries.

• Oral or written interim reports.

Management is legally required to prepare a shipping document for all movement of hazardous materials. The document must be filed with bills of lading. Management expects 100% compliance with the procedure. Which of the following sampling approaches is most appropriate?

• Attribute sampling.

• Variables sampling.

• Discovery sampling.

• Targeted sampling.

Fact Pattern:  An internal auditor has submitted a first draft of an engagement communication to an engagement client in preparation for an exit meeting. An excerpt is below.

The engagement was performed to accomplish several objectives:

- Verify the existence of unused machinery being stored in the warehouse.

- Determine whether machinery had been damaged during storage.

- Review the handling procedures being performed by personnel at the warehouse.

- Determine whether proper accounting procedures are being followed for machinery kept in the warehouse.

- Calculate the current fair value of warehouse inventories.

- Compare the total value of the machinery with accounting records.

It was confirmed that, of the 30 machines selected from purchasing records for the sample, 13 were present on the warehouse floor and another five were on the loading dock ready for conveyance to the production facility. Twelve others had already been sent to the production facility at a previous time. An examination of the accounting procedures used at the warehouse revealed the failure by the warehouse accounting clerk to reconcile inventory records monthly, as required by policy. A sample of 25 machines was examined for possible damage, and all but one was in good condition. It was confirmed by the internal auditors that handling procedures outlined in the warehouse policy manual appear to be adequate, and warehouse personnel apparently were following those procedures, except for the examination of items being received for inventory.

When an internal auditor is communicating with engagement clients, both situational factors and message characteristics can damage the communication process. An internal auditor has only limited control over situational factors but has substantial control over message characteristics. Which of the following is a message characteristic that the internal auditor who prepared the engagement communication overlooked?

• Prior encounters with the engagement client.

• Noise.

• Nature of the audience.

• Sequence of message.