SUPPLEMENT SIX ASSIGNMENT QUESTIONS

THE INTERNAL AUDITING HANDBOOK

SUPPLEMENT SIX

ASSIGNMENT QUESTIONS
Q.1 YOUR DEFINITION OF INTERNAL AUDIT
Working from memory, set out below your own formal definition of internal audit:

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Q.2 DEFINING THE AUDIT ROLE

A new trainee accountant who has recently joined the finance department has been sent to your
internal audit section for a three-month secondment as part of their training programme. He feels that
internal audit is a minor branch of the external audit function and has written on his study notes a
formal definition of internal audit that reads as follows:

“Internal audit is a checking function that provides test data that may be used
by the external auditor in reducing the need for further testing.”

As the auditor in charge of this secondment, explain to the trainee what is wrong with this
definition and suggest any ways that it might be improved.

Q.3 THE BENEFITS OF INTERNAL AUDIT

Using the formal definition of internal auditing, what in your opinion would be the benefits that
might accrue from resourcing such a service?

Q.4 AUDIT VERSUS MANAGEMENT’S ROLE

You are the audit manager with two staff, Erma and Joseph. When conducting an audit review of the
personnel department your senior auditor Erma (who is the auditor in charge of this assignment) finds
that the senior personnel officer has ten junior staff reporting to her. When the personnel officer is not
available there is no one to deal with difficult queries and these are left until she returns. During the
course of the audit Erma discusses this apparent gap with Joseph, your other senior auditor, and
indicates that she will be including this point in the audit report with a recommendation to balance
the structure. Joseph says that this is not appropriate in that organisational structures fall outside the
scope of audit work. You overhear the conversation and the two auditors ask for your views.

a. Who do you agree with?

b. Explain why you agree with Erma/Joseph.
c. What types of issues relating to a personnel department would fall outside the scope of audit
work?

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Q.5 SCOPE AND ASSIGNMENT PLANNING
You are a senior auditor in an internal audit department consisting of 8 auditors. You have arranged a
meeting between yourself and the Transport Manager (TM) so that the terms of reference for a
planned audit review of the transport function may be agreed. The conversation at this meeting runs
as follows:
You: “I am now ready to start the audit of transport and I want to make sure that we have clear terms
of reference for the work”.
TM: “I suppose you will be checking the level of fuel usage.”
You: “This might arise although we are primarily concerned with controls over this service that
enhance operational efficiency.”
TM: “Last time transport was audited, the auditor checked the level of fuel usage compared to
mileage for each vehicle and examined around 250 log sheets, going back eighteen months. I can
show you the records if you wish to repeat this exercise.”
You: “We are moving towards an operational auditing approach which requires less detailed
checking.”
TM: “I thought you were mainly concerned with uncovering frauds. Several months ago the new
Director of Operations asked me to review transport but I have not had the time to do anything. I
would certainly be interested in any improvements that may be identified via your audit. Is it possible
to have a paper covering the scope of audit work so that I might discuss this matter with my
Director?”

On the basis of the above please draft this paper covering the scope of audit work and how this
might help improve the quality of an operational area.

Q.6 PERSONAL EXPERIENCES

Recall the time you have spent in internal auditing and the variety of audit projects and associated
work that you have carried out.

a. Describe any developments you have noticed in the way audit work has been approached over
the years and whether this indicates a change in the direction of the internal audit services
within your organisation.
b. Why do you feel that these changes (if any) have come about?
c. In your opinion, are these changes a good or bad thing for the overall development of internal
auditing?

Q.7 THE NEW STATEMENT OF RESPONSIBILITIES (SOR)

The Institute of Internal Auditors issued a SOR in 1981 that set out the role and responsibilities of
internal auditing. A more recent SOR was issued in 1991 and made several changes to the 1981
version. We may trace the development of internal auditing as a profession through the way SORs
have changed in that these statements reflect the current view of best professional practice. Assuming
this to be the case, compare and contrast the 1981 and 1991 SORs. Now address the following
questions:

a. List the main differences in the 1991 SOR.

b. Explain the significance of these changes.
c. Does the new SOR reflect fundamental new advances in internal auditing or does it merely
suggest that there have been minor developments?

Q.8 PROFESSIONALISM
There is some debate over the extent to which internal auditing may be defined as a separate
profession on a par with say the accountancy profession.

Please tick the box which in your opinion best fits the description of the current state of internal
auditing.

It has full professional status

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SUPPLEMENT SIX ASSIGNMENT QUESTIONS

It is fast becoming a distinct profession

It has a long way to go in this respect

Explain why you have made this selection.

Q.9 SETTING STANDARDS

Your Chief Internal Auditor has been criticised for a lack of formal internal auditing standards. These
are required as a matter of some urgency. As a result this task has been delegated to you, the Audit
Manager. The CIA has asked for an initial briefing paper that sets out:

a. The role of internal auditing standards and how they might be used.
b. The topics that should be addressed by a comprehensive set of standards along with a brief
description of each one.
c. Suggestions on ways in which such a set of standards might be implemented in the internal
audit department.

Q.10 COMPARING THE TWO MAIN STANDARDS

Compare and contrast the two sets of standards produced by the IIA and APB.

a. What are the main differences?

b. As a result of these differences are the two versions inconsistent?
c. Is it necessary to choose one version for implementation within an internal audit unit or can
both be adopted?

Q.11 HOW COMPLETE ARE THE IIA STANDARDS?

Please study the IIA standards carefully.

Discuss whether or not these standards provide sufficiently detailed guidance in each of the five
key areas (covered by the five general standards) and whether they may be expanded in terms of
providing a more comprehensive coverage of internal auditing.

Q.12 BARRIERS TO INDEPENDENCE

The Directorate of Finance (DF) provides financial services to five main service directorates in
Potsville local authority. Top management in DF has recently been reorganised and the new
organisational chart is set out as follows:

FIGURE Q.12

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 DIRECTOR
DIRECTOROFOF
FINANCE
FINANCE

ADF Chief Finance ADF

Income Accountant Manager Technical
local final 3 audit managers loans &
investment accounts 1 consultancy group
income capital a/cs
financial systems
budgets payroll personnel
general
income returns building management
race relations
micrographics
typing pool
post room

The Finance Manager used to be the Assistant Director (AD) responsible for internal audit with three
audit managers and one consultancy manager reporting to him. The restructuring gave this officer the
additional responsibilities as set out in the chart above. The Finance Manager is also the union
representative for a union called PIS which represents all Directors and Assistant Directors and many
other senior managers in Potsville local authority. This involves representing them in internal
disciplinaries if there are charges laid against them. Note that as part of the audit work, the Audit
Managers may have to investigate senior officers and assist management in preparing a disciplinary
case against them if necessary. A number of recent audit investigations have implicated senior officers
who are members of the PIS Union. You are an external audit consultant who has been asked to carry
out a review of the internal audit function in the above organisation. You are now seeking to assess
whether the internal audit unit is sufficiently independent as part of this review. Based on the above
scenario discuss the following issues:

a. Will the new structure create barriers to independence for internal audit?
b. Do the PIS arrangements pose a problem in this respect?
c. What alternative structure would provide an enhanced level of audit independence?

Q.13 PLANNING AND INDEPENDENCE

Three years ago, your Chief Internal Auditor read about a client based approach where audit services
are marketed and then sold to clients. As a result he decided to provide a response based audit service
whereby managers may request an audit investigation where they are experiencing problems in
particular areas. This has meant that no audit plan has been produced for the last three years. There
are four audit groups who report to the CIA who in turn reports to the Director of Finance. Audit has
been carrying out management requested investigations that include the following examples:
• Enquiry into the way a revenue contract for the supply of computer equipment has been placed by
the organisation and whether this contract represents good value for money.
• An investigation into an internal dispute whereby some buying staff were upgraded and not others,
resulting in a three week strike.
• An investigation into the conduct of a senior officer in the Legal Department who may have
provided inconsistent advice to the Chief Executive.
• A review of several honoraria payments that were given to a group of senior officers, to determine
whether this was properly authorised and falls within the official procedure.
• An investigation into an officer who appears to be claiming overtime that is not being worked.

Most of the audit work is similar to the above and since it is carried out by teams of auditors, there is
very little time left for any planned work. Some of the investigations are so sensitive in nature (where
a senior officer is implicated) that they are carried out personally by the CIA who, as a result, spends
much of his time away from the audit offices. As the senior audit manager second in command after
the CIA, you have been asked by the CIA to discuss the current position with him. The CIA is now
under pressure from the Audit Committee to prepare an annual audit plan and he asks your advice on
the following key issues:

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SUPPLEMENT SIX ASSIGNMENT QUESTIONS

a. Is internal audit operating as an independent review agency in line with professional

standards?
b. How can we publish a formal audit plan when so much of our work depends on referrals from
management that cannot be anticipated and planned for?
c. If we fail to respond to all management requests for assistance, will this lead to a lack of
support throughout the organisation?

How would you respond to each of the above questions?

Q.14 SETTING THE TERMS OF REFERENCE

The quarterly audit plan includes an audit of payroll scheduled to take one senior auditor four weeks.
As the senior auditor in question, you have been asked to meet with the payroll manager to discuss the
pending audit. At this meeting you explain that you will wish to consider the controls over the input,
processing and output from the computerised payroll system. You go on to say that this will involve
assessing the adequacy of controls and the results of audit tests applied to them. The payroll manager
understands why this audit is being carried out, and remembers a similar one completed several years
ago. However, he goes on to explain that he will not have much time to spend with you because of
many developments including:
1. The computerised system used on the weekly payroll (8,000 staff) is now being applied to the
monthly payroll (5,000 staff) with a target live date due in some four months time. This task is
proving difficult with many setbacks.
2. The payroll manager is also required to restructure the payroll division based on a recently agreed
major reduction in the revenue budget. The 35 payroll staff have to be cut down to 28 which
poses a problem since there are no vacancies.
3. One week ago many overpayments on the weekly payroll were discovered as some 50 workers who
have left the organisation within the last year continued to be paid by the system. The Director
of Finance has instructed the payroll manager to recover this £200,000 overpayment.
4. The payroll staff are discussing management issues with their union representatives and are
threatening strike action. The dispute is over a pay rise that was promised some two years ago to
compensate for additional work. Neither weekly nor monthly staff have yet received this rise as
this promise does not appear to have been properly authorised.

The payroll manager has drafted a strategy document in an attempt to deal with these problems.
However his line manager, the Assistant Director, is on long-term sick leave and it is not clear when
he will be available to provide any assistance. As the meeting progresses the payroll manager asks you
whether audit can provide any assistance at all.

Having reference to the above scenario, please answer the following questions:
a. What would be your response to the payroll manager’s question?
b. How might audit help with the above problems (1 to 4)?
c. Would assisting the payroll manager mean that audit is acting as consultants and as a result,
would lose its independence?

Q.15 EXPLAINING THE AUDIT ROLE

The new internal audit strategy requires that audit conduct operational audits that involve, for the first
time, reviewing controls in areas outside of the finance department. The only work that has in the past
been carried out in other departments has been related to the investigation of fraud, where many cases
have been referred to the local police after audit enquiries. The first operational audit that has been
programmed is an audit of the central transport management (CTM) function that caters for some 700
company vehicles. As the audit manager in charge of this audit you have written to the manager of
CTM asking for a meeting to discuss the terms of reference for audit. He has cancelled several
planned meetings using various excuses and eventually met with your senior auditor (Joan Brown). At
this meeting the CTM manager appears very nervous and is very suspicious of Joan. He asks why his
area has been chosen and suggests that there are no frauds taking place because staff are honest and
he keeps an eye on them. He goes on to suggest that audit should look at the central purchasing
section instead, as there have been a number of thefts in the past few months. In fact two years ago he
disciplined and dismissed a member of staff who was investigated by internal audit and found to be
using vehicles for private purposes. He concludes that his staff will be most upset when they hear that
they are to be audited. Joan has described the meeting to you and feels that she will not be well

© Spencer Pickett 1997 5

received by the CTM manager and staff and asks that you meet with the manager before the audit
starts. After discussing the case with Joan, you agree that you should meet with the CTM manager:

a. Draft a comprehensive checklist of areas that would be covered during this meeting.
b. Would you cancel the audit and look into central purchasing instead?
c. Is there any way that the trepidation of the CTM manager could have been avoided before he
met with the senior auditor?

Q.16 WORKING WITH THE AUDIT COMMITTEE

As the Chief Internal Auditor (CIA) in a large local authority, you report to a Director of Finance (DF)
who in turn reports to the Chief Executive (CE). You also report to an Audit Committee (AC) which
consists of the following individuals:
• The CE (Chair of the AC).
• The DF.
• The Leader of the ruling party.
• The deputy Leader of the ruling party.
• The CE’s policy advisor.

As a result of these reporting arrangements you have been undertaking many “special investigations”
for the DF, CE and the Leader. These take up much of your time and the agenda of the AC is based
mainly around the latest special investigation. As an example the last AC (which meets quarterly) had
the following typical agenda:
1. Strike in the personnel section.
2. Investigation into unauthorised redundancy payments.
3. Draft audit report on the XYZ contract.
4. The computer auditor vacancy.
5. New audit project - reducing stockholding levels.
6. Any other business.
A new Chief Executive has just been employed and wishes to review the AC. At his first meeting with
you he asks for a comprehensive report addressing the following key questions:

a. Does the AC have the appropriate constitution?

b. Is there a better recommended structure?
c. Do you have any comments on the type of matters that the AC deals with (refer to the above
agenda)?
Please draft a suitable report along with relevant recommendations.

Q.17 PREPARING A CHARTER

You are an audit consultant who has been asked by a Director of Internal Audit of a large public body
where internal audit is a statutory requirement, to draft an Audit Charter that may be submitted to a
newly formed Audit Committee.

a. What steps would you take as part of the process of preparing this Audit Charter?
b. What key areas would be addressed in the Charter?
c. What would be the procedure for getting the Charter approved?

Q.18 THE ESSENTIAL INGREDIENTS

As the audit manager in charge of a small audit team you have been asked to carry out a
straightforward systems audit. Unfortunately the senior auditor assigned to the audit in question has
been taken ill and will be away for at least a month. The Chief Internal Auditor has authority to obtain
an additional auditor who will work on a short-term, two month contract to carry out the planned
systems audit. This person will have to work by themselves and carry out the audit to acceptable
standards. The CIA has asked you to prepare the terms of the contract so that he might advertise for
someone who would have the overriding ability to:

“perform systems audits to acceptable standards without supervision.”

Against the background of the above information please :

a. Describe each key stage of the systems audit process.

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SUPPLEMENT SIX ASSIGNMENT QUESTIONS

b. Indicate the types of skills that are required for each of these stages.
c. Contrast the roles of the audit manager and the lead auditor (i.e. senior auditor) for each of
the stages of the audit.

Q.19 THE IMPORTANCE OF PERFORMANCE STANDARDS

You have just been appointed as the new CIA for an audit unit consisting of five senior auditors.
During an introductory meeting with your five staff you explain how you will be setting standards for
the performance of audit work. This will cover assignment planning, analysis of information,
findings, reporting and following up. One of your senior auditors advises you that they do apply
formal standards on analysing information and preparing findings. However most work is unplanned
and since a great deal of ad-hoc management enquiries are performed, there are many file notes but
only the occasional report issued. As such there are no formal standards covering these last two topics
(planning and reporting). As a response to this situation, explain:

a. The importance of standards covering the performance of audit work.

b. Why it is necessary to have standards on each of the main components of audit work including
planning and reporting.
c. What problems might ensue if the audit unit failed to formally plan and report its work.

Q.20 LONG-TERM PLANNING

The CIA has expressed some concern about the adequacy of the existing audit plans that are prepared
each year and sent to the audit committee for approval. The committee has complained that less than
50% of planned audits are performed and the plans tend to fall out-of-date after a few months as more
important audits are programmed mainly from requests by management. The annual plan is normally
derived from audits from previous years’ plans that were postponed along with a few new audits that
management has asked to be covered. The audit unit has some fifteen staff (arranged in three teams of
five - headed by an audit manager). They audit head office and twelve local branches spread across the
region. The CIA has asked you (a senior auditor) to research and document suitable procedures for
preparing the annual audit plan for consideration by the audit committee.

a. List the problems with the existing planning arrangements.

b. Draft suitable new procedures for preparing the annual audit plan.
c. Note any factors relevant to the process of getting support for the planning procedures from
the audit committee.

Q.21 PRELIMINARY SURVEYS

An auditor complains to you, the audit manager that he needs terms of reference for any audits that
are assigned to him before he can start the necessary fieldwork. Several times he has been asked to
perform a preliminary survey with a view to setting these terms of reference and has used the same
argument to express his concerns. You decide to hold an in-house training session on the topic of
preliminary surveys and with this in mind:
a. Explain why it is not possible to set terms of reference for an audit without first doing some
background work.
b. Prepare the structure of the training session and discuss each of its key components.
c. What factors would contribute to determining the amount of time spent on the preliminary
survey?

Q.22 ASSIGNMENT PLANNING

Assignment plans provide direction to an audit. They also give guidance where necessary and form
the basis of control over the audit process itself.

Expand on this theme by explaining how the assignment plan can:

a. Give direction to the audit.
b. Provide guidance.
c. Form a control over the audit.

Q.23 SYSTEMS THEORY

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The organisation that you audit has twelve main stores that supply commodities to each of the main
departments that are spread across the country. Each year the internal audit unit takes a large sample
of stock items from three of these stores selected on a cyclical basis. The sample runs into many
hundreds of items of stock which are checked to verify that they were ordered, delivered, stored,
issued and then coded to the correct cost centre. The sample covers high, medium and low value
items. All errors, problems and missing documents are listed and reported to the Assistant Director
who is responsible for the twelve stores’ managers. After having attended a course on systems based
auditing, your CIA asks that this approach be applied to the stores audits in future.

a. Describe the approach that should be adopted for tackling stores using this new approach.
b. Explain the benefits that accrue from applying a systems based approach to the audit of
stores.
c. Discuss whether SBA still involves checking a random sample of stock.

Q.24 SYSTEMS ASCERTAINMENT

An organisation administers a payroll system that caters for some 10,000 employees ranging from
weekly paid operatives to monthly paid officers from seven different departments.

a. How would you go about flowcharting the payroll system?

b. What types of controls would be isolated from preparing this flowchart?
c. What would be the advantages and disadvantages in preparing systems notes in narrative
format as opposed to a detailed flowchart?

Q.25 SYSTEMS EVALUATION

The organisation employs a creditors systems controller who is located in the finance department.
This officer monitors a payments system that has been devolved to each of the five other departments
who process their own expenditure as well as filing the appropriate documentation.

a. What types of controls would you expect to find in the creditors system?
b. What steps could the systems controller take to ensure that each department based payments
clerk was complying with the creditors systems procedures?
c. List some of the questions that might appear in an ICQ for a creditors system.

Q.26 THE CONCEPT OF RISK

You are an internal auditor working for a public authority which administers 115 schools under
current legislation. You have been assigned to an audit team of senior and semi-senior auditors who
audit these schools as part of the ongoing annual audit plan agreed with the Education department.
The Chief Education Officer (CEO) realises that because of the large number of schools they cannot
be audited each year. Internal audit have agreed with the CEO that the schools will be subject to risk
analysis and the following programme will be applied:

SCHOOLS FREQUENCY NUMBER OF

RISK LEVEL OF AUDIT AUDIT WEEKS

HIGH RISK each year 2

MEDIUM RISK every three years 2

LOW RISK every three years 1

So for example, the high-risk schools will be visited annually and the audits will last for two weeks.
Note that each audit is performed by one auditor only. The schools audit covers the adequacy of local
accounting systems and the accuracy of returns sent to the education department. It also reports
whether the schools accounts show a true and fair view and are consistent with other related
information such as staff and pupil numbers.

On the basis of the above circumstances:

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SUPPLEMENT SIX ASSIGNMENT QUESTIONS

a. Set out and explain the factors of a suitable risk appraisal criterion.
b. Describe how you would go about collecting information to undertake the risk appraisal
exercise.
c. If the entire audit programme used for schools audits takes three weeks to complete, how
would you decide which areas to leave out for the audits that run for less than this period?

Q.27 TESTING AND WORKING PAPERS

You have been assigned to an audit of a sundry debtors (SD) system that accounts for over £10m of
debt each year. The system has the following attributes:
• Where an account for services rendered (or goods delivered) has not been paid within the due date
an account is set up as a SD for recovery action.
• Six staff work in the SD section which includes a manager and a senior officer. The remaining
staff are junior finance officers.
• They work on a mainframe based debtors system that is designed to maintain accounts, send out
regular reminders and record comments on recovery action in the form of automated booknote
entries.
• There are some 17,500 live accounts on the system with debts that range from one month to two
years old. Twelve months ago a new procedure was adopted whereby, after three months,
unpaid accounts that are not in dispute are filed with the small claims court. Meanwhile very
old accounts and cases involving larger amounts are sent to the legal department for court
action.
• The senior officer is the designated systems controller who monitors officer interface with the
system and generates special reports for the manager, on the overall progress on recovering
outstanding debt.

During the course of the audit you realise that there are several thousand unpaid accounts that are
over six months old and 500 accounts that have been on the system for over a year. The current
arrangements for debt management are not documented and there are no formal procedures used by
the staff in the way they process and deal with outstanding accounts. Furthermore the manager is
frequently on sick leave and you have only met him twice during the three weeks that you have spent
on the audit to date. On one of these occasions he explained that debtors are written to immediately
the debt is referred to them and at this point he would review their status and categorise them in
various ways e.g., “gone away”, “in dispute”, “instalments arranged”, “no reply” and so on. His staff
would then be asked to pursue the debt in accordance with the assigned status rating.
In view of the above how would you:
a. Check compliance with the procedures relating to the initial categorisation of debt that has
been described to you by the manager?
b. Check whether the amount of debt as set out on the system is correct?
c. Confirm whether the lack of procedures leads to poor debt recovery?
d. Apply statistical sampling to the above mentioned tests?
e. Record the above mentioned work in schedule format and explain why it is important to
design set working papers?
f. Use computer assisted tools in the tasks a to e?
g. Test the view that the absence of the manager impairs the performance of the SD section?

Q.28 INTERVIEWING
Part 1. You have been asked by the CIA to interview a director who has asked for an increased
internal audit coverage in her area of responsibility. The director is responsible for personnel, building
management, cleaning, general administration, health and safety and fire procedures.

a. List the steps you would take in preparing for this interview.
b. Provide a checklist of areas that you would wish to cover during the interview.
c. How would you deal with this request for additional work, bearing in mind that the audit plan
has been set and agreed with the audit committee?

Part 2. After having completed an audit of the transportation function, you have convened a meeting
with the transport manager, Mr. Brown. You begin by discussing some of the main findings arising
from the report, including an inefficient management information system, log books that are not
properly maintained, and many other deficiencies. Before you get to the recommendations that are
designed to tackle each of the key control weaknesses that you have identified, you find that Mr.

© Spencer Pickett 1997 9

Brown is becoming increasingly agitated. After a while he indicates that the audit findings are unfair
and contain what he sees as direct criticisms of his managerial abilities, which he finds upsetting. He
suddenly becomes very emotional and states that he feels victimised by internal audit and is being
used as a scapegoat for all that has been wrong in the transport section for many years (before he
started). At this stage, Mr. Brown requests a comfort break and says that he will return in a few
minutes.

On Mr. Brown’s return decide:

a. How would you bring a sense of calm to the interview?
b. How would you deal with the concerns/accusations made by Mr. Brown?
c. With hindsight, is there a way that this confrontation could have been avoided in the first
place?

Q.29 AUDIT REPORTING

1. The details listed below are relevant to an audit that has just been completed. You may add any new
factors you like and make any assumptions that are consistent with what has been provided.
TERM OF REFERENCE:
To review controls over the company’s car loan arrangements. Interviewed finance staff and all six
personnel officers. Tested a sample of 100 old and new loans.
BACKGROUND:
Car loans given to staff who use cars a lot (essential car users). Loans up to £6,000. Some 2,000
people have loans. Mainly officer grades. Administered by personnel sections in each of the six
departments. Debtor accounts set up in finance. Repayments deducted from salaries each month.
FINDINGS:
Procedures out of date. Each personnel section operates loan scheme differently. Staff are given little
information about repayments. Documents evidencing purchase are not properly checked.
Many errors found in sample examined - e.g. repayments not deducted, cheques made out to employee
not car vendor, old cars not deducted as part exchange, staff leaving without paying off loan, delays in
processing applications, rules unclear e.g. staff given loans while on long-term sick leave, no evidence
of purchase on some loans, cars not used for business, insurance certificates not checked, staff with
loans also taking taxis (paid for through petty cash).
RECOMMENDATIONS:
Comprehensive procedures published (rules made clear), careful checks by personnel - e.g. insurance
seen each year, handbook published for staff, essential car user status removed where miles not
claimed and loans deducted from salary for leavers.

1. Please draft a brief audit report that incorporates the material that has been provided (and
your own material). Remember to set out the various components of the report under clearly
marked headings.
2. You have been asked to put on a two day training programme for junior auditors on standards
for drafting audit reports. If the course is broken down into eight components (i.e. two sessions
in the morning and two in the afternoon for each of the two days), how would you structure the
course for these eight sessions?
3. How would you go about developing and implementing a pre-defined report structure to cover
systems based audits reports prepared by the audit section?
4. Draft a checklist of considerations that can be used by the audit managers when reviewing
draft audit reports prepared by field auditors. The checklist should set out the topic and matters
that should be reviewed for each of the topics.

Q.30 THE AUDIT MANUAL

Sideleigh limited is a large manufacturing company that has an internal audit department of some 27
staff. These are arranged in five audit groups along with a chief internal auditor and an audit
administration officer, broken down on a functional basis as follows:

FIGURE Q.30 ORGANISATION CHART

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SUPPLEMENT SIX ASSIGNMENT QUESTIONS

CIA
admin.
officer

manager manager manager manager manager

financial probity special computer contract
systems audits investigations audits audits

temporary staff as and when required

The CIA had commissioned a review of internal audit by a firm of consultants. They found that each
auditor tended to work to their own methodology and there was little real interface among the five
audit groups. The key recommendation arising from this review was that the CIA should coordinate
the production of an audit manual that would set working standards between auditors and across the
groups. The audit committee had considered the report and asked the CIA to arrange the preparation
of the audit manual as soon as possible.

You are a consultant employed by the CIA to design an audit manual. The current audit manual was
drafted seven years ago and has fallen into disuse. It is suggested that you start with a formal
presentation to the CIA and audit group managers as an introduction to the exercise.

You are required to:

a. Design acetates for use in the presentation in line with a suitable structure for the occasion.
b. Following on from the presentation, what would you put in your detailed work programme for
the work required to cover the task of developing and implementing an audit manual?
c. List the contents of the audit manual that you would prepare. For each item listed describe
briefly the material that would be included.
d. Once the audit manual has been completed, what recommendations are available to ensure
that the manual is maintained and used by auditors?
e. During the presentation to the CIA and audit managers, the group manager for special
investigations suggests that her team be excluded from the exercise as each investigation is
unique and cannot be planned for. How would you respond to this view?
f. For each of the above five teams, indicate the type of approach to designing procedures
relevant to the group. Also describe the extent to which the operational procedures should be
prescribed, act as guidelines or be left to the professional judgement of the auditor.
g. During your review of the audit manual you find that the CIA shows little interest in your
work. He implies on several occasions that the audit manual is mainly to satisfy the request from
the audit committee for defined procedures. Most of the managers apart from one, appear to
have adopted a similar line, taking their cue from the CIA. Furthermore you realise that the CIA
has not allowed any time in audit plans for staff involvement in the project. The audit manual is
also not discussed at the weekly team meetings (CIA and audit managers). Explain why it is
important to get the CIA and manager involved in the audit manual and describe the steps you
would take to stimulate greater input from them.
h. The audit committee has asked for a presentation on the audit manual once it has been
completed. Prepare acetates for this presentation in line with a suitable structure.
i. How would you go about responding to a request from the CIA for the audit manual to be
automated and held on floppy disk?

Q.31 AUDIT ATTENDANCE AT FORMAL PANELS

You have been the CIA of a large internal audit department for one year. You receive a draft
committee report that criticises internal audit for not always reporting possible frauds to the police.
This report states that internal audit must report all suspected frauds to the police and be allowed no
discretion in this matter. The incident referred to in the report relates to a case dealt with three years
ago, involving a manager in the finance department who was investigated and dismissed for
defrauding the petty cash system. This ex-employee has recently been charged with another serious
fraud and an external enquiry panel (chaired by Mr. C) was asked to investigate the background to his
dismissal from your organisation (hence the committee report). You ask to see the relevant audit
manager (Jack) who provides an outline of the following facts:

© Spencer Pickett 1997 11

1. Two years ago, Jack used to be responsible for auditing the Finance Department (DF). He now
covers audits of contracts.
2. Jack recalls assigning an assistant audit manager (John) to the investigation. John has told Jack
that he had met with senior management and the Director of Finance several times during the
course of the investigation, but cannot remember if the question of police referrals was
discussed.
3. Jack explains that he generally refers all cases to the police and cannot understand why this one
was not passed over to them.
4. The case file shows no evidence of meetings with management or mention of the police.
5. Both Jack and John met with Mr. C and the Enquiry Panel three months ago and told the Panel
that they cannot recall whether they advised management to refer the case to the police.

You talk to the Director of Finance who tells you that Jack did in fact ask finance management to
involve the police, but this was declined as the amount of money involved was not considered
material.

Consider the following issues:

a. What action should now be taken on the draft committee report in terms of comments from
the CIA?
b. What weaknesses in internal audit’s procedure have now been highlighted?
c. What direction should now be taken to remedy these weaknesses?

Q.32 STANLEY - CONDUCT UNBECOMING

You are the audit manager responsible for a team of three senior auditors, including Stanley who has
no formal audit training. You have just received a complaint from the Director of Operations that
reads as follows:
“…I refer to your senior auditor, Stanley, who is auditing contract xyz. My
contracts manager, Frank Cosby, has told me that Stanley interviewed him
yesterday and accused him of doctoring contract documents. Frank went on
to say that Stanley refused to allow him to leave the room unless he admitted
this allegation.”

“I find this behaviour unacceptable and I am asking that you take the
strongest action against your senior auditor…”

You have spoken to Stanley who says that this is the only way to get the real truth from these contract
staff. On further investigation, it would appear that Stanley tends to intimidate staff during his audits.
One such person (a clerical officer) has had a nervous breakdown after dealing with Stanley on a
difficult audit where the relevant accounts that Stanley was reviewing were incorrectly prepared.

a. How would you go about investigating this problem?

b. What is your view of the approach adopted by Stanley?
c. On the basis that the allegations are well founded, draft an appropriate response to the
Director of Operations.

Q.33 THE CLUB BAR

You are the Chief Internal Auditor of a large organisation in charge of 22 auditors. The organisation
has a club bar at Head Office for the benefit of its employees. This club bar is some 200 yards from the
audit offices and consists mainly of a bar and darts board. It is open lunch times from 12 to 3pm and
in the evenings from 4pm to 11pm. Some of your auditors would occasionally attend this venue at
lunchtimes, although this was mainly on Fridays where they would stay for one or two drinks. One
auditor, Dan David, is a friend of the bar staff and visits more frequently. He would tend to stop there
a few evenings after work, drinking with friends and colleagues. Dan is very active in club affairs. As
a result Dan has organised darts tournaments, Friday night dances and special events that were always
well attended by employees. All went well for a few months until it became clear that a hard-core of
some four or five auditors led by Dan, were playing darts at the club bar every lunchtime and were
sometimes late back for work. There was also a noted increase in the level of alcohol consumed and
this made audit staff somewhat noisy and boisterous in the afternoons. Dan was well known for his
drinking and he smelt of alcohol most afternoons after lunch at the club bar, despite being a good

12
SUPPLEMENT SIX ASSIGNMENT QUESTIONS

worker. After several months, audit assumed a reputation for lunchtime drinking stints and a joke
went around that;

“if you ever wanted to find an auditor, you should visit the club bar.”

Dan’s audit manager, Mike, appears to be a close friend of Dan and his family, and seems to be
turning a blind eye to the problem. Note that the organisation has no defined policy on alcohol
consumption. In fact your line manager, the Director of Finance, is known to like a drink both at
lunchtime and after work, and Dan has often referred to this fact when anyone has questioned him
about his drinking.

a. Do you think that the scenario described above represents a problem for the internal audit
department?
b. Is there a difference between drinking at lunchtimes and drinking only after work?
c. Is there any action that you now need to take bearing in mind the example set by the Director
of Finance?

Q.34 CO-ORDINATING INTERNAL CONTROL TEAMS

You have just been appointed the new CIA for a large organisation, where internal audit is based in
the Finance Department. You have been introduced with your staff of ten auditors (one of whom is
your deputy, Louise). Louise describes how quarterly audit reports are submitted to the Audit
Committee. These reports set out the work carried out by the internal audit department during the
previous quarter. On reading your job description (JD), it appears that your main role is to set plans
for the audit department, review the work produced and then prepare quarterly and annual reports
based on this work. However in item 15.b at the end of the JD you note the following:

Each of our five main departments, except the Finance department, has a
small internal control team (ICT) which reports to the appropriate Director.
However, the CIA will monitor the work carried out by these ICTs and ensure
that they meet acceptable standards. He will also ensure that their work is
included in the CIA’s quarterly report to the Audit Committee.

You ask Louise about this issue and she replies that three out of the five departments do have ICTs
that consist of around two to three staff each. She goes on to say that they probably carry out basic
testing work and investigations into minor breaches of procedure. She is not sure why the other two
departments appear not to have ICTs. In essence, internal audit knows little about these ICTs as they
have never prepared reports for the Audit Committee.

a. Do you feel that these internal control teams may be significant to the internal audit role?
b. What arrangements should be made to meet item 15.b of your job description?
c. What would you look for when reviewing them?
d. Do you feel that it would be better to allow the ICTs to report directly to the Audit Committee
or should you report on their behalf?

Q.35 ISSA AND THE ENDLESS AUDIT

You are the CIA in charge of four audit groups as follows:
Group 1: contract audit
Group 2: special investigations
Group 3: systems audits
Group 4: probity audit
Each group contains a manager and four auditors (two senior and two junior). One of the junior
auditors, Issa Olman, was appointed six months ago as an audit trainee and assigned to the systems
group where she has worked quite well. As part of her career development she is spending six months
in the contract audit group after which she will be transferred to the probity team. In the contract
group she was asked to carry out extensive testing of hundreds of invoices provided by one IT supplier
in support of a high value claim. After one month of this exercise Issa appeared very demotivated and
started taking a great deal of sick leave. After two months on the contract group, Issa asked for a
transfer. Her manager however explained that she could not leave until the audit was completed
whereupon Issa took more certificated sick leave and laboured at the task when she was at work. This

© Spencer Pickett 1997 13

stalemate continued for a further two months and the probity audit manager has complained that he is
waiting for Issa and progress on the group’s work programme is being impaired. The contract audit
manager on the other hand insists that Issa must complete the work before he can release her.
Meanwhile Issa is obviously demotivated.

a. Is there any way that this problem could have been avoided in the first place?
b. What would be the best course of action?
c. Are there any improvements that could be made to the staff work rotation plans?

Q.36 JEFF AND HIS GOLD WATCH

You are the Chief Internal Auditor in charge of three audit managers, who in turn run two audit
groups (each group contains four auditors). One of your audit managers has left and you are assessing
which of the six senior auditors should be asked to act-up into this vacant post until it can be filled.
Jeff Johnson, the senior auditor who appears most appropriate, has a formal accountancy qualification
and over ten years experience in internal audit. Jeff is in the audit group that now has no audit
manager. You decide to discuss Jeff’s position with the remaining two audit managers, Frank and Sue.
At this meeting the conversation runs as follows:
Frank: I have known Jeff for many years; he is a solid auditor with more experience that any of us.
Sue: That’s true, but he is very demotivated. He often comes to work late and seems more interested
in socialising with the other auditors. Perhaps he has been in audit too long?
You: He has the qualification and experience. I admit that he does not seem to shine like some of the
other staff.
Frank: Jeff has told me that he is not really interested in promotion as he does not see work as his
main preoccupation.
Sue: That’s right. Apparently he has a very hectic social life and sits on many different committees
and social groups. My senior auditor, Derick Mason, is much more ambitious.
You: Well we could choose from several auditors but you appreciate that our policies require us to
select only those whom we deem suitable, before arranging informal interviews. I feel that Jeff is the
only suitable candidate.
Frank: We all agree but, I would suggest that he will not be interested and will not want to work the
extra hours.
You meet with Jeff and ask him to apply for the acting up. He declines and recommends Derick
Mason who he says, wants the job more than him. You speak to Derick who is surprised and tells you
that although Jeff seems laid back and does not work late in the office, this is misleading. Derick goes
on to explain that Jeff works at home on audits although he does not publicise this attribute.
Apparently Jeff feels that he has been passed over for promotion in the past and received little support
from his ex-manager. You arrange to meet Jeff again the following day.

a. Note a list of questions for this second meeting with Jeff?

b. On the basis that Jeff is suitable for the job, how would you persuade him to apply?
c. Having decided to informally interview Jeff and Derick, list the draft questions that will be
used for their interviews.

Q.37 BOB AND THE PAPERLESS OFFICE

You are an external consultant who has been asked to carry out a review of the filing systems of a
large private sector internal audit department. One area that you generally consider in such a review is
the extent of automation with a view to promoting the “paperless office”. You arrive for a meeting
with one of the three audit managers, Bob Price. He takes you into his office and removes a pile of
files from a chair before inviting you to sit down to discuss the scope of the review. You observe many
bundles of audit files and assorted correspondence located on his three desks and many chairs, and
scattered around the floor of his room. After opening pleasantries, the conversation is as follows:
You: Do you have your own filing system?
Bob: The large filing cabinet used to belong to a previous audit manager who left two years ago. I
keep my files out in the open so they are readily accessible. My room is locked every night so there is
no security risk.
You: Do you use a networked PC with E-Mail facilities?
Bob: Yes, this was installed some three months ago but I have not got a password so I do not use E-
Mail. I write my memos by hand.
You: Why are there dozens of files all over the room with no labels on them?

14
SUPPLEMENT SIX ASSIGNMENT QUESTIONS

Bob: I need to sort them out but I am too busy. My junior auditor wants to clear up the mess but I
need to tell him where to put the files. Anyway it is more important to get the work done than spend
time filing papers.

a. What are the main implications for internal audit of such a mess in the audit manager’s
office?
b. What would be the benefits from maintaining a tidy office and promoting the use of
computerised files?
c. What plan of action would you recommend for Bob in terms of sorting out his files and
papers?

Q.38 TENDER EVALUATION AND THE PRE-AUDIT THEORY

As the Chief Internal Auditor, you are in charge of three audit groups. One group specialises in
contract audit and employs staff who have a background in this field. This group receives copies of all
draft reports that seek approval for proposed capital and revenue contracts, which they comment on
before the reports go to the Contracts Approval Committee. The manager of this group also chairs the
Tender Evaluation Panel that considers all bids for large contracts, before the contracts are awarded.
This is argued to be “pre-event auditing” where suppliers may be vetted before they are chosen. As a
result of an external review of internal audit, a draft report was sent to you from the reviewer. This
report criticises the internal audit presence on Tender Evaluation Panels as an inappropriate use of
audit resources. In contrast, the audit manager in question feels that this role is important as a guard
against fraud and corruption in contract letting. Meanwhile a senior director has aired the view that
this must impair audit’s ability to review these contracts at a later date.

a. What do you think of your audit manager’ view that he should be chairing the Tender
Evaluation Panel?
b. What do you think of the director’s view that this impairs audit independence?
c. Write an appropriate response to the party who reviewed your section (internal audit) that
addresses the question of audit’s role on the Tender Evaluation Panel.

Q.39 FRAUD INTERVIEWS

You are the audit manager for the investigations audit group. Ronald Barlow is a senior auditor who
works on the contracts audit group, spending most of his time assisting in contract arbitration. Ronald
approaches you late one afternoon and tells you about a problem he has with his latest audit.
Apparently Ronald is looking at a cleaning contract that implicates several managers, employed by
your organisation, in a possible fraud. He has been asked to formally interview these managers and
find out why they awarded the contract to a cleaning contractor who is not performing satisfactory
work. Ronald is not sure how to tackle this task as he has never done this type of work before, whilst
his manager also has very limited fraud experience.

a. What would be your advice to Ronald?

b. What type of problems might ensue if an inexperienced auditor is allowed to conduct fraud
interviews?
c. Is there anything that the CIA can do to address this situation?

Q.40 IMMERSED IN DETAIL

You are the newly appointed audit manager in charge of the financial systems audit group. You hold a
group meeting to discuss the audit approach that is currently being applied with a view to agreeing a
common methodology for the future. There are two senior auditors and one junior in your group in
addition to yourself. At the meeting you ask each group member to discuss their approach and you get
the following responses:
Tanya (senior auditor): I feel we must explore the systems problems in detail. My last audit (the
Creditors system) took three months to complete and I can say that I became an expert in this
payments system. I have analysed every aspect of the Creditors system from start to finish and
although this has taken a long time, I have flowcharted every process. Last month I issued an 85 page
report on creditors, although so far, management have failed to respond to my findings.
Raymond (senior auditor): I have developed a full interrogation facility which enables me to test
100% of the payroll files by using computerised data that has been downloaded onto my PC. I have

© Spencer Pickett 1997 15

been looking for duplicates, incorrect codes and employees that do not reconcile with the personnel
system. This means that I can take any financial system, download the data and perform endless
testing routines on the extracted data. My audits are thus computerised and I simply test and report
any resulting errors to management. So far I have downloaded and tested 25% of the payroll and I
will tackle the last 75% over the next few weeks.
Susan (junior auditor): I am assisting Raymond on the payroll audit. This mainly involves data input
and checking printouts.

a. What do you think about Tanya’s approach?

b. What do you think about Raymond’s approach?
c. How would you introduce a systems auditing methodology into your new audit group?

Q.41 SOPHIA’S TRAINING PROGRAMME

You are the CIA in charge of a section of some 20 auditors. You receive a memorandum from a junior
auditor, Sophia, that requests support for professional audit training, based around a day release class
at a local college. The course is fairly expensive and would last for two years. Your impression of
Sophia is that she is a fair worker but not really interested in a career in internal auditing. She has
spent three years working on various low-level testing programmes as part of a system audit team and
as such has limited experience of other audit work. In fact Sophia is one of the auditors who has not
developed much over the years. She does not use the computer very often, being happier with hand-
written schedules rather than computerised spreadsheets. Her manager, Bob, is in charge of the system
audit team. You have to approve all requests for training before they go up to Personnel for final
approval. The organisational criteria for training approval are defined as:
• it should be relevant to the job.
• the officer must be given associated work development.
• there must be a good chance of exam success.

a. How would you decide whether to support the application or not?

b. How would you implement Sophia’s development programme?
c. How could you assist Sophia in passing the examinations?

Q.42 USING CONSULTANTS IN AUDIT

As the Chief Internal Auditor of a substantial internal audit function, four audit teams report to you.
One team consists of five efficiency experts who were transferred from management services to
internal audit some six months ago after a major organisational re-structuring exercise. This team has
been the subject of major criticisms for regularly reporting high levels of VFM savings that could not
be achieved in practice. You were informed by your line manager, the Chief Executive, that this team
is being disbanded and all save two of the consultants will be made redundant. After an interview
board, two efficiency experts, Fred and Ginger are retained for assimilation into the remaining three
audit teams. These two officers are highly graded but, through no fault of their own, know little about
internal audit. Your three audit managers are very worried that they will not be able to perform as well
as your audit staff but are being paid much more in terms of their grade and annual salary. The two
officers have a background in operational research. At an audit managers meeting you have to decide
what to do with Fred and Ginger in terms of integrating them into the audit department. The three
audit teams have the following special responsibilities:
Team 1 - special investigations and probity audits.
Team 2 - system audits.
Team 3 - contract audits.

a. How would you handle the criticism that Fred and Ginger, although senior officers, have no
audit training?
b. How would you handle the task of placing them into an audit group?
c. Do you feel that non-audit specialists can have a place within an internal audit department?

Q.43 UTILISING INFORMATION TECHNOLOGY

As the CIA of an audit department consisting of fifteen senior and junior staff you are concerned that
there is very little use of computerised data from the many automated systems that the organisation
uses. As a result, you have asked your audit manager how far audit is utilising computer systems
interrogation. He provides a brief report with extracts that read as follows:

16
SUPPLEMENT SIX ASSIGNMENT QUESTIONS

A few auditors use our mainframe terminal that links audit into the main
corporate financial system. However only three auditors have passwords to
the key systems. Twelve auditors do not use this facility at all while only two
of those with passwords can be said to be proficient in on-line interrogation
(i.e. Bobby and myself). The interrogation only allows us to view selected
accounts and we cannot prepare special reports or download data for audit
testing. There are many smaller local area networks where we have no on-
line access. For these systems, we tend to use print-outs requested from
management when reviewing any specific data.

Your audit manager confides in you that most auditors show little interest in systems interrogation and
he is not sure what to do about this. While there are several PCs in the department, they are used
exclusively by himself and Bobby. He reminds you that there is provision in the organisation’s IT
budget for a substantial purchase of computer equipment that could result in every auditor having a
PC.

You have mentioned this problem to your line manager, the Chief Executive, who asks you to
prepare a suitable report that covers the following points:
a. The reason audit needs more computers and interrogation facilities.
b. A formal bid for funds to be allocated from the IT budget setting out what should be acquired
and why.
c. The way in which you would encourage auditors to become more computer-literate and so
fully utilise this additional equipment.

Q.44 THE MYSTERIOUS ROOM 66

Room 66 is a secure room on the top floor that belongs to internal audit and the keys are held by the
Audit Admin. Officer (AAO). The room was originally obtained by a previous Head of Internal Audit
(HIA) who had the commendable idea of using it as an interview room as well as the audit library.
Since he left twelve months ago it has fallen into disuse and now holds old files, a few remnants of
out-of-date audit books and an old table and chair. Because the room is locked, it does not get cleaned
which means it is now very dusty and untidy. There has been no HIA for a year and you have just been
appointed to this post. The AAO has told you that there is little that can be done with the room
because of the many old files that are kept there. Although they are no longer used, these files contain
confidential information and so must be kept under lock and key. The AAO goes on to explain that
any interviews are usually held at the auditor’s desk which has proved to be somewhat inconvenient.
The Payroll Manager has expressed an interest in using room 66 as a place to hold his weekly group
meetings and has asked you whether it is still required by internal audit.

On the basis that you wish to retain this room as an interview room and audit library, list the
steps that you now need to take.

Q.45 COMPREHENSIVE REVIEW OF INTERNAL AUDIT

You have just been appointed as the new Chief Internal Auditor for a large public sector organisation
that provides the following services to the local community:
• Social Services.
• Housing.
• Education.
• Highways and sewer maintenance.
• Refuse collection and other related services.
• Sport, library and other leisure facilities.

The previous CIA resigned several months ago after much deep seated criticism of the audit function.
Many of the problems are highlighted in a recent external review of the audit department. On your
arrival you find that the audit department is structured as follows:

© Spencer Pickett 1997 17

 FIGURE Q.45

CIA

Group A Group B Group C Group D

Contract audit Computerised Schools & Housing &

social services & financial leisure audits refuse &
systems investigations
4 Staff 5 Staff 6 Staff 4 Staff

After meeting with the four group auditors you realise that auditors spend most of their time
performing major investigations that can each last many months. These are essentially investigations
into matters of fraud and irregularity including breach of procedure resulting in internal
disciplinaries. No systems work is done and since all frauds are referrals from management, there are
no audit plans or quarterly/annual audit reports. The audit service is a response based one with a
continuous stream of special projects carried out on behalf of the Director of Finance (your line
manager), the Chief Executive and various Directors and Assistant Directors. The previous CIA felt
that this was appropriate because the organisation is dogged by wide-scale fraud and corruption. Most
critics agree however that this problem is due to a lack of good controls which is perpetuated by the
failure of internal audit to carry out any reviews of systems of internal control. The group auditors
convey a sense of frustration and concern over the lack of direction or communication that was
provided under the former CIA. The audit department has a reputation as an unruly bunch of
characters with no professional standards at all. This is particularly worrying in view of recent
legislation that means in-house internal audit and other financial services will have to compete with
private sector firms in a few years. If an external supplier wins the contract for the provision of an
internal audit service, then your staff will be made redundant. It would appear that most of them have
already resigned themselves to this fact. The Audit Committee consists of the CIA, Director of
Finance, the Chief Executive (CE) and a selection of Councillors from the local party in power. This
forum has not met for six months but the members are eager to see a new and improved audit service
under your guidance. The Chair (the CE) has asked, as your first priority, that you provide a
comprehensive paper setting out your proposed strategy for the next twelve months. This must be
ready in time for a specially scheduled meeting of the Audit Committee in five weeks time.

a. How would you go about developing an appropriate strategy?

b. What problems would you envisage in implementing your strategy and how might these be
minimised?
c. Prepare a suitable strategy to cover the internal audit department over the next 12 months.

Q.46 TRAINING
The internal audit department has the following staff whose background is shown in brackets:

FIGURE Q.46

18
SUPPLEMENT SIX ASSIGNMENT QUESTIONS

CIA qualified accountant

Audit Audit Audit

manager manager manager
contracts investigations systems
(unqualified) (unqualified) (unqualified)
Asst AM Asst AM Asst AM
quantity statistician IT expert
senior auditor senior auditor senior auditor
unqualified Personnel accountant
junior auditor junior auditor junior auditor
unqualified unqualified unqualified

The audit department has recently been reviewed by an external audit consultant who has reported as
the main recommendation the following:

“There is a major lack of consistency in the way audit work is performed due
to the different backgrounds of the members of the audit department which is
impairing the resultant performance.”

“We recommend the appointment of an additional auditor who will be

responsible for audit training, quality assurance and the audit manual (which
is now out-of-date).”

“The large training budget, which has not been used for many years, should
now be applied to the training and development of audit staff by this new
auditor.”

The CIA has been aware of quality problems that have led to internal audit’s poor reputation. He
accepts the above recommendations and has employed you as the new audit training co-ordinator.

The CIA has asked you to prepare a paper covering the following matters for discussion at the
next audit manager meeting:
a. Detail the main items that will be included in the audit manual in the section on audit
training.
b. Describe the steps that would be required for a training needs analysis.
c. What types of training would be available and how they would be implemented?
d. How would the success of the training programme be measured?

Q.47 INDUCTION TRAINING

You are a senior auditor in an audit unit consisting of twelve senior and two junior auditors. The
Director of Finance has recruited five trainee accountants who have just graduated from the local
university. They will be spending their first six months in internal audit before transferring to the
accountancy department. The CIA has asked you to design a two-day induction training course that
will act as an introduction to internal auditing for these five trainees.

a. What would be the formal objectives of such a course?

b. Describe how this course would be structured, including the subject matter and how it would
be presented.
c. How might you schedule the work for the six months that the five trainees will be spending in
internal audit?

Q.48 IT SECURITY POLICY

You are the computer auditor for a large organisation that has six main departments, that all have a
heavy involvement in IT. There are large corporate financial systems comprising of payroll, the main
financial system, creditors, debtors, insurance, pensions, along with Personnel and many other non-
financial systems. Some of these systems are decentralised, and allow direct on-line access to each of

© Spencer Pickett 1997 19

the six departments. There are also many local systems, some on the mainframe (ICL VME) and
others on separate UNIX boxes. Most systems can be accessed via a wide area network, which also
provides an office admin. system that most employees use. You and your line manager (a group
auditor) have met with the organisation’s Computer Manager to discuss work he has been doing on
the corporate IT strategy. At this meeting you point out that there is no mention of IT security in the
draft strategy or any other corporate IT document. The computer manager admits that there is no real
IT security policy apart from individual efforts by various systems administrators (who issue
passwords for the various computer applications). Systems administrators for financial systems are
based in the Finance Department. For other systems they are based in the department that runs the
system. Their efforts are not co-ordinated in any way, and their roles vary greatly. The Computer
Manager goes on to request that you provide an input into the IT security policy as part of the audit
consultancy services. Your manager agrees that the areas to be covered by the IT security policy can be
drafted by internal audit and asks you to perform this task.

Based on the above scenario, draft the areas to be covered by the IT security policy and describe
what should be included in each part.

Q.49 Designing a new computer audit function

Your organisation employs 10,000 people organised in ten departments. There are two large
mainframes (ICL and McDonnell Douglas), a minicomputer (Bull), an assortment of UNIX systems
and hundreds of PCs, some networked and some stand alone along with a Novel network. There is no
IT security officer. The internal audit unit consists of some twelve auditors. You have just been
appointed Audit Manager (systems)) and your line manager, the Chief Internal Auditor, has agreed
that a new Computer Auditor post (reporting to you) will be funded and recruited to.

Please draft the job description and specification for the new Computer Auditor post.

Q.50 FRAUD INVESTIGATIONS - OVERVIEW MODEL

A new chief executive has just been appointed to a large public sector organisation that employs
15,000 people, organised into 12 departments. There have been many problems in the past with high
levels of reported fraud and indiscipline by employees (many of whom have been dismissed). The new
CE has asked you, the Chief Internal Auditor, to develop an anti-fraud policy to tackle this problem.

Draft a comprehensive paper setting out the structure of this policy and areas that should be
covered.

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