MILLORA, ANGELO JAMES W.

BSAC – AAI
AUDITG2 – PRELIM EXAM 10-6-20
CASE 1:
1. How do internal and external auditors differ and how should they relate?
Internal IA’s work within a company providing monitoring and assessment of the different parts of the business if the
case may be. While external auditors work independently form an organization/client and usually provide an audit
opinion, depending on the service, on the financial statements. They are similar as they are crucial to achieving better
governance and that they provide opportunities for the company to grow better and that they conduct audit activities.
2. How does internal audit maintain its independence and objectivity?
In order to maintain objectivity, IA’s should be truly independent from the client being audited and should keep in mind
the un-biased and impartial mindset in regard to engagements of any kind. Independence comes when the IA’s render
their services with impartial and unbiased judgment. As such, they must continue with those mindsets in order to
maintain it.
3. Is it mandatory to have an internal audit activity?
It isn’t mandatory. However, many companies still choose to establish one as it serves as a key resource in identifying
risks and recommending improvements in the operations, controls, and management of a business.
4. What are the critical skills and attributes of a CAE?
ATTRIBUTES
 Independent, Objective, and Ethical – Should be involved in the monitoring of the organization’s operational and
ethical environment and be independent and objective in the assessment of the results of the business
processes.
 Intellectually Curious – Should exercise professional skepticism and analyze different scenarios and be curious so
as to come up with the appropriate results and proper decisiveness.
 Change Agent – This should emit from the CAE, that is, the desire to change for the better or to improve in the
areas both efficient and deficient.
 Focus on Quality – Quality comes when the processes are done right and done with utmost professionalism and
expertise.
SKILLS
 Solid Business, Technical and Process Skills – Should have good understanding of the organization’s industry,
products, services, and methods of doing business, as well as the in-and-outs.
 Basic IT Knowledge – A basic understanding of such will provide the CAE with the ability to effectively assess and
communicate technological risks to management.
 Communication and Listening Skills – A CAE must possess this in order to be effective in articulating risks and
opportunities to broad range of stakeholders and the management.
 People Management – This is to bring out the best potential of different people.
5. What are the skillsets and staffing needs of an internal audit activity?
Exceptional management is one, as it provides the company essential manpower at different times of the day, in turn, it
becomes more efficient. Other than that, proper judgment can be exercised in the assessment of different areas of the
company such finance, operations, and investing.
6. What is internal audit’s role in preventing, detecting, and investigating fraud?
The IA’s are the appropriate resource for assessing the effectiveness of what management has implemented, since they
have the expertise in recognizing the indicators of malpractice, this enables them to assess and organizations internal
controls properly and advise management of the necessary measures to adopt in the case that the indicators are
present.
7. What services can the internal auditors provide for the audit committee?
The internal auditors provide an objective assessment on the state of the organization’s risk, control, governance, and
monitoring activities to the audit committee. Internal auditors can also act as advisors and provide critical services
related to the audit committee’s activities and processes. Internal Auditors should also provide the following to the audit
committee on a regular basis: gathering information, objective assurance and consulting activities related to risk
assessment of the business, confirmation on the adequacy of the audit staff and budget requirements, report the scope
for the audit activities, information on the oversight of other control and monitoring functions, information on emerging
trends and successful and prospective practices in internal auditing.
8. What should be the reporting lines for the CAE?
 Direction and Accountability Reporting Line - The reporting line provides for the IA, the ultimate source of
independence and authority.
 Administrative Reporting Line – relates to the relationship within the organization’s management structure also
the daily operations of the internal audit activity and provides appropriate interface and support for
effectiveness. This would include: Budgeting and management accounting, human resource administration,
internal communications and information flows, administration of the organization’s internal policies and
procedures.
9. What standards guide the work of internal audit professionals?
Mainly, The International Standards for the Professional Practice of Internal Auditing (ISPPIA) outlines the tenets of the
internal audit profession. Such also contains other applicable guidance, regulations and policies that have an impact on
how internal auditing plans and processes are performed, and may provide clarification and portrayal of acceptable and
recommended processes.
10. Why should an organization have an audit committee?
Internal Auditing creates a medium for management and the board, as they assess the ethical environment and overall
status of the operations, and it serves as an organization’s safety net for compliance with the rules, regulations,
legislations, and overall best business practices. Internal controls are those structures, activities, processes, and systems
that help management mitigate the risks to an organization’s achievement of objectives, the role of an IA is to assess
these controls so as to also help it mitigate from having errors or risks. Organizations that lack an internal audit function
are missing out on the valuable benefits that IA’s provide a company, thus either becoming stagnant in value or not
flourishing in potential.
CASE 2:
A. Refer to The IIA’s Code of Ethics. Identify three specific Rules of Conduct relevant to this case. Using the Rules of
Conduct you identify as the context, discuss the ethical issues raised in the case.
 Integrity – Highlighting 1.3 wherein IA shall not knowingly take part in any illegal activity, or engage in acts that
are discreditable to the profession of internal auditing or to the organization. The case being, Brenda and Hal
already broke this rule as Brenda provided the board with fraudulent results and Hal is pushing for the extra
money from the bonus.
 Objectivity – Considering the whole of this rule, highlighting that the IA should not participate, accept, and not
disclose anything and all material facts that may cause impairments in the reporting and in their professional
judgment. This rule was broken when Brenda carried on with her acts; When Hal wanted to hide the IA’s results
under the rug before the bonus; and when Gail was trying to cover up for her supposed goodwill which she was
trying to keep.
 Confidentiality – Highlighting 3.2 of this rule, where in the IA shall not use information for his or her own
personal gain or in any manner that would be contrary to law or detrimental to the ethical objectives of the
organization. This rule was broken when all of the staff were focused on the bonuses too much that they lacked
the conscience of this stunt having detrimental effects on the company in the future thinking they might
outsmart the external auditors, too.
 B. Discuss how the ethical dilemma Mark faces might have been avoided. In other words, discuss specific things
Comstock’s management and/or the internal audit function might have done to reduce the risk of such a
situation arising.
 As there isn’t any perfect, near-perfect or even model ethical company out there, we can only imagine. There
should have been an analysis of the tendencies of fraudulent cases in the industry, and that the audit function
should always be prepared in cases of the indicators of malpractice arise. But what’s worse is when the audit
team or the management themselves allow for the malpractice to happen and continue, in the end-all-be-all of
cases, quitting the job or in extreme cases whistleblowing is even an option, though doing so opens the risk to
public safety of the auditor. The management should have cooperated with the internal audit team/function so
as to help each other mitigate the potential and current risks that are present, since it would be for the benefit
of the company, then it would have been a viable option regardless of if there was a bonus or not. All of them
should have been vigilant and diligent so as to not allow other people to do tasks they weren’t authorized to do
in situations where urgency was not needed.
C. Clearly indicate what you would do if you found yourself in Mark’s position. Briefly explain why.
 Personally, depending on the circumstances of Mark’s life, assuming he is living well, then I’d have had to report
my colleague’s actions to management and follow the bureaucratic process. Since there were policies to be
followed and that looking for loopholes in the rules or even in the laws governing auditing, do not result to
ethical and fruitful results. Doing the latter may only hurt the company even more in the long run as these
actions pile-up so does the tendency of them being caught. Such contrast to my convictions will only lead to a
spiral of guilt and growing up in a toxic environment. This is never beneficial in the end so quitting the job if not
measures or changes took place is an even better option.
CASE 3:
A. How should Pat proceed with the audit committee chair? What obligations does Pat have, if any, to the audit
committee chair? As the CAE, what are Pat’s role and responsibilities with respect to the audit committee and
the audit committee chair?
 Pat, as the CAE, should report to executive management for assistance in establishing directions, support, and
administrative interface; and to the organization’s most senior oversight group, might as well be the audit
committee, for strategic direction, reinforcement, and accountability. Establishing such roles for Pat will help her
achieve independence, objectivity, and organizational stature necessary to fulfill its obligations and mandate to
effectively assess internal controls, risk management, ang governance. The Standards require that the CAE
report to a level within the organization that allows the Internal Audit Activity to fulfill its responsibilities Best
practice recommends that the CAE directly report to the Audit Committee, Board of Directors, or other
appropriate Governing Authority.
B. Discuss the key issues that must be understood and addressed (and with whom) to properly discharge any
reporting responsibilities noted.
 Direct and Accountability Reporting Line (to Audit Committee, Board of Directors, and or other appropriate
Governing Authorities):
o Results on the internal audit activities and other matter the CAE deems necessary, which includes
private meetings where management presence is absent.
 Administrative Reporting Line (Organization’s management):
o Budgeting and management accounting
o Internal communication and information flows
o Administration of the organization’s internal policies and procedures

CASE 4:
A. Describe the specific audit procedures that should be performed to determine whether sales transactions
occurring immediately before and after year-end are recorded in the proper period.
 Analytical Review – Since it is quite unusual for the company to have shipped the products prior to it being
billed, unless the company has an ungodly amount of trust in its clients, other than that of Invoice 8535. This is
the foundation for finding audit evidence.
 Inquiry – IA’s would inquire the accountants, the sales department, and management about how the process of
financial recording occurs and how the order invoice is processed in the system and who authorizes the
shipment of the goods.
 Inspection: In order to Verify or to Vouch the documents presented to him/her. He may reconcile his findings
with that of what was registered in the financial reports. Other than that, the auditor might examine whether
the invoice issued by the client was really based on that specific good, so a thorough check on the inventory of
the specific item might occur. Payment vouchers may also be given notice and to see who approved them.