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Question 3 mpoort to (a) Compare and contrast the roles of an internal auditor and an external auditor (8 marks) d be a tion, Coffee Plc, operates a national network of bars selling drinks and serving food to the ach bar is run by a full-time manager who employs a number of part-time staff to serve (b] Your organiza general public. E drinks and to prepare and serve food You are the Chief Internal Auditor for Coffee Plc and operate out of Head office with a team of five edures on the qualified staff. As part of your departments remit you carry out analytical review proc accounting figures sent to the central accounting office by each bar manager The company operates automatic tills with staff selecting the item s ordered by the customer and the total calculated automatically At the end of each shift the details and total of all the transactions are sent electronically to the Accounts Department at Head Office. Any cash is counted by the bar manager and banked daily Your team have brought to your attention that one particular bar in central London is not performing as well as other bars in the area and their takings in comparison to casts are much lower. Therefore, you instruct a member of your team to conduct a more in -depth day-by-day analysis of the takings, which shows that the takings are significantly lower on Fridays. This is unusual because Fridays are normally a very busy day. However, no discrepancy between the totals on the tills and the cash receipts has been found. As Chief internal Auditor, you now need to conduct an investigation because you suspect that a member of staff is not entering transactions into the tills and then stealing the cash given by customers Required As Chief Internal Auditor of Coffee plc, explain what procedures you would follow to investigate the suspected fraud. (10 marks) (c) Evaluate the extent to which an auditor, conducting the statutory audit of a company, can rely on the work of the internal auditor, according to ISA 610 Using the work of Internal Auditors? (7 marks) Total 25 marks

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Answer #1

Role of internal auditor and statutory auditor can be summarised as follows:

Role of internal auditor:

  • Objectively assess a company’s IT and/or business processes
  • Assess the company’s risks and the efficacy of its risk management efforts
  • Ensure that the organization is complying with relevant laws and statutes
  • Evaluate internal control and make recommendations on how to improve
  • Identifying shortfalls or gaps in processes
  • Promote ethics and help identify improper conduct
  • Assure safeguards
  • Investigate fraud
  • Communicate the findings and recommendations

Role of a statutory auditor:

  • Auditing the financial statement of the company as per the statutory act and considering relevant ISA.
  • Responsible to give qualified of unqualified audit report.
  • Examine and verification of the transaction based on materiality and on sample basis.
  • Verification of the statutory compliance
  • Auditing of the books of account of the company.
  • Giving opinion on financial statements whether it is true and fair of not.

B. Being a chief internal auditor of coffee plc i would like to follow following procedure to investigate the suspected fraud.

1. Understand and observe the procedure followed by the bar manager to record the daily transactions.

2. Walk through with the standard operating procedure followed by the bar manager.

3. Verification of the records maintained by the bar staff.

4. Verification of the records maintained to record the entry of the customers and tallying the same with the daily count shown by the bar manager in the report sent to head office.

5. Physical verification of the stock records maintained at the bar.

6. Validation of the bar receipt from the stock purchased and sold.

7. Regular physical monitoring the the customer coming in the bar for a week.

8. Comparison of previous period data with current period.

C. The external auditor exercises professional judgment in determining whether the work of the internal audit function can be used for purposes of the audit, and the nature and extent to which the work of the internal audit function can be used in the circumstances.

Determining the Nature and Extent of Work of the Internal Audit Function that Can Be Used Factors Affecting the Determination of the Nature and Extent of the Work of the Internal Audit Function that Can Be Used (Ref: Para. 15–17) A15.

Once the external auditor has determined that the work of the internal audit function can be used for purposes of the audit, a first consideration is whether the planned nature and scope of the work of the internal audit function that has been performed, or is planned to be performed, is relevant to the overall audit strategy and audit plan that the external auditor has established in accordance with ISA 300.

Examples of work of the internal audit function that can be used by the external auditor include the following:

  • Testing of the operating effectiveness of controls.
  • Substantive procedures involving limited judgment.
  • Observations of inventory counts.
  • Tracing transactions through the information system relevant to financial reporting.
  • Testing of compliance with regulatory requirements.
  • In some circumstances, audits or reviews of the financial information of subsidiaries that are not significant components to the group (where this does not conflict with the requirements of ISA 600)
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