Question

3) Role of internal audit function

30 Chapter 1: Auditing and Internal Contrel Management ii External auditor i Internal audit To whom should the Director of Internal Audits report. Explain your answer. Comment on the audit committee member's per- spective as to the committee's current composition. 3. Role of Internal Audit Function Nano Circuits Inc. is a publicly traded company that pro- duces electronic control circuits, which are used in many products. In an effort to comply with SOx, Nano is in the process of establishing an in-house internal audit function, which previously had been outsourced. The company began this process by hiring a Director of Internal Audits. Nano Circuits' CEO recently called a planning meeting to- discuss the roles of key corporate participants regarding the implementation and maintenance of internal controls Central to this decision is the organizational placement of the future internal audit function and to whom the new Director of Internal Audit should report. In addition, Internal Auditor Independence Technical Solutions, Inc. is expanding and reorganizing its IA function. Currently the Director of Internal Audit Sharon Kalafut, reports to the corporate controller, who receives and reviews all internal audit reports. Kalafum forwards copies of the internal audit reports to the audit committee of the board of directors and to the manager directly responsible for the function being audited An issue of contention among the managemens team pertains to which department or function th Director of Internal Audits should report. Marti. Stevens the CEO wants to ensure that Technical Solu tions complies with the SOX and that the internal aud department is structured such that it strengthens th company's internal control system. Also, an overarchir objective for the reorganized audit function is that t external auditors are able to rely on the work perform= by the internal audit department to a substantial degra Arguments put forth by interested parties as to whe the IA department should be organizationally locat are presented next: 4. Nano Circuits considered the need to reconstitute its Board of Directors Audit Committee. Participants at the meeting included the company president, the chief finan- cial officer, a member of the audit committee, a partner from Nano Circuits external audit firm, and the Director of Internal Audits. Expectations and concerns presented by the meeting participants are summarized next CEO: The CEO expressed concern that Nano Cir- cuits complies with SOX and PCAOB requirements and recommendations. The internal audit function should strengthen the organization's internal control system by developing control policies and procedures and by detecting violations of policies and procedures. CFO: The CFO saw the role of the internal audit function as one that should be focused primarily financial issues and therefore, the director of Internal Audits should report to the CFO. Audit committee member: The committee mem- ber felt strongly that the Audit Committee as currently constituted is appropriate and no changes need to be made. Although none of the committee members are trained accountants they all have extensive industry experience, they have all been associated with Nano Cir- cuits in various capacities for many years, and are well qualified to fulfill their policy-oversight responsibilities. External audit partner: The external audit partner pointed out that the internal audit function should be organized such that it supports a close working relation- ship with the external auditors. This would include monitoring internal control systems on a continuing basis to provide a body of evidence on which the exter- nal auditor can rely. Director of Internal Audits: The Director of Inter- nal Audits argued that the new IA function should focus more on operational auditing issues, but it also should play a role in the review of internal controls over finan- cial reporting on Chief Operations Officer (COO). John Sween the COO of Technical Solutions, believes that Director of IA should report to him. Under t arrangement the IA staff members would involved in the preparation of policy statements internal control regarding safeguarding of assets a in the design of business processes. Chief Information Officer (CIO). Larry Rich, CIO, has pushed hard to have the IA func report to him and take on an active role in design, installation, and initial operation of a computerized systems. IA staff will be prima concerned with the design and implementatio internal accounting controls and conduct the ev ation of these controls during the test runs audits. Corporate Controller. The controller, L Johnson, believes the IA group should rem within her functional area. Currently the IA performs a number of controller related t These include Internal auditors reconcile bank statemer the corporation each month. The cont believes this strengthens the internal cc function because the internal auditor i- Required Describe the role that each of the following areas has in the establishment, maintenance, and evalua- tion of internal control:

Answer 1

Part A

Management: The basic role of the management is to establish the internal control department for the company and also to hire such number of individual with such expertise which is required to perform the job. Further, management should provide complete autonomy so that the internal audit department can perform its job independently. Management should regularly churn the number of individuals in the internal audit department, so there wont be any conflict of interest. For the purpose of evaluation management should on monthly basis demand a report for the finding of the internal audit team.

External Audit: External auditor should help the management in hiring the appropriate person for the job an regularly reviews the report of the internal auditor and also guide the auditor regarding the risk and materiality.

Internal Audit: The director of internal auditor should take the complete responsibility regarding the setting up the internal audit department. He should hire appropriate person divide the job among various individual and regularly reviews the work of the individual. Further, he should rotate its individual in order to avoid any conflict of interest.

Part B .

The director of internal auditor should directly report to the audit committee regarding the finding at the company level. The main reason for the same is that audit committee is ultimately responsible for all the finding and ultimately report to the senior management. Audit committee makes all the plan on how the audit is conducted and reviewing the overall function.

Part C.

Since the audit committee members are associated with the company from a very long period of time and has various industry experience which is beneficial for the company. However, there must be one expert which knows about the accounting from and can see the overall account because of the primary function of the audit committee is to review the accounts of the company. Thus there can be addition of one member which may be expert of the accounts.

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Answer 2

The following describes the revenue cycle procedures for a hypothetical company.

            The sales department clerk receives hard-copy customer orders and manually prepares a six-part hard-copy sales order. Copies of the sales order are distributed to various departments as follows: Copies1, 2, and 3 go to the shipping department, and Copies 4, 5, and 6 are sent to the billing department where they are temporarily filed by the billing clerk.

            Upon receipt of the sales order copies, the ship-ping clerk picks the goods from the warehouse shelves and ships them to the customer. The clerk sends Copy 1 of the sales order along with the goods to the customer. Copy 2 is sent to the billing department, and Copy 3 is filed in the shipping department.

            When the billing clerk receives Copy 2 from the warehouse, she pulls the other copies from the temporary file and completes the documents by adding prices, taxes, and freight charges. Then, using the department PC, the billing clerk records the sale in the digital Sales Journal, sends Copy 4 (customer bill) to the customer, and sends Copies 5 and 6 to the AR and inventory control departments, respectively.

            Upon receipt of the documents from the billing clerk, the accounts receivable and inventory control clerks post the transactions to the AR Subsidiary and Inventory Subsidiary ledgers, respectively, using t heir department PCs. Each clerk then files the respective sales order copies in the department.

            On the payment due date, the customer sends a check for the full amount and a copy of the bill (the remittance advice) to the company. These documents are received by the mailroom clerk who distributes them as follows:

1.     The check goes to the cash receipts clerk, who manually records it in the hard-copy cash receipts journal and prepares two deposit slips. One deposit slip and the check are sent to the bank; the other deposit slip is filed in the cash receipts department.

2.     The remittance advice is sent to the AR clerk, who posts to the digital subsidiary accounts and then files the document.

Prepare a data flow diagram and a system flow-chart of the revenue cycle procedures previously described.