CGA-CANADA INTERNAL AUDITING & CONTROLS [MU1] EXAMINATION September 2012 Marks

Note:
The questions in this examination test the knowledge, skills, and professional values demonstrated in this course. Marks are given for reasoned and persuasive arguments, and for clarity and impact of presentation. You must provide practical illustrations for the use of concepts and analytical methods in the circumstances described in each question. Read the specific requirements of each question carefully, and ration your time across all questions.

Time: 4 Hours

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Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note:
2 marks each

a.

Which of the following concepts can be described as an objective examination of evidence for the purpose of providing an independent assessment on risk management, control, or governance processes for the organization? 1) 2) 3) 4) Consulting Assurance Risk management Management auditing

b. Which of the following techniques used by consulting auditors will best build credibility with their clients? 1) Have a conversation with the client rather than presenting him or her with a presentation on issues 2) Present a clear report starting with information about what went wrong during an audit and then moving to the issues 3) Apologize for the findings in the audit report if it contains very bad news 4) Be ready to expand beyond the specific facts uncovered by the audit c. Which of the following standards addresses engagement planning? 1) 2) 3) 4) Attribute standard Performance standard Engagement standard Implementation standard

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d. Which of the following is true? 1) Only the vice-president, finance can approve the internal audit charter. 2) As the nature and scope of consulting services are subject to agreement with the client, only the nature of assurance services to be provided to the organization is in the audit charter. 3) The audit charter should be reviewed when the board requests it. 4) Internal audit has the responsibility to consider the scope of work of the external auditors and regulators. e. Which of the following concerning outsourcing is true? 1) Responsibility for the internal audit activity can be outsourced to provide access to expertise that would not normally be available in-house. 2) Recommendations to outsource a significant portion of the internal audit activity require the approval of the chief audit executive and the chief executive officer. 3) The chief audit executive needs to inform the external service provider if any engagement communications refer to the services provided. 4) Companies may outsource internal audit services to their public accountants as long as the same firm does not audit the organizations financial statements. f. Which of the following is a requirement of the Sarbanes-Oxley Act? 1) To report on insider stock transactions within 2 business days 2) To strengthen enforcement measures, including personal financial liabilities, but exclude criminal penalties, for securities-related offenses 3) To redefine the relationship between external auditors and their clients and makes chief financial officers directly responsible for those relationships regarding corporate accounting and auditing 4) To restrict certain transactions by officers and directors and limits loans by public firms to their officers and directors to no more than 10% of their salary g. Which approach does an IT control framework support to identify and implement controls? 1) 2) 3) 4) Cost-based approach Technology-based approach Risk-management-based approach Efficiency-based approach

h. Which of the following is a specific risk in an IT environment? 1) An explosion occurred at a chemical plant on the site adjacent to the companys computer-processing facility. 2) The technology used becomes obsolete. 3) The software vendor went bankrupt and support services are no longer available. 4) The companys computer-processing facilities were damaged by flood. i. Failure to maintain necessary skill sets is an example of which category of risk in an IT environment? 1) 2) 3) 4) j. Inherent risk Current risk Specific risk Technological risk

Which of the following concerning end-user computing is true? 1) 2) 3) 4) Innovation, creativity, and business understanding are hampered. Basic system functionality tends to be well tested. Enhanced transferability is achieved as a result of completeness in documentation. Bureaucracy is reduced. Continued...

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k. Comprehensive audits include which of the following components? 1) 2) 3) 4) l. Financial statement, compliance Value-for-money, fraud investigation Compliance, risk management Risk management, value-for-money

Which of the following refers to the activities of the Auditor General? 1) 2) 3) 4) Comprehensive audit Bureaucratic audit Legislative audit Public governance audit

m. Which of the following is true concerning the Treasury Board of Canadas policies for internal audit for the Government of Canada? 1) Deputy heads establish plans to provide an independent annual assurance report to the Auditor General on the adequacy and effectiveness of risk management, control, and governance processes within the department. 2) The Auditor General will report periodically to the Treasury Board on the state of risk management, control, and governance processes across government. 3) Deputy heads of large departments are responsible for establishing an independent departmental audit committee. 4) The Treasury Board requires that it be briefed periodically by the deputy heads of large departments on significant issues of risk arising from internal auditing across government.

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Question 2 Genex is a marketing firm that specializes in helping companies establish an Internet presence through websites, smart phones, and tablet computer applications. Genex is based out of Toronto but has clients all over North America. The company has grown considerably over the past 5 years and now has over 20 employees. As it is a service provider, the majority of its costs are salaries and travel/entertainment expenses. Employees often travel to client sites to research the companies and better understand operations in an effort to create a strong working relationship and a customized solution. In the past 2 years, Genex has encountered cash flow problems and had to request additional lines of credit to continue to operate. Factors contributing to the cash flow problems were related to accounts receivable and the timeliness of collections. As a result of the cash shortfalls, the president of Genex requested an audit of the controls surrounding cash management. Since Genex did not have an internal audit department, the audit was outsourced to a consultant. The consultant reviewed the companys operations with a specific focus on cash flow and issued a report with observations and recommendations for corrective action. Once the report was received, the president felt that no further support was given by the consultant. In fact, attempts to contact the consultant were unsuccessful. The president was aware that to mitigate the risks identified by the audit, his company would have to take corrective action. However, he was unclear as to how to evaluate his companys performance in terms of addressing the identified issues. It has been a year since the audit and though some corrective actions have been initiated, Genex is still experiencing cash flow difficulties. The president wants to understand the steps to be taken to follow up on the audit report. As a result he has hired you, a CGA and consultant, to explain the importance of following up on the audit as well as provide an opinion on whether the corrective actions taken by management were sufficient. He has provided you with the following information regarding audit observations, recommendations, and corrective action taken: Issue Billing for services rendered was only at the end of the contract. Some contracts were for extended periods of time (several months). Since Genex had not billed the clients, it would have to carry all associated costs. Once invoices have been issued there is no aging of receivables or monitoring of outstanding revenue. Organizational leadership and expertise is lacking with respect to the tasks of cash management. Required Write a memo to the president to address his request. Be sure to identify relevant audit objective(s), criteria, and procedures for the follow-up audit. Note:
4 marks will be awarded for clarity, logic, and persuasiveness.

Recommendation Progressive billing must be implemented immediately so that cash is collected in a timely manner.

Corrective Action Taken Billing is now performed on a monthly basis.

Assign the responsibility to track receivables internally or outsource this function to a qualified service provider. Hire a qualified individual to assume cash management responsibilities.

The head office administrator and his team have assumed the monitoring and collections responsibilities on a part-time basis. The head office administrator has assumed this responsibility.

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Question 3 Prop Inc. is a property management firm based in Halifax with $1 billion in assets and revenue of $250 million in 2011, mainly from rental income. The company has a department of maintenance and development (DMD) that oversees any maintenance and construction work performed on its properties. DMD employs technical staff to carry out small maintenance work, but procures the service of external contractors for more extensive projects. The procedure for procuring such services is as follows: 1. DMD estimates the contract value of the work to be performed 2. If the cost is estimated to be more than $50,000, the project needs to go through public tender. The project will be posted to a government website to solicit bids from contractors, and the lowest bid will be accepted. 3. If the estimated cost is less than $50,000, the project supervisor will obtain at least 2 quotes from the list of preferred vendors. The vendor with the lowest bid is selected. If the lowest bid is greater than $50,000, the project will have to go through the public tendering process. 4. Once a bid is accepted, DMD will make a purchase request to the purchasing department. The purchasing department will then determine if sufficient funds are available and if the proper approval was obtained. Once verified, a purchase order (PO) is created in the system, which will reserve the amount of the contract against the budget so that the money cannot be spent on other purchases. No invoices can be paid without an associated PO in the system. 5. A contract will be signed between DMD and the contractor. 6. Due to the nature of construction projects, sometimes modification of the contract is necessary. For example, severely degraded pipes may be found once a wall is opened. It will therefore require extra work in plumbing to complete the project. In the case when a contract modification is necessary, a change order (CO) request is made to the purchasing department. If approved, it will be added to the original PO amount. 7. As a project progresses, the contractor will invoice the company. The invoice payments will be recorded in the accounting system and reduce the amount reserved in the corresponding PO. 8. All purchase orders, change orders, and invoice payments must be approved by a project supervisor or director. Recently, the controller of the company received some disturbing information from an employee concerning DMD. The employee alleges that the public tendering process is often bypassed in favour of selecting vendors from the preferred list. Projects were intentionally estimated at values less than $50,000 and were later increased with change orders. This was done to circumvent controls, as he claims that project supervisors were receiving bribes in the form of cash incentives to manipulate the contractawarding process. He also claimed that there are several deficiencies in the accounting system that make it difficult to evaluate with accuracy a projects performance relative to its budget. The controller therefore asked you, the chief audit executive (CAE), to review the matter. The following tables provide information regarding the procurement of contractor services in the last 6 months of 2011.

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EMPLOYEE EMP_ID EMP_NAME 101 Ali Awad 102 Brian Bean 103 Cathy Chan 104 Hugh Holme 105 Kim Kan 106 Steve Short 107 Tim Tom 108 Zee Ziggy EMP_ID: EMP_NAME: POSITION: INVOICE INV_ID I0100 I0140 I0165 I0185 I0190 I0195 I0200 I0215 I0220 I0240 I0270

POSITION Project supervisor Electrician Project supervisor Carpenter Plumber Electrician Director Secretary

A unique number for each employee The name of the employee The job position of the employee

INV_DATE 7/8/2011 8/1/2011 9/1/2011 9/26/2011 10/5/2011 10/12/2011 10/15/2011 10/25/2011 11/2/2011 11/22/2011 12/1/2011

VENDOR_NAME ABC Elevator ABC Elevator Piper Plumbing Inc. Piper Plumbing Inc. Piper Plumbing Inc. Short Electric Brick Work Inc. Brick Work Inc. Coco Cooling Coco Cooling Coco Cooling

INV_AMT $45,000.00 $24,000.00 $40,000.00 $15,000.00 $20,000.00 $4,000.00 $47,000.00 $20,000.00 $10,000.00 $45,000.00 $50,000.00

INV_ID: INV_DATE: VENDOR_NAME: INV_AMT:

A unique number for each invoice The date when the invoice is issued The vendor name on the invoice The invoice amount

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TRANSACTION TRANS_ID CODE 1001 P0100 1023 I0100 1058 P0100 1125 I0140 1220 P0101 1252 I0165 1344 P0101 1380 I0185 1456 P0101 1499 I0190 1532 P0102 1588 I0195 1599 P0103 1604 I0200 1652 P0103 1677 I0215 1698 P0104 1750 I0220 1768 P0104 1811 I0240 1823 I0270 TRANS_ID: CODE: TYPE:

TYPE PO INV CO INV PO INV CO INV CO INV PO INV PO INV CO INV PO INV CO INV INV

TRANS_DATE 7/1/2011 7/10/2011 7/25/2011 8/1/2011 8/10/2011 9/1/2011 9/20/2011 9/26/2011 10/1/2011 10/5/2011 10/10/2011 10/12/2011 10/17/2011 10/17/2011 10/28/2011 10/28/2011 10/30/2011 11/2/2011 11/12/2011 11/22/2011 12/1/2011

TRANS_AMT $49,000.00 $45,000.00 $20,000.00 $24,000.00 $45,000.00 $40,000.00 $10,000.00 $15,000.00 $20,000.00 $10,000.00 $4,000.00 $4,000.00 $47,000.00 $47,000.00 $30,000.00 $20,000.00 $45,000.00 $10,000.00 $50,000.00 $45,000.00 $50,000.00

REF_CODE P0100 P0100 P0101 P0101 P0101 P0102 P0103 P0103 P0103 P0104 P0104

APPROVE_BY 101 101 101 101 103 103 103 103 103 103 106 106 103 103 103 103 107 107 107 107 107

A unique number for each transaction A unique code for each purchase document (Prefix: P purchase order; I invoice) A code representing each type of transaction (PO purchase order; CO change order; INV invoice) TRANS_DATE: The date when the transaction is recorded in the system TRANS_AMT: The transaction amount REF_CODE: The CODE related to the transaction APPROVE_BY: The ID of the employee who approved the transaction Required 12 a. Using the information provided, describe the procedures that you would employ using an analytical software tool such as ACL to fulfill the controllers request. State the conclusions that you would reach as a result of these procedures.

b. Functions provided by generalized audit software vary from program to program, but in general, most programs can perform certain common functions. Describe six such functions.

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Question 4 Streamline is a distributor of electrical components sold mostly to hardware stores in Canada. The company has been in business for over a decade and has established strong working relationships with numerous suppliers abroad. One of the main organizational objectives has been to control cost of goods sold. Streamline has been able to accomplish this by taking advantage of its network of suppliers and buying power to obtain the lowest prices for electrical components. The company had been successful in reaching this objective while maintaining its other organizational objective, which was to provide an exceptional level of product quality. To ensure product quality, any supplier to Streamline had to meet the companys safety requirements and pass quality inspections. In the past year, there was a change of senior management, who stated that the focus of the company going forward would be to increase profit margins by focusing exclusively on obtaining the lowest prices possible on electrical components. The requirement for suppliers to meet Streamlines quality standards was abandoned. The reasoning for the change in strategy was the expectation that suppliers would govern themselves regarding product quality. However, this new direction may have negatively affected the company. Though profit margins increased in the past year, sales did not grow for the first time in the companys history. Retailers reported to the company that there was a noticeable increase in product returns and warranty claims. The president of Streamline has requested that an internal audit be conducted to determine if this past years change in strategy is the reason for the lowered sales growth and apparent reduction in product quality. She has made the formal request to the chief audit executive (CAE) to conduct the audit. The CAE believes that as a result of Streamlines strategy (past and present), the purchasing department has always played an important role in the company. The purchasing department establishes standing orders with suppliers that generally last for 2 to 3 months. Product needs are based on sales projections and are intentionally designed so that product orders are filled within a certain timeframe. This allows Streamline the opportunity to review supplier performance as well as pricing almost every quarter. Supplier performance is solely based on the receipt of goods. In other words, if products are received in full and in a timely manner, then a supplier will receive a good rating by Streamlines purchasing department. No evaluation is currently in place to assess product quality. The receipt of goods is recorded in Streamlines information system to compare against product orders. When a standing order is created, the quantity of products ordered and other relevant information such as pricing is recorded in the information system. Once products are received, the quantities are updated in the system. This allows for reports on expected amounts of products still to be received and products available for distribution to retailers. Streamline does not perform any physical counts of inventory to validate the amounts entered in the system. The CAE has asked you, a staff auditor and CGA in the internal audit department, to prepare a memo outlining the proposed audit plan. Required 24 a. Write the memo where you describe the audit plan of Streamlines purchasing department. The CAE has also requested that you provide an opinion as to which approach is better in this case: risk-based or traditional auditing. Your proposed audit plan should describe the audit objectives, criteria, and procedures. Note:
4 marks will be awarded for clarity, logic, and persuasiveness.

b. Briefly discuss whether you believe the strategy and present controls at Streamline are a contributing factor to the recent decline in sales and reduction in product quality.

100

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INTERNAL AUDITING & CONTROLS [MU1] EXAMINATION

MU1
Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 8 pages. There are 4 questions for a total of 100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms. Glossary of Assessment Terms Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.
Calculate Mathematically determine the amount or number, showing formulas used and steps taken. (Also Compute). Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned. Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Provide detail on the relevant characteristics, qualities, or events. Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information. Calculate or formulate a response that considers the relevant qualitative and quantitative factors. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw) This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the how and why of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example. Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or conclusions. List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details. Prove Establish that something is true by citing evidence or giving clear logical reasons. Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario. Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another. Review Examine a subject critically, analyzing and commenting on the important statements to be made about it. State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate) Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. Trace In narrative form, describe progress, development, or historical events from some point of origin. Explain

Compare

Contrast

Criticize

Define

Describe Design

Determine

Diagram

Discuss

Evaluate

CGA-CANADA INTERNAL AUDITING & CONTROLS [MU1] EXAMINATION September 2012 SUGGESTED SOLUTIONS Marks Time: 4 Hours

Note:
The questions in this examination have been set to test the knowledge, skills, and professional values demonstrated in this course. The emphasis is much more on a reasoned and persuasive argument, on clarity and impact of presentation, and responding specifically to the case or situation presented, than on the mere recall of material from the Module Notes or readings.

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Question 1 Note:
2 marks each

Sources: a. 2) Topic 1.1 (Level 1)

b. 1) Topic 1.1 (Level 1) c. 2) Topic 2.1 (Level 1)

d. 4) Topic 2.2 (Level 1) e. f. 3) Topic 2.5 (Level 2) 1) Topic 3.9 (Level 2)

g. 3) Topic 7.3 (Level 1) h. 1) Topic 7.3 (Level 1) i. j. 4) Topic 7.3 (Level 1) 4) Topic 7.8 (Level 1)

k. 1) Topic 10.2 (Level 2) l. 3) Topic 10.3 (Level 2)

m. 3) Topic 10.4 (Level 1)

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Question 2 Source: Topics 4.1 and 6.6 (Level 1) MEMORANDUM Date: To: From: Re: September 4, 2012 Olivier Pinot, President, Genex John Smith, CGA Follow up to the audit

At your request, I have prepared this document to outline the typical steps in a follow-up to the audit report. In addition, I will provide my professional opinion about the perceived effectiveness of the corrective action that your company has taken. The first step in the follow-up program is to establish the scope of the work to be conducted. In Genexs case, we would use the audit report as a basis for follow up to determine if the identified issues have been addressed and risks mitigated to an acceptable level. We must also take into consideration whether the original circumstances surrounding the issues still exist. The second step is to prepare the actual follow-up audit program. This includes establishing a follow-up audit objective, criteria, and procedures. The objective should be to determine if the corrective action taken has addressed the issues identified in the audit report. The audit criteria should be: 1. Progressive billing has been implemented and invoices are issued within a reasonable timeframe. 2. Accounts receivable are tracked and reasonable efforts are made to collect payments in a timely manner. 3. Cash management is the responsibility of a qualified and skilled staff member. Based on the above, audit procedures will be established to test against the audit criteria. The results of these procedures will be evaluated for efficiency and effectiveness. All of the audit work will be carefully documented and recorded for ease of reference. The third step is to carry out the actual follow-up audit program based on the audit objective, criteria, and procedures established in the second step. The audit work should be carried out by a qualified individual independent of your organization. During the course of the audit work, adjustments may be required to the scope to better assess whether the corrective actions that were implemented are working effectively. The fourth step is to examine the results of the follow-up audit work and to draw a conclusion as to whether the corrective measures initiated by your company were sufficient to mitigate the risks and address the issues identified by the audit report. In the case where no corrective measures were taken, we would ask management why and evaluate whether the justification is acceptable. In your case, you do not have an internal audit department or a board of directors, but nonetheless in order to truly follow the internal audit process through to completion you would have to address all the issues or provide a reasonable explanation why corrective action was not taken. The fifth step is the responsibility of the internal auditors to review the follow-up audit work and associated files to ensure that assertions are well supported and audit standards have been met. The final step is to report on the results of the follow-up audit work. The report, in this case, will be issued to you, and will summarize the scope of the work carried out as well as observations, conclusions, and any specific comments. If necessary, it will also identify issues to be flagged for further attention by management or additional follow up by the internal auditors.

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The end result of the follow-up audit should conclude on whether the issues have been addressed. As evidenced by the above explanation, in order to comment on the effectiveness of your companys corrective action, I would have to conduct the actual follow-up audit. However, based on the information you have provided, I do have some preliminary concerns regarding the corrective actions taken: 1. Monthly billing may not be sufficient to meet the demands of your cash flow issues. Billing alone does not necessarily mean that the cash will be immediately received. It may be necessary to bill clients on a weekly basis or based on milestones agreed upon at the beginning of a contract. 2. Accounts receivable should be consistently monitored and tracked on a full-time basis. The cash collected is important to the company, especially in light of the cash management problems. Therefore, the timely collection of receivables is vital to company operations and must be made a priority. 3. The head office administrator may not have the necessary training or qualification to properly oversee the cash management responsibility. Only once the follow-up work is completed can I make a more substantial conclusion as to the results of your corrective action. Please feel free to contact me should you require any additional information. Notes:
2 marks for each step in the follow up program for a total of 12 marks. 4 marks for identifying the objective, criteria and procedures. 2 marks for an opinion on each of the corrective measures to a maximum of 6 marks. 4 marks for clarity, logic, and persuasiveness.

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Question 3 a. Source: Topic 5.6 (Level 1) Procedures

Join the tables EMPLOYEE and TRANSACTION by matching EMP_ID to APPROVE_BY, and join the resulting table to INVOICE by matching CODE to INV_ID. Extract the records from the table TRANSACTION in which TYPE = PO; summarize the resulting table by CODE and by TYPE with the sum of TRANS_AMT. Summarize the table TRANSACTION by CODE with the sum of TRANS_AMT.

Note:
2 marks for each procedure, to a maximum of 4 marks.

Observations and conclusions

Observation: Employee Steve Short (ID 106) approved a PO (P0102) and payment of the subsequent invoice (I0195) to Short Electric. Conclusion: The vendor name (Short Electric) suggests that there may be a relation to the employee. Moreover, it is a violation of the policy for Steve Short, an electrician and not a project supervisor, to approve these transactions.

Observation: All of the POs are initially set at an amount less than the $50,000 threshold. In all cases except one, POs have subsequent change orders that increased the contract value to an amount significantly greater than the threshold. Conclusion: This suggests an intention to bypass the public tendering requirement and validates the accusations made.

Observation: Transaction 1750 involves an invoice payment of $10,000 to Coco Cooling. However, the payment is charged against P0103, which is a PO for Brick Work Inc. Conclusion: The accounting system should not allow for an invoice from one vendor to be charged to a PO for another vendor. There should be some matching performed either manually or automatically by the system prior to payment.

Observation: Two of the invoices, I0200 and I0215, were dated prior to the date indicated on the PO and CO. Conclusion: The PO and CO were created in the system after the invoices were received. In order to process the payments, the required PO and CO had to be created. This bypassed the controls for approval.

Note:
2 marks for each conclusion and observation, to a maximum of 8 marks. Marks will be awarded for any other acceptable answers.

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b. Source: Topic 5.6 (Level 1) Read data files in a variety of file structures including sequential, indexed sequential, and direct access files the more advanced programs can also read and process information from multiple files concurrently Merge records from multiple files Sort records according to specifications from the auditor, including alphabetic sequence, numeric sequence, and date sequence Perform selection of records based on logical criteria specified by the auditor; for example, select all invoices in December that are more than $1,000 Perform numeric computations such as adding one field to another, subtracting one field from another, multiplying two fields to create a new field, and dividing one field by another to generate a new field Perform statistical sampling such as selecting every nth record, or selecting randomly data can also be stratified into different groups before sampling Perform frequency analysis data can also be stratified into different groups before frequency counts are performed Perform summation of data records, such as footing of all outstanding invoices, and generate reports that summarize the result of the operations requested by the auditor (some generalized audit programs provide report formatting commands to the auditor to customize the output report) Note:
1 mark for each function to a maximum of 6 marks.

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Question 4 a. Source: Topics 3.3 and 5.4 (Level 1); Topic 8.4 (Level 2) MEMORANDUM Date: To: From: Re: September 4, 2012 Damian Milano, CAE John Smith, CGA Audit plan for Streamline

As you have requested, I have reviewed the processes surrounding the purchasing function. In addition, I have taken into consideration the changes in strategy and organizational objectives to determine a suitable audit plan. There are two conventions for conducting internal audits. The traditional approach is to focus on the control system that is in place to mitigate the various risks that are faced by Streamline. The controls are then tested through a series of audit procedures and recommendations are made to address identified risks. In contrast, a risk-based approach takes into consideration the organizational objectives, then considers the risks and examines the methodologies to mitigate those risks. In our case, I feel it is better to proceed with a risk-based approach to specifically test if the organizational objectives have negatively affected operations. The risk here is that the focus on obtaining the lowest possible cost while abandoning our quality-control requirements may have hindered the publics perception about the reliability and durability of our products. This has a direct effect on sales. The main components of the audit plan require the establishment of audit objectives, criteria, and procedures. The audit objective should be to determine if the change in the companys purchasing strategy has negatively affected sales. More specifically, has the focus on cost savings at the expense of product quality harmed the companys reputation and resulted in lost consumer demand for its products? The audit criteria should be the following: 1. Determining needs The acquisition of goods should be well defined and related to the mission of the organization. Contracts for goods are reviewed every 2-3 months depending on consumer demand. This is done by standing orders with quantities based on sales projections. 2. Monitoring of suppliers performance The purchasing department should monitor supplier performance to ensure goods ordered are delivered in accordance with the approved purchase order. Supplier performance is considered every 2-3 months; however, it does not take into consideration if products received were of good quality. 3. Receipt of goods Goods should be counted and inspected upon receipt. Presently, goods are not inspected for product quality and physical counts are not performed to validate the numbers entered in the information system.

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The audit procedures to test against the criteria include the following: 1. Acquisition of goods:

Review sales forecasts to determine if quantities ordered reflect sales projections Review product availability projections from suppliers

2. Monitoring of suppliers performance:

Review purchase orders and compare to actual products received Identify dates products were received and compare to time when items were ordered

3. Receipt of goods:

Review the inspection records of the receiving department regarding shipments received Reconcile information in the information system to actual shipments received

By conducting an audit of the purchasing function we will be in a better position to determine if there is a correlation between the reduction in sales and product quality to the change in strategy. It would appear that this is the case; however, only upon completion of our audit work will we be able to further conclude on this matter. Note:
2 marks for each definition plus 2 marks for choosing an approach to a maximum of 6 marks. 2 marks for the audit objective. 2 marks for each audit criteria to a maximum of 6 marks. 2 marks for each audit procedure to a maximum of 6 marks. 4 marks for clarity, logic, and persuasiveness.

b. Source: Topic 9.7 (Level 2) It would appear that the strategy has had a negative impact on not only the product quality but also consequently on Streamlines sales. The decision to allow the suppliers to self-govern would appear to be ineffective as there has been a noticeable increase in warranty claims and product returns. If retailers, or even worse, consumers, have the impression of poor product quality this will negatively affect the companys sales. This result is evident by the stagnant growth in sales of the year in which this new company strategy was implemented. Other controls within the company, such as the failure to verify product quality at the time of receipt, tend to strengthen the argument that the new strategy is directly responsible for the current situation.

100

END OF SOLUTIONS

SMU1S12

CGA-Canada, 2012

Page 7 of 7

CGA-CANADA INTERNAL AUDITING & CONTROLS [MU1] EXAMINATION September 2012 EXAMINERS COMMENTS

General Comments
Candidates overall performance was borderline satisfactory. This is consistent with the results from the previous examination in June 2012. Also previously addressed was the issue of candidates poor performance on Question 1. The degree of difficulty of the multiple-choice questions is set high and requires candidates to prepare by studying all recommended course material including the readings. This resulted in a lower overall average mark despite candidates satisfactory performance on all other questions. Candidates did very well in demonstrating their knowledge of the follow-up process, use of generalized audit software to solve data centric problems, and assessing risk and developing a risk-based audit plan. Areas for improvement include providing an opinion on corrective action taken to address audit findings (as part of the follow-up process) and describing common functions used in generalized audit software to conduct analysis. Overall, candidates are showing improvement as the pass rate and the average mark for specific topics has shown much improvement.

Specific Comments
Question 1 Multiple choice (Levels 1 and 2) Overall candidate performance was unsatisfactory. Candidates had difficulty with questions relating to basic concepts such as defining internal audit and its purpose and authority. There were areas where performance was particularly poor. These include topics relating to outsourcing, corporate governance, and internal audit considerations for not-for-profit organizations. These are all important themes, in particular corporate governance as internal auditors must be in a position to exercise an opinion on the effectiveness of the governance function for any given organization. Question 2 Internal audit follow-up process and monitoring recommendations (Level 1) Candidate performance was satisfactory. Candidates did very well on describing the steps to be followed in implementing a follow-up program. The area where they did have difficulty was in providing an opinion on the corrective action taken by the auditee. This is very important from a risk management perspective. The final step in the internal audit process is to ensure that any issues originally identified in the internal audit report have been mitigated or addressed to a satisfactory level. Candidates must be able to perform this critical evaluation in order to effectively perform their duty to the organization. Question 3 Analysis of data (output from audit software) and computer assisted audit techniques (Levels 1 and 2) Candidate performance was generally satisfactory. The level of understanding with regard to data analysis with the use of audit software has been steady and on the whole satisfactory. However, in this case, improvement is required in understanding the basic and most common functions (as well as their use) employed by most audit software programs. Question 4 Risk assessment, preparing an audit plan, purchasing function, and strategic planning (Level 1) Candidate performance on this question was satisfactory. Candidates did very well and were able to explain the difference between traditional and risk-based audits and clearly identify under which circumstances one methodology would be preferred over the other. In addition, candidates also did well on describing an audit program for the purchasing function.

MU1S12

CGA-Canada, 2012