The internal auditor and the critical thinking process
Lydia L.F. Schleifer Associate Professor, School of Accounting, Clemson
Defines critical thinking as
the art of examining an issue
from numerous perspectives,
questioning the validity of
both the premisses and the
conclusions. Critical thinking
skills are essential to the
internal auditor’s function. A
recent update of the common
body of knowledge (CBOK)
reflects this expectation by
the internal auditing profes-
sion. Respondents ranked
reasoning skills, which essen-
tially are critical thinking
skills, as the most important
subject area. Discusses
several definitions and frame-
works of critical thinking,
including a critical thinking
framework that is both com-
prehensive and useful in
describing what the internal
auditor does. This framework
includes affective, cognitive,
and behavioural components
which basically describe the
attitudes, thought processes
and actions that are essential
to the critical thinker and to
the internal auditor. The
internal auditing classroom is
an appropriate setting for the
internal auditor to begin
honing the critical thinking
skills demanded by the pro-
fession. Arguments are pre-
sented for the importance of
teaching in a way that
encourages critical thinking
in the classroom, with the
goal being transferability to
the workplace. Describes two
assignments that have proved
useful in developing critical
thinking skills.
Managerial Auditing Journal
11/5 [1996] 5–13
© MCB University Press
[ISSN 0268-6902]
University, Clemson, South Carolina, USA, and
Mary Brady Greenawalt Associate Professor, Department of Business Adminis-
tration, The Citadel, Charleston, South Carolina, USA
Internal auditors contribute greatly to corpo-
rations and other types of organizations by
performing a service to management that
adds value by helping the entity function
better. As Kalbers and Fogarty[1] put it,
Their work focuses on the extent to which
other functions in the organization are
operating within the control parameters
established by law and corporate policy. In
addition to evaluating compliance, internal
auditors pass judgment upon the efficiency
and economic viability of productive ele-
ments of the company.
In order to function as a value-adding compo-
nent of their organizations, internal auditors
must go beyond the tasks of evaluation and
passing judgement to make recommenda-
tions for improvement. Johnson says, “the
real nuts and bolts of internal auditing is
providing exemplary customer service”,
where the customer is none other than man-
agement [2, p. 46]. Taking a broader perspec-
tive, though, Jacka admonishes internal
auditors to adopt a customer-driven orienta-
tion, evaluating the activities and processes
of the organization through the eyes of the
organization’s customers[3].
In adopting a customer orientation and
aiming to add value to the organization, the
internal auditor seeks to assess the effective-
ness and efficiency of the organization and
make recommendations for improvement.
Such evaluation and recommendations call
for the auditor to exercise critical thinking
skills at the highest level. According to
Bloom’s[4] taxonomy of six levels of cognitive
skills, the highest level of cognitive processes
is the ability to evaluate, which surpasses
both analytical skills and synthesis in terms
of complexity. Evaluation is an integral part
of the internal auditor’s value-adding activi-
ties.
These six skills are listed below:
1 Recall: remembering information, meth-
ods, processes, patterns, structures, or
settings; a low level of abstraction, but the
foundation for higher levels.
2 Comprehension: the lowest level of under-
standing – knowing target information
and being able to use it.
3 Application: the use of remembered infor-
mation and ideas to solve a problem.
4 Analysis: the characteristics and elements
of a problem are sorted out, principles and
techniques applied, and elements reorga-
nized to some end.
5 Synthesis: parts or elements are pieced
together to form a whole; at this level stu-
dents can communicate and can derive
abstractions, including the formulation of
hypotheses and the discovery of new
insights from existing facts.
6 Evaluation: judgements are made about
the importance and appropriateness of
methods and materials for a given pur-
pose.
The education and training of today’s inter-
nal auditor must focus on the development of
the higher order cognitive processes, and by
so doing enable the internal auditor to be a
critical thinker. The comprehensive study[5]
recently sponsored by The Institute of Inter-
nal Auditors, which was aimed at identifying
the Common Body of Knowledge (CBOK) for
the practice of internal auditing, determined
that skill in reasoning and problem solving is
the most important subject area, followed
closely by communications and auditing
skills. The four specific competences that
comprise this highest-ranking subject area
are the abilities to:
1 apply problem-solving skills;
2 understand the role of information in
problem solving ;
3 use inductive and deductive reasoning;
4 understand the decision-making process.
The need for in-depth knowledge of related
subject areas such as statistics, marketing,
and economics depends on the internal audi-
tor’s function within the organization and
degree of supervisory responsibility. Accord-
ing to Ratliff[6], however, top audit executives
surveyed consider it to be the responsibility
of educational institutions to foster thinking
skills such as problem solving, perceptive
questioning, analytical thinking, and inde-
pendent learning skills in their students.
Furthermore, these executives felt that the
teaching of analytical thinking and indepen-
dent learning was the sole province of educa-
tional institutions (rather than employers
and professional societies).
This paper examines what critical thinking
is, demonstrates how it relates to the internal
[5]
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
[6]
audit process, and gives examples of how
educators and trainers can stimulate their
students’ critical thinking processes.
Critical thinking
Critical thinking entails engaging one’s mind
in evaluating ideas and concepts, contrasting
and comparing them, and looking at them
from different perspectives. Rather than
accept at face value what is presented, the
critical thinker questions the validity of the
situation as presented, determining for him-
self or herself the appropriateness of the
ideas and their relationships.
Numerous definitions and descriptions of
the critical thinking process can be found in
the literature. Kurfiss[7] sets forth the follow-
ing:
Critical thinking is a rational response to
questions that cannot be answered defini-
tively and for which all the relevant infor-
mation may not be available. It is defined
here as an investigation whose purpose is to
explore a... problem to arrive at a . . . conclu-
sion about it that integrates all available
information and that can therefore be con-
vincingly justified.
Critical thinking, according to Ruggiero,
involves reviewing the ideas that have been
produced, reaching a tentative decision about
the best course of action or the most reason-
able belief about an issue, and then assessing
and further refining that solution or belief[8].
Definitions of critical thinking cannot com-
pletely convey what the critical thinking
process is all about. Ruggiero and other criti-
cal thinking experts have developed more
detailed frameworks that attempt to capture
the essence of critical thinking [8].
Huffman et al.[9] categorize the components
of their comprehensive critical thinking
framework into three main sets:
1 affective components,
2 cognitive components, and
3 behavioural components.
All three sets of components – attitude,
thought processes, and actions – are part of
the critical thinking process. These sets of
components are listed below[9,10]:
1 Affective components: (the emotional foun-
dation that either enables or limits cre-
ative thinking):
• Valuing truth above self-interest;
• Accepting change;
• Empathizing;
• Welcoming divergent views;
• Tolerating ambiguity;
• Recognizing personal biases.
2 Cognitive components: (thought processes
involved in critical thinking)
• Thinking independently;
• Defining problems accurately;
• Analysing data for value and content;
• Employing a variety of thinking
processes in problem solving (e.g. induc-
tive, deductive, dialogical, dialectical);
• Synthesizing; resisting overgeneraliza-
tion;
• Employing metacognition (reflective or
recursive thinking).
3 Behavioural components: (actions neces-
sary for critical thinking.
• Delaying judgement until adequate data
are available;
• Employing precise terms;
• Distinguishing fact from opinion;
• Gathering data;
• Encouraging critical dialogue;
• Listening actively;
• Modifying judgements in the light of
new information;
• Applying knowledge to new situations.
Affective components describe the aspects of
a person’s frame of mind or emotional out-
look that will enable a person to be a critical
thinker (or limit that person’s ability). To be a
critical thinker, one should have the right
attitude, which includes the recognition that
the same intellectual standards apply equally
to one’s own ideas and beliefs as to those of
people with whom one disagrees. Being a
critical thinker involves being able to tolerate
ambiguity and to recognize that there may
not be a single right answer to a problem. The
appropriate frame of mind for critical think-
ing also includes a willingness to be flexible
in forming and modifying one’s beliefs.
Cognitive components are the actual
thought processes of critical thinking. These
thought processes include defining issues
clearly, analysing evidence, and synthesizing
information. A critical thinker should be able
to use different thinking skills such as induc-
tive and deductive reasoning. Also essential
to critical thinking is metacognition, or the
ability to analyse the adequacy of one’s deci-
sion, commonly referred to as “thinking
about thinking”.
Behavioural components are the actions
needed for critical thinking. These compo-
nents are identified with actual strategies one
can employ to foster the critical thinking
process. Such strategies include using precise
terms to identify issues and definitions, col-
lecting relevant information, actively ques-
tioning others to obtain varied points of view,
and listening to others. Critical thinkers
must be able to apply their knowledge to new
situations and change their judgements if
necessary when presented with new informa-
tion.
These three elements are necessary to the
thinking demanded of the internal auditor.
They enable the internal auditor to function
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
at the higher cognitive levels of Bloom’s cog-
nitive taxonomy, the synthesis and evaluation
levels, and therefore to make judgements
which will lead to recommendations for man-
agement.
Critical thinking and the internal
auditor
According to the Statement of Responsibilities
of Internal Auditing,
Internal auditing is an independent
appraisal activity established within an
organization as a service to the organiza-
tion. It is a control which functions by exam-
ining and evaluating the adequacy and
effectiveness of other controls.
In meeting their job responsibilities, internal
auditors employ at one time or another all of
the components in the critical thinking
framework put forth by Huffman et al.[9]
Internal auditors strive to incorporate the
affective components of the critical thinking
process into their jobs. For example, internal
auditors are expected to abide by a code of
ethics that provides guidance in maintaining
the appropriate frame of mind or attitude for
critical thinking. The auditor’s professional
ethics address the need to exercise honesty
and avoid conflicts of interest, a goal which is
consistent with valuing truth above self-
interest.
Internal auditors are admonished to be
objective and unbiased; an important aspect
of their job is to be independent of the func-
tions they audit. This constant reminder of
the importance of independence and objectiv-
ity places the internal auditor in a position of
recognizing personal biases. The nature of
the internal auditing function requires that
auditors deal with other people and therefore
acquire such interpersonal skills as
empathizing and welcoming divergent views;
these components are necessary in a job in
which one can expect sometimes to meet with
resistance to the audit findings or sugges-
tions for improvements. Tolerating ambigu-
ity is important to internal auditors who
must recognize that there may not be only
one solution to a given problem or one answer
to a given question; they deal constantly with
situations in which there are degrees of risk
or degrees of a “fix” to a problem, constrained
by the amount of resources available. And
finally, internal auditors must have a frame of
mind that is capable of accepting change;
their jobs entail a progression of moving from
one auditee to another, and even when return-
ing to a former audit site, they may find that
changes have been made based on previous
audit findings or that new evidence has come
to light. The internal auditor, as critical
thinker, must be willing to change beliefs
when new evidence and experience demand
such change.
The cognitive components, or thought
processes that are essential to critical think-
ing, are also an integral part of the internal
auditor’s function. According to Huffman et
al.[9], in defining problems the critical
thinker must identify issues in clear terms in
order to gather the relevant information.
Internal auditors must identify the opera-
tional objectives of an entity and the risks to
that entity in order to gather data about the
controls that are in place and how they func-
tion to reduce the risks to the entity. Clearly,
one of the internal auditor’s main functions
is to analyse data for value and content, eval-
uating what kind of evidence exists and the
credibility of the source to decide how it will
impact the auditor’s judgement. All this audit
evidence must be synthesized in the workpa-
pers to support the auditor’s conclusions and
findings. Arriving at those conclusions, the
auditor must employ various types of think-
ing processes including inductive reasoning
(moving from the specific to the general as in
audit sampling) and dialogical thinking
(extended verbal exchange between differing
points of view as in the interview during the
preliminary survey). Even after initial audit
judgements and findings have been reached,
the internal auditor uses metacognition by
reviewing and analysing the workpapers to
ensure that the thinking process, as docu-
mented, supports the auditor’s evaluation
and conclusions reached.
The behavioural components of the critical
thinking process actually describe the audit
process to a great extent. In the preliminary
survey stage of the audit, the internal auditor
must determine the nature of the operation:
for instance, what are its objectives, goals,
and standards, its risk exposures, and its
internal controls. This beginning certainly
involves the auditor’s applying knowledge to
new situations, having to transfer informa-
tion and experiences from prior audits to new
contexts. During the interviews that are part
of the preliminary survey phase, the internal
auditor must listen actively and encourage
critical dialogue, being an active questioner
and probing the meaning or logical strength
of the responses received. In obtaining infor-
mation from auditees, the internal auditor
must distinguish fact from opinion. During
field work, the internal auditor gathers data,
including information on all sides of an issue,
and occasionally must modify judgements in
the light of new information if new informa-
tion contradicts previous assumptions. In
developing deficiency findings, the internal
auditor must determine what should have
been done and the causes and significance of
any deviations; this part of the audit involves
[7]
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
[8]
getting management’s concurrence with the
facts and findings and then making recom-
mendations for improvement. Throughout
this process, the internal auditor must delay
judgement until adequate data are available.
One can see the relationship between inter-
nal auditing and critical thinking again in
Lawrence Sawyer’s amplified definition of
internal auditing:
Internal auditing is a systematic, objective
appraisal by internal auditors of the diverse
operations and controls within an organiza-
tion to determine whether (1) financial and
operating information is accurate and reli-
able, (2) risks to the enterprise are identified
and minimized, (3) external regulations and
acceptable internal policies and procedures
are followed, (4) satisfactory standards are
met, (5) resources are used efficiently and
economically, and (6) the organization’s
objectives are effectively achieved—all for
the purpose of assisting members of the
organization in the effective discharge of
their responsibilities[11, p. 7].
Sawyer comments on his definition by noting
that far from simply verifying that the rules
are being followed this approach questions
even the rules. His definition of internal
auditing means that the auditor identifies
shortcomings that may result in failure to
meet expectations and solutions to what is
causing risk to the firm.
One could apply Chaffee’s list of critical
thinking skills[12] to what internal auditors
do. Internal auditors:
• solve problems;
• generate and organize ideas;
• form and apply concepts;
• design systematic plans of action;
• construct and evaluate arguments;
• explore issues from multiple perspectives;
• apply knowledge to new situations;
• critically evaluate the logic and validity of
information;
• develop evidence to support views;
• carefully analyse situations;
• discuss subjects in an organized way.
Critical thinking skills, no matter which
taxonomy one chooses to adopt as a frame-
work for understanding them, function as the
tools that allow internal auditors to refine a
mass of information into a form with which
they can work. In essence, the internal
auditor needs to function as the critical
thinker par excellence.
Given the discussion above, it is clear that
institutions of higher education need to pro-
vide their graduates with the critical think-
ing tools necessary to be successful internal
auditors. The following section discusses the
need to foster critical thinking in the class-
room and provides two specific examples of
internal auditing assignments designed with
this purpose in mind.
Critical thinking in the internal
auditing classroom
A number of scholars have argued for the
importance of teaching critical thinking
skills in the classroom. Some universities
teach critical thinking in a separate class, but
there is also a strong effort to develop “teach-
ing thinking across the curriculum”[8, p. 11].
Paul Kimmel argues that, while spending
time with critical thinking exercises will
mean a reduction in what topic areas can be
taught, teaching critical thinking will “pre-
pare the student for life-long learning, thus
reducing the need for the accumulation of
factual knowledge in the college setting”[13,
p. 4].
However, Ruggiero argues cogently that
teaching thinking can be not so much an
addition to what is taught but an attitude
towards the topic areas already addressed in
any class. He gives the example of an econom-
ics professor who assigns students two oppos-
ing articles to read, and then quizzes them
simply on the content of each article. By ask-
ing questions that would require critical
thinking, he could encourage thinking skills
without ignoring or reducing the content of
the course[7,8].
Ruggiero further argues that critical think-
ing skills should be taught in every class for
two good reasons. First, teaching thinking
only in a composition course or a special
thinking course isolates what is learned, so
that students may not recall those skills when
higher levels of cognition are needed, much
in the same way that writing declines over
the course of a student’s academic career if
writing is not required in later courses. Sec-
ond, using critical thinking skills in the class-
room tends to get students more involved in
their learning, and thus more enthusiastic
about the content. The traditional lecture
approach makes students think of the content
of the course as “static, inert, dead”[7,8].
Chaffee contrasts two educational models
which he terms “coverage” and “critical
thinking”. Educators who focus on covering
as much material as possible exemplify the
coverage model. On the other hand, those
who adopt the critical thinking model empha-
size understanding of the topics at hand, even
if that is at the expense of quantity of mater-
ial covered. Furthermore, the level of under-
standing of a topic or discipline must be at a
sufficiently high cognitive level for the stu-
dent to ponder whether the material makes
sense rather than just accept information at
face value[12].
The rest of this paper describes two exam-
ples of assignments that help students prac-
tise their critical thinking skills and at the
same time develop a greater understanding of
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
the content of the internal auditing course.
The goal of these exercises is three-fold: to
require students to use critical thinking
skills, to help them understand about risks
and controls and the audit process, and to
prepare them to apply their knowledge in
new situations when they move into the
workforce.
Assignment number one: discount
store merchandise returns.
The following assignment is based on a radio
programme about a discount store’s return
policy for merchandise. The objective of the
assignment is to discuss the risks to the store
and controls that could be implemented to
minimize losses due to fraudulent returns.
According to the radio segment, the partic-
ular discount store valued customer goodwill
enough to allow returns of merchandise
unaccompanied by a receipt to prove pur-
chase of the item. Apparently there were
those who had learned to take advantage of
this situation and could obtain cash simply
by entering the store, picking up an item from
the shelf, and going to customer service with
a story that it was a gift, they had not been
given a receipt, and so on. Voila! Cold, hard
cash for very little effort!
The class discussed this situation, and
students overall expressed their opinions that
a store should insist on receipts with mer-
chandise returns, and if it did not, there was
not much else that could be done to thwart
the above-mentioned type of theft. The con-
versation seemed over. However, the students’
previous written assignments showed that
they could be much more creative.
The situation was made more challenging
in the following two ways: the professor
described how a customer could defraud the
store even with a receipt, and the students
were instructed to design a response involv-
ing one of four types of solutions.
Concerning the first challenge, the receipt,
it was pointed out that a customer could
obtain a receipt, legitimately or not, return to
the store the next day with the receipt hidden,
go to the section containing items like the one
already listed on the receipt, take the item to
customer service, and return it for cash or
exchange it for another item. Obviously, a
store might need other controls, not just a
“receipt with return” policy.
Concerning the second challenge, based on
past assignments, it was apparent that some
students, when asked to design controls to
mitigate certain risks, could be very elabo-
rate and tackle the problem as if money were
no object. Some students tended to think in
terms of technology (with a popular item
being surveillance systems!). So the class was
divided into groups, each of which was to
“solve” the merchandise return problem with
only one of the following methods:
• additional personnel;
• technology;
• reconfiguration of the store;
• documentation.
The students enjoyed tackling the problem, as
evidenced by lots of laughter during group
discussions, and the results were interesting.
Also interesting and surprising was how the
students felt territorial about their area of
“expertise”; they were not reluctant to speak
up if impinged on. For example, if one group’s
supposedly “personnel-only” solution seemed
to require additional documentation, the
“documentation” people protested (good-
naturedly, of course).
The students presented their ideas in class
and handed in, in outline form, their pro-
posed solutions. The case, in narrative form,
is included in Appendix 1. Brief examples of
the student responses are also listed there.
Discussion of cost versus benefit
The discount store problem lends itself to a
very good discussion of the cost versus bene-
fit issue. Students acknowledge that before
implementing any of their solutions, they
would want to know how much money might
be lost to the type of customer fraud
described above. The students realize that
hiring even one additional person to stand at
the entrance and watch for merchandise
being carried back into the store can be very
expensive.
This assignment relates to several of the
affective, cognitive, and behavioural compo-
nents of the critical thinking process
described in the first section of the paper. The
students in this assignment were required
first to define the terms of the problem by
understanding precisely the risks and con-
trols they were faced with. They were
required to use deductive reasoning to move
from their general understanding of controls
to specific controls that would apply to the
merchandise return problem, and thus apply
their knowledge to a new situation. Through
the use of the groups, the students were
required to encourage critical dialogue and
listen actively to their fellow students, and
were expected to welcome divergent views.
Because the solutions offered came from
different perspectives as directed by the
assignment, students found it necessary to
tolerate ambiguity, as there were several
different answers, each of which had merit.
Finally, through the class discussion of the
way the groups reached their decisions, and
the analysis of costs and benefits, the stu-
dents were required to think about their own
thinking (metacognition).
[9]
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
[ 10 ]
Assignment number two: round
robin development of the planning
process for an internal audit
The second assignment involved the “round
robin” development of an audit procedure
based on an operating objective. The purpose
of this assignment was to get students to see
how the planning process can be applied to
any work situation and to get everyone
involved in the task (unlike group work
which can sometimes leave some students on
the sidelines). This round robin project does
not allow for spectators!
After a brief class lecture on how the inter-
nal auditor takes the results of a preliminary
survey and designs the audit programme,
each of the students was instructed to think
about a job each had had in the past. They
were to engage the task in the following way:
• They were to write down and briefly
describe their job and record one operating
objective (out of perhaps many) of that
company or department.
• Then each student passed his or her piece
of paper to a neighbour, who was to
describe a risk that might be present in that
particular company or department.
• The papers were passed along to another
person who was to write down a control
that would mitigate or decrease that risk.
• The papers were passed again to a fourth
person, who was to contribute the assertion
being made related to that control and oper-
ating objective.
• The fifth person in the chain was to add an
audit objective.
• And the last person was to develop an audit
procedure that would provide the evidence
needed by the internal auditor.
Appendix 2 presents the assignment in more
detail as introduced in class.
During this class assignment, the students
were very involved in the process. There is
not much room to be the passive observer
knowing that the next person depends on
one’s own contribution to each step in the
process. They actually had a good time!
When the lists were completed, several of
the students presented the final product they
had ended up with. Examples of two of the
lists are included in Appendix 3. The presen-
tation and the ensuing discussion enabled the
professor to clear up any misconceptions or
misunderstandings, or to point out any places
where there might be a lack of connection
between any two steps in the process.
In a basic version of this assignment, the
professor might include only the operational
objective for the first step listed above, and
not include examples of goals and standards.
However, with time allowing, students could
be asked to list an idea for a related goal and
also a standard after identifying the opera-
tional objective.
In addition, with more time, the students
could be asked to critique and even revise the
growing list of steps in the planning process
rather than merely add a step based on the
previous step, as was done in our case; this
variation would involve metacognition. Also,
students could be given the opportunity to
ask the previous contributor to clarify what
was meant by that person’s item; this varia-
tion would require the students to listen
actively, think dialogically, and encourage
critical dialogue.
The students in this exercise were asked to
define the operating objective of their jobs,
and they had to think inductively, moving
from the specific experiences to general state-
ments about appropriate controls. They also
had to think about the process of creating
ideas regarding potential risks and appropri-
ate controls (metacognition). Student com-
ments about both assignments are included
in Appendix 4.
In summary, both assignments force the
students to look closely and selectively, to
analyse situations and make judgements
about them. The assignments give the stu-
dents the opportunity to learn more than just
definitions but to apply the definitions they
have learned in an analytical way, a way
which gives the principles of internal audit-
ing more meaning and which should help the
students to develop the critical thinking tools
they will need to add value to the organiza-
tions which will hire them.
Conclusion
The internal auditor is and must be a critical
thinker; critical thinking skills are essential
to the internal auditor’s function. The recent
update by Albrecht et al.[14] of the common
body of knowledge (CBOK) reflects this expec-
tation by the internal auditing profession.
Respondents ranked reasoning skills, which
essentially are critical thinking skills, as the
most important subject area. The ability to
employ critical thinking skills successfully
enables the internal auditor to operate at
Bloom’s higher level cognitive skills.
The article discusses several definitions
and frameworks of critical thinking. Huffman
et al.’s[9] critical thinking framework is both
comprehensive and useful in describing what
the internal auditor does. This framework
includes affective, cognitive, and behavioural
components which basically describe the
attitudes, thought processes and actions that
are essential to the critical thinker and to the
internal auditor. The internal auditing class-
room is an appropriate setting for the inter-
nal auditor to begin honing the critical think-
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
ing skills demanded by the profession and
described here. This article also describes
two assignments useful in developing critical
thinking skills.
References
1 Kalbers, L.P. and Fogarty, T.J., “Professional-
ism and its consequences: a study of internal
auditors”, Auditing: A Journal of Practice and
Theory, Vol. 14 No. 1, 1995, pp. 64-86.
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nal Auditor, June 1994, pp. 62-4.
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Objectives, D. McKay, New York, NY, 1956 (pub-
lished in Needles, B.E. Jr, Financial Account-
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Common Body of Knowledge for the Practice of
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Internal Auditor, October 1993, pp. 56-9.
Appendix 1
Discount store returns
Jane Price is auditing a large retail store. In
discussing the store’s merchandise return
policies and procedures, the customer service
manager expressed her concern about some
recent events. Although the discount store
chain has a policy of requiring a receipt for
all merchandise returned or exchanged, the
general understanding is that customer good-
will is too important to risk alienating cus-
tomers who try to return merchandise with-
out a receipt.
Recently, the customer service department
manager, whose department is located in the
back of the store, learned of a customer who
returned a rather costly item, in an unopened
box, explaining that it was a present and the
gift giver had not sent the receipt with it. This
customer wanted to return the item rather
than exchange it, stating, “My family doesn’t
really need any more kitchen appliances.” It
was the third time in a week that this cus-
tomer had returned a gift item without a
receipt. The customer service department
manager expressed some doubt to the cus-
tomer, revealing his and his employees’ suspi-
cions to the customer.
The following week, the same customer
purchased an item, obtained the receipt with
it, and suddenly realized: “I’ve got a receipt.
I’ll go in tomorrow with this receipt, pick the
same item off the shelf, and take it back to
exchange it for something else I want.” This
is exactly what happened. The customer ser-
vice department manager immediately real-
ized the scheme but knew, under the current
policies and procedures, that not much could
be done. She hoped that Jane Price and the
internal audit department could make some
suggestions to management.
Discussion questions
1 Assume the store manager maintains that
it must continue taking back items with-
out a receipt for the sake of customer good-
will. What additional controls could man-
agement employ to minimize losses due to
the first type of fraud discussed in the
case?
2 Assuming the store will be strict about
requiring receipts with returns, what
controls could be implemented in each of
the following categories, to mitigate the
possibility of a customer’s attempting to
defraud the store by “returning” merchan-
dise never purchased.
• additional personnel;
• technology;
• store design and layout;
• documentation.
3 Discuss the cost versus benefit issue for
the controls in each of the categories in
question (2).
Examples of student responses to assignment 1
These were as follows:
• Additional personnel: Employ a person to
stand at the entrance and check packages
or products being carried in by customers.
• Technology: For large or costly items,
brand the item with a unique ID number,
and when it is sold, record the ID number of
the item sold for a record that that particu-
lar item had been sold.
[ 11 ]
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
[ 12 ]
• Reconfiguration of the Store: Require that
returns be processed by a customer service
department which cannot be accessed from
inside the store.
• Documentation: Require that customers fill
out a form when returning merchandise
and flag individuals who attempt to make
more than one return without a receipt.
Appendix 2
Assignment 2: the planning process for an
internal audit instructions to the students
This assignment is designed to incorporate
the concepts in the textbook related to the
preliminary survey and audit programmes.
We are going to develop examples, based on
your own job experiences, of the following
concepts or steps in the audit planning
process:
1 Identifying a company’s (or department’s
or function’s) objectives, goals and stan-
dards:
During the preliminary survey the audi-
tor needs to determine the objectives of
the activity being audited. An objective
describes what an activity intends to
accomplish. Goals would be ways of mea-
suring progress towards the objective.
Standards are the target or the level of
achievement that would signal attain-
ment of the objectives.
2 Identifying the risks to the organization:
The internal auditor, in the preliminary
survey, also needs to identify the particu-
lar exposures or losses that the organiza-
tion may incur either from human error
or deliberate wrong-doing by employees
or others.
3 Identifying controls that are or should be in
effect to reduce the risks identified (step 2)
or to accomplish the objectives identified
in step 1:
In the planning process the auditor
determines whether certain controls
exist, that is, whether they have been
implemented and are working as
designed.
4 Identifying the related assertion:
The management assertion is what man-
agement is saying is being accomplished
by that function or operation. [This step
was added to bring the list, if necessary,
back to the basic operating objective
(just in case it veered away too much
from the first step).]
5 Determining the audit objective:
Internal auditors must set their own
audit objectives, that is, what they
intend to accomplish in the audit. Audit
objectives are different from operating
objectives which describe what the orga-
nization wants to accomplish.
6 Determining the audit procedures to be
used:
Audit procedures are the specific steps
taken by internal auditors to obtain the
evidence they need to achieve their audit
objectives. The audit procedures must be
related to the audit objectives for the
evidence obtained to enable the auditor
to reach conclusions that are valid.
The basic process outlined above can be
applied to any activity that is to be audited.
Choose a job that you have held or currently
hold and describe that job. Then write down
one operating objective of the department you
worked in or the company you worked for.
Initial or sign your job description and objec-
tive; pass your paper to the person behind
you. On the paper you receive, write down a
risk or exposure for that company related to
that particular operating objective you see
before you. Pass the paper to the person
behind you. Again, on the paper you receive,
write down a description of a control that
company could or should implement to
reduce the risk you see described for that
company. Pass the paper to the student
behind you. On the paper you receive, read
carefully the operating objective, risk, and
control you see described and write down
what your audit objective would be if you
were assigned to audit that activity; pass
along the paper again. Finally, on the paper
you receive, design and describe an audit
procedure that you would use to gather the
evidence needed to meet the audit objective
you see listed. Each time you make a contri-
bution to the process, initial what you add.
Appendix 3
Examples of two of the student-developed
lists from assignment 2
Example 1: Brooks Center for the Performing
Arts
• Operating objective: To manage or conduct
as near to perfect backstage work as well as
theatrical lighting and to design a func-
tional theatre atmosphere.
• Risk: Faulty lighting may destroy a perfor-
mance.
• Control: Lighting supervisor.
• Assertion: Have, as a means of employment,
a requirement that employees have exten-
sive experience with respect to lighting and
design.
• Audit objective: To see if procedures have
been performed correctly.
• Audit procedure: Distribute the National
Lighting Supervisors Aptitude Test
(NLSAT) to potential supervisors. To
observe the performance of the lighting
during a performance.
Lydia L.F. Schleifer
and Mary Brady Greenawalt
The internal auditor and the
critical thinking process
Managing Auditing Journal
11/5 [1996] 5–13
Example 2: Student Development Office of the
University
• Operating Objective: To minimize the num-
ber of student getting in disciplinary (sic)
problems (i.e. break university rules and
regulations).
• Risk: The programme used does not meet it
(sic) objective to minimize # of student
(sic)in trouble.
• Control: Hold public seminars telling stu-
dents what is expected and what are the
consequences of their actions
(punishments enforced).
• Assertion: We try to minimize the number
of students getting in trouble but take
action against the ones who do.
• Audit objective: To obtain evidence that
action is taking (sic) against students with
a disciplinary problem.
• Audit Procedure: Survey of students to
determine percentage of student (sic) going
through the judicial process
Appendix 4
Selected comments from the students
Responses to Assignment 1
1 Was the project beneficial as a learning
experience? Why or why not?
Yes it was. It made us think of how to solve
the problem from those different points of
view. It also allowed for some class discus-
sion.
Yes. The hardest part though was sticking
to just what we were assigned. We really
had to think of something to go with our
part.
Yes. The project stimulated thought about
some of the real life occurrences involving
theft or fraud. The project gave insight
into some possible deterrents to the fraud.
Yes it was because this issue seems to be a
major problem for the stores. I don’t know
if any of our solutions were feasible but it
would be interesting to see if they would
work.
Yes, I have worked retail before and was
aware of means of controlling this situa-
tion. I found this assignment interesting in
that our class, consisting of a diverse
group of students, offered a diverse array
of solutions.
Yes, this case forces the students to focus
on one area and get feedback from group
members in order to devise a reasonable
solution.
The project was beneficial because it
allowed us to think about the problem as if
we were working for the store, and we were
given constraints as to how to solve the
problem. It allowed us to be imaginative.
Yes – it made the group think up solutions
independently. There was no right or
wrong answer.
Yes. It helped develop our interpersonal
skills because we worked on the project as
a group and all get to share our ideas and
analyse the situation together.
2 Would you recommend that future classes
be given this assignment? Why or why not?
Yes. It stimulates the mind. Auditors have
to be analytical and that is what this does.
Yes, it is a very interesting subject and
helps us to think with an internal auditing
frame of mind.
Yes, because it is a practical application of
what I think internal auditing is.
Yes, it applies to a real world situation –
We’ve all been in a WalMart.
Yes. It makes you think about how to solve
a problem that you often wouldn’t think
much about and come to a decision as a
group.
Responses to Assignment 2
1 Was the project beneficial as a learning
experience? Why or why not?
This was extremely beneficial because I
had absolutely no understanding of the
whole process until we did that. It was
easy and it put the idea into something
that we could learn step by step.
Yes. It actually got me thinking about some
aspects of my job. It made me aware that I
did learn a lot about my place of employ-
ment.
Yes because it reinforced the topics in the
textbook. It made them more understand-
able when applied to real situations.
Yes, it was beneficial but I did not like to
follow an idea of someone else. If it was
wrong (their idea or step)it would be hard
to correct it by following them.
This project was very interesting. We were
able to participate and contribute to a
variety of different situations, in that each
case was originated individually.
Yes, each student should be able to see and
understand objectives, goals and stan-
dards. Students will not always be able to
get feedback from a group and to be able to
understand the organizational aims is an
important concept.
2 Would you recommend that future classes
be given this assignment? Why or why not?
Yes – it applies to a job we actually did, so
we have a clearer understanding.
Yes, because the rotation of papers is good
to put you in a foreign situation to do the
procedure. It tells you that you don’t (sic)
need to be an expert to do the audit.
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