RoleofInternalAuditor(CMA12904Y8)

LeighIndustrieshasaninternalauditdepartmentconsistingofadirectorandfourstaffauditors.The
directorofinternalaudit,DianeBauer,reportstothecorporatecontroller,whoreceivescopiesofall
internalauditreports.Inaddition,copiesofallinternalauditreportsaresenttotheauditcommitteeofthe
boardofdirectorsandtheindividualresponsiblefortheareaofactivitybeingaudited.
Inthepast,thecompanysexternalauditorshavereliedontheworkoftheinternalaudit
departmenttoasubstantialdegree.However,inrecentmonths,Bauerhasbecomeconcernedthatthe
objectivityoftheinternalauditfunctionisbeingaffectedbythenonauditworkbeingperformedbythe
department.Thispossiblelossofobjectivitycouldresultinmoreextensivetestingandanalysisbythe
externalauditors.Thepercentageofnonauditworkperformedbytheinternalauditorshassteadily
increasedtoabout25percentofthetotalhoursworked.Asampleoffiverecentnonauditactivities
follows.
Oneoftheinternalauditorsassistedinthepreparationofpolicystatementsoninternalcontrol.
Thesestatementsincludedsuchthingsaspoliciesregardingsensitivepaymentsandthe
safeguardingofassets.
Reconcilingthebankstatementsofthecorporationeachmonthisaregularassignmentofoneof
theinternalauditors.Thecorporatecontrollerbelievesthisstrengthenstheinternalcontrol
functionbecausetheinternalauditorisnotinvolvedineitherthereceiptorthedisbursementof
cash.
Theinternalauditorsareaskedtoreviewtheannualbudgeteachyearforrelevanceand
reasonablenessbeforethebudgetisapproved.Attheendofeachmonth,thecorporate
controllersstaffanalyzesthevariancesfrombudgetandpreparesexplanationsofthese
variances.Thesevariancesandexplanationsarethenreviewedbytheinternalauditstaff.
Oneoftheinternalauditorshasbeeninvolvedinthedesign,installation,andinitialoperationofa
newcomputerizedinventorysystem.Theauditorwasprimarilyconcernedwiththedesignand
implementationofinternalaccountingcontrolsandconductedtheevaluationofthesecontrols
duringthetestruns.
Theinternalauditorsaresometimesaskedtomaketheaccountingentriesforcomplextransactions
astheemployeesintheaccountingdepartmentarenotadequatelytrainedtohandlesuch
transactions.Thecorporatecontrollerbelievesthisgivesanaddedmeasureofassurancetothe
accuraterecordingofthesetransactions.
Required:
a.
Defineobjectivityasitrelatestotheinternalauditfunction.
b.
Foreachofthefivenonauditactivitiespresented,explainwhethertheobjectivityof
LeighIndustriesinternalauditdepartmenthasbeenmateriallyimpaired.Considereachsituation
independently.
c.
Thedirectorofinternalauditreportsdirectlytothecorporatecontroller.Doesthisreporting
relationshipaffecttheobjectivityoftheinternalauditdepartment?Explainyouranswer.
d.
WouldyourevaluationofthefivesituationsinQuestionbchangeifthedirectorofinternalaudit
reportedtotheauditcommitteeoftheboardofdirectors?Explainyour answer.
Response:
a.
Theinternalauditormusthaveandmaintainobjectivity,whichimpliesnosubordinationof
judgmenttoanotherandarisesfromanindependentmentalattitudethatviewseventsonafactualbasis
withoutinfluencefromfeelings,prejudice,opinions,orinterests.
b.
i.Theinternalauditorsobjectivityisnotimpairedbythepreparationofpolicystatementson
internalcontrol.Thepreparationofpolicystatementstoguideothersinthedevelopmentand

implementationofinternalcontrolsisaresponsibilityoftheinternalauditstaff.
ii.Theinternalauditorsobjectivityisimpaired.Inordertomaintainobjectivity,theauditorshould
notperformoperationalassignmentsthatareincludedaspartoftheindependentevaluationand
verificationofapropersystemofinternalcontrol.Separationofdutiesmustbemaintained.
iii.Objectivityisnotimpairedinthereviewofthebudgetforrelevanceandreasonablenessifthe
internalauditorhasnoresponsibilityforestablishingorimplementingthebudget.However,thereviewof
variancesandexplanationswouldimpairobjectivityasthisisanareathatwouldnormallybereviewed
duringanoperationalaudit.
iv.Objectivityisimpairedtotheextentthattheinternalauditorhasbeeninvolvedinthedesignand
installationofinternalaccountingcontrolsbecausetherewillbelittleconfidenceinauditfindingsissued
bytheindividualwhodesignedandinstalledthesystembeingaudited.
v.Thepreparationofaccountingrecordswillmateriallyimpairtheinternalauditorsobjectivityby
involvingtheauditorindaytodayoperations.
c.
i.Thisreportingrelationshipadverselyaffectstheobjectivityoftheinternalaudit
Department.Thecorporatecontrollerisresponsiblefortheaccountingsystemandrelatedoperational
transactions.Theinternalauditstaffisresponsiblefortheindependentandobjectivereviewand
examinationoftheaccountingsystemandrelatedoperationaltransactions.Independenceandobjectivity
maynotexistbecausetheinternalauditstaffisresponsibleforreviewingtheworkofthecorporate
controller,thepersontowhomitreports.
ii.No,theresponsesforQuestionbwouldnotbeaffectedbytheinternalauditstaffreportingtoan
auditcommitteeratherthanthecorporatecontroller.Inordertomaintainobjectivity,theinternalaudit
staffshouldrefrainfromperformingnonauditfunctionssuchasmanagementdecisionmaking,design
andinstallationofsystems,recordkeeping,oroperationalduties.