ACC 383.

2 Management
Audit and Control – Class 17
Urton Anderson

Class 17 Fall 2010 1

Administration
 “Interview” workpaper
 GAO/Other report
 Written Description of Auditee –October 26
 Case 3 – October 28

Class 17 Fall 2010 2

Today’s Agenda
 Case 2
 Sampling
 PPS sampling
 Judgment sampling
 Options to sampling
 Reporting
 Internal Control

Class 17 Fall 2010 3

Written Description
“Memo” or WP which describes:
1. Objectives of Operations
- units responsibilities
2. Environmental Constraints
- internal (org policy)
- external (laws and regs)
3. Resources
- unit's financial resources
- unit's human resources
- unit's information processing resources
4. Function Components
- org chart of unit
- flowchart of (basic) operating process
5. Management
- background and impressions of
6. Analytical Review Results (if applicable

Class 17 Fall 2010 4

Internal Audit Selection of
Auditee

Process Audit
Preparation

Preliminary
Survey of
Operations

Control
Description &
Analysis

Expand
Test of
Controls
Develop Findings
&
Recommendations

Reporting Reporting

Follow-up

Audit
Class 17 Fall 2010 5
Evaluation
Reporting
 Observation Evaluation and Escalation
 Reporting
 written report
 interim
 closing conference
 follow-up

Class 17 Fall 2010 6

Observation Evaluation and
Escalation
 What is an observation?
 Observation evaluation

Class 17 Fall 2010 7

What is an observation (finding)?
 Conclusion during an engagement that the
risk is not adequately managed (operations)
 Conclusion that internal control activities in
the engagement are not properly designed or
not operating as intended (design)

 Gap between criteria (what should be) and

what is
Class 17 Fall 2010 8
Observation evaluation
 Insignificant
 Significant
 Material

Class 17 Fall 2010 9

Insignificant
 Individual observation , or group of observations
where the control activity has a remote likelihood of
failing or the impact of its failure is inconsequential
 SOX environment – is a key control involved?
 No key control – management in area only
 Key control – even if insignificant - formal
communication to higher level management and
external auditor

Class 17 Fall 2010 10

Significant
 Individual observation, or group of
observations where control activity has more
than a remote likelihood of failing and the
impact is more than inconsequential
 Communication – higher management,
external auditor, audit committee

Class 17 Fall 2010 11

Material
 Individual observation , or group of
observations where control activity has more
than a remote likelihood of failing and the
impact is not only more than inconsequential,
but exceeds the f/s materiality threshold (e.g.
5% pretax NI)
 Communication – higher management,
external auditor, audit committee and
shareholders (under some laws)
Class 17 Fall 2010 12
AS 5
Material Weakness

Significant Deficiency

Deficiency
Class 17 Fall 2010 13
The Report
Purpose:
(1) INFORM - tell what the auditors found
(2) PERSUADE - convince management of the
worth and validity of the audit findings
(3) GET RESULTS - move management toward
change and improvement

Class 17 Fall 2010 14

Class 17 Fall 2010 15
STRUCTURE OF REPORT
Part I.
(1) Executive Summary
Part II.
(1) Purpose of Audit (R)
(2) Scope (R)
(3) Background - description of function reviewed
(4) Summary of Findings (R)
Part III
(1) Detail Findings and Recommendations
(2) Distribution list
Class 17 Fall 2010 16
Class 17 Fall 2010 17
Part III
Audience: function management and one level up
(1) Detail Findings and Recommendations
Worksheet for developing findings
Summary create awareness
Condition reinforce awareness
Criteria create awareness and acceptance
Effect create acceptance
Cause create acceptance and impel action
Recommendation impel action

Class 17 Fall 2010 18