1. The internal auditors report directly to the CEO and the CEO is the one who decides on the audit plan.
Control Weakness: The CEO sets up all the meetings that take place between the internal auditors and the audit committee and the director of the internal audit department doesn’t have outside access to the audit committee. Although the internal audit department is in charge of giving a presentation to the audit committee, the CEO must filter everything that is reported (including all documentation). Also, whenever there tends to be questions in regards to the receiving, processing or manufacturing functions, the CEO just refers the auditors to the Human Resources department, instead of going into detail on the issues that are raised.
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This organizational structure is useless and does not allow for effective internal control over financial reporting. The CEO can easily steer the internal auditors away from key issues. Objectivity of information is compromised because the internal auditors can simply be under pressure to misstate financial statement account balances.
Recommendation: The internal auditors need to report directly to the Audit Committee, and not the CEO. By doing so, the internal auditors will be able to work independently outside of management control. This will allow for the internal auditors to exercise due care about issues raised that can be conflicting with the CEO’s agenda. Internal auditors must have direct access to the audit committee so that they are able to report on significant deficiencies that arise and to be able to address these deficiencies with management. Furthermore, the overall control environment can be improved and risk assessment can decrease if there is that open communication between the auditors and management. 2.The machine operator’s pay is contingent on the number of spheres that go through helixination.
Fraud Risk: This is a fraud risk because the machine operator’s economic incentives can have a drastic influence on the production process. The operator can push green spheres through the helixination process and still can get paid
Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences
The three scenarios illustrated above clearly shows that the investment in the new machine creates greater value to the company, unless there should be some unexpected turnout in sales. By acquiring the Vulcan Mold-Maker machine Fonderia di Torino S.p.A will be able to replace labor intensive required semi-automated machines with automated machines, thus reducing medical claims. The company will also benefit from higher levels of product quality and lower scrap rates. Labor costs will be reduced by almost 298,334.4
Furthermore, when the internal control is fixed, the outside auditor can rely on the clients system and less audit testing can be conducted. When everything is improved, the management letter is given to the organization’s top management and not disclosed to the public, (Finkler, S. A., Ward, D. M., & Calabrese, T. D., 2013). Next, is the auditor’s report that entails the opinion letter usually written in three paragraphs and given to the board of trustees. Then, the opinion paragraph is added on to state the organizations financial statements are in accordance of the financial position and followed through with (GAAP). The clean opinion addresses the opinion of the auditor and the overall exercising of professionalism. Also, the complete opinion of the financial statements is to give a representation of the organization. All other opinions may be included and can be addressed by adverse opinions if (GAAP) was not in accordance. A qualified opinion can be added if a specific area wasn’t included in the financial statement when needed. Finally, the management reports are conducted by the management team and not the auditors. The management report is the annual report the topics included in the report are the internal control system and the responsibility of the audit committee.
Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and
Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.
As the internal auditor he is responsible for assuring that the firm is maintaining its records and reporting its financial results in accordance with the FASB rules and regulations and GAAP. If the CFO still refuses to make the necessary policy modifications required to the accounts receivable procedures in order to comply with the rules then as a matter of maintaining his integrity, and with the stakeholders in mind Willie should then make an appointment with the board of directors audit committee to relay the failure in failing to meet the rules and regulations set out by the FASB in accordance with GAAP.
There should be no reason that the internal auditors are reporting to the financial vice president when they should be reporting to the board of director audit committee.
It is highly recommended that the CFO does not interfere with the CAE’s job to provide feedback directly to the audit committee. Moreover, the company’s strategy should be discussed to assure that COO, marketing and sales VP and general counsel do not take passive roles. Additionally, the CFO should not focus so greatly on opposite strategy as presented by the CEO, as now the CEO wanted to maintain secure growth via acquisitions, securing gap in production and more geographic coverage, and on the other had the CFO wanted only more and more new acquisitions, which was not the right approach because his subordinates may have been confused about company’s strategy.
Even though The Schwan Food Company is a private company, since the company’s goal was to double its size in five years, establishing an internal audit function could provide assurance and consulting services to help the company achieve its objectives and expand globally. The four factors that may have caused The Schwan Food Company to change its internal control practices and corporate governance structure are,
Fraud Risk: These weakness affects all levels of the internal control environment and other areas of the company. It shows that internal controls are not as important as meeting the company’s performance outlooks. If management does not openly display ethical conduct, the expectation of fraud and misappropriation
The company should hire it’s own internal auditor’s to ensure that the staff understand the company’s accounting procedures. This also helps the external auditor as it give the external auditor another viewpoint when assessing fraud risks. The internal auditors are apart of those charged with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
The purpose of this paper is to highlight the role of external auditing in promoting good corporate governance. The role of auditors has been emphasized after the pass of the Sarbanes-Oxley Act as a response to the accounting scandal of Enron. Even though auditors are hired and paid by the company, their role is not to represent or act in favor of the company, but to watch and investigate the company’s financials to protect the public from any material misstatements that can affect their decisions. As part of this role, the auditors assess the level of the company’s adherence to its own code of ethics.
Section 404 requires public companies to establish internal controls and report annually on their effectiveness over financial reporting. The CFO and CEO are held personally responsible for the internal controls via the requirement to sign a statement certifying the adequacy of the internal control system (Moffett and Grant, 2011, p. 3). Additionally, the company’s independent auditor must issue an attestation regarding management’s assessment of the internal structure as part of the company’s annual report (Bloch, 2003, p. 68).
The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.