Expected length: 3,000 word (+/- 10%)
This assessment is based on a case study of Wonderville Shire Council focussing on considering the work of an internal auditor, understanding and assessing internal control, computerised systems and application of relevant auditing standards.
Students will need to demonstrate understanding of the key issues in the relevant literature and apply their research to the area of discussion and investigation.
Academic writing skills will be assessed. This includes introduction, conclusions, high level of critical analysis and discussion of contents from academic journals and other supporting textbooks. THIS DOES NOT INCLUDE WIKIPEDIA.
A minimum of five (5) academic journal articles (no earlier than 2006) should be sourced. All references must be cited in-text and listed in the reference section. Footnotes are NOT to be used.
Please identify your response to each of the six (6) questions separately within your assignment.
All assignments must include a signed cover sheet of the group participants and a copy of the marking guide.
You are the senior external auditor assigned to the audit of the Wonderville Shire Council (Council), a large council with its own internal audit department. Your audit manager has given you the task of evaluating the internal audit department s work and its effect on the audit program. The Council has an elected council and a general manager who heads the staff. Key departments are headed by directors who report to the general manager.
Information from the internal auditor
You have obtained the following information from Peter McFarland, director of internal audit.
– Peter reports to the general manager, and also reports independently to the audit committee on a quarterly basis.
– The audit committee is an advisory board whose three members are appointed by the Council in general session from recommendations made by the Council s director of corporate services and the general manager.
– Members of the audit committee are usually retired accountants or business people, who are entirely independent of the council. They meet quarterly and receive and approve the quarterly report of internal audit at their meeting.
– Peter s staff consists of three people:
o Jane Stafford, a Chartered Accountant with five years audit experience;
o Mark Buren, a junior auditor with a Bachelor of Accounting degree and two years audit experience; and
o Susan du Bois, a qualified lawyer with 10 years general legal experience
They have all been with the Council for two to five years.
– Peter McFarland has been with the council for seven years and is a Chartered Accountant with 15 years audit experience. He and Jane are members of the Institute of Internal Auditors Australia.
– The work program of internal audit is proposed by Peter, taking into account requests submitted by the audit committee, the general manager, the finance director and your firm. The program receives final approval from the audit committee. Councillors and Council staff must submit requests through the general manager or the finance manager
– The general manager is highly supportive of the work of Peter s department and has always acted swiftly to implement its recommendations
– Internal audit staff have to complete at least 40 hours of training, at least half of which must be specific to internal audit issues. Training is mostly provided by outside bodies.
– Peter and Jane usually head up the audit team, but Susan takes the lead where legal knowledge is necessary for the audit program.
– Peter reviews the work of other staff but his work is not reviewed.
Documentation regarding internal audit
The documentation you have obtained, recording the work and procedures of internal audit at the Council, has given you the following information.
– The internal audit work program covers most of the Council s significant accounting operations. As well as other areas where risk has been identified by the Council s risk management committee.
– Reports on the findings and recommendations of internal audit work performed at the Council are clear and comprehensive.
– Working papers are neatly indexed, showing the objective of the work, the assessment of risks, the audit plan and program and the persons completing the work, as well as sufficient and appropriate evidence to back up their conclusions.
– Internal control issues and fraud are always considered, and audit procedures to establish the effectiveness of controls are undertaken.
– The procedures manual is comprehensive and provides a lot of detailed information regarding the various business services of the Council.
– The audit committee minutes always include discussion and approval of the internal audit report, as well as the committee s recommendation regarding action to be taken on problem areas where these have not yet been addressed.
In examining the internal audit department s work program for the year, you note that it completed two audits that directly relate to risks that you have identified ion your risk analysis. These are:
– Tender and buying procedures; and
– Completeness of income.
The tender and buying procedures have been the subject of a number of frauds at the Council in previous years. These have involved the procedures for receiving, evaluating and approving tenders being subverted by staff taking bribes from suppliers. The drafting of tender specifications and clauses in legal agreements, as well as tender opening procedures, are the areas most at risk of manipulation in favour of one supplier.
The completeness on income has also been a concern in the past due to problems in the invoicing department, including late invoicing, poor cut-off procedures and long delays in issuing credit notes. This last problem is mostly due to the Council s software not being programmed to use current costing rates.
1) Explain why it is necessary to evaluate the internal audit department.
2) With reference to Appendix 1 to ASA 610, assess whether the work of the internal audit department can be relied upon for the external audit. Explain your reasoning.
3) Describe two audit procedures that you would expect to see in the internal audit department s work program relative to the two risks that you identified in your risk analysis above.
4) Explain who you would expect to be leading the internal team auditing the tender and buying process. Explain your reasoning
During the year Wonderville Shire Council implemented a new accounting system. As part of understanding the significant change to the Council s control environment you have asked your junior audit partner to analyse and review the new accounting system at Wonderville Shire Council. The junior audit partner has identified the following controls relating to the operation of the new accounting system.
a) Users cannot override the customer name when entering an account code
b) Users cannot change data fields such as address, invoice date, discount rates, unit sell price, GST rate, stock descriptions and payment terms
c) At the end of each day, a sales report is printed out and reconciled to the postings in the general ledger by the head of accounting at MSL
d) Users cannot process transactions if the customer balance exceeds trhe credit limit and, therefore, such an invoice will not be posted
e) Users cannot post a transaction if there are incomplete data fields (e.g. account code, stock product code)
f) Users cannot enter negative values (e.g. quantity, price)
g) All sales processed on 28-30 June are automatically posted to the July ledger because the warehouse is closed over these dates, so any sales will belong to the July period
h) All data is backed up on a nightly basis
i) Login to any computer that has an accounting program installed is restricted to authorised accounting staff. These staff must choose passwords comprising a minimum of eight characters and a mix of numerals and letters. Passwords must be changed monthly
j) All authorised accounting staff are specifically trained in the use of the new accounting system, the accounting software provider employs a third-party help desk that Council staff can ring at any time.
5) Identify whether each of the controls listed from a) to j) above is an IT application control, an IT general control or a manual control.
6) Explain each of your answers provided in
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