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AUI4861 2020 TL 201 - Assignment answers

Advanced Internal Audit practice (University of South Africa)

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Tutorial Letter 201/0/2020

INTERNAL AUDIT PRACTICE

AUI4861

Year course

Department of Auditing

IMPORTANT INFORMATION
This tutorial letter contains important information about
your module.

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KEY TO ASSIGNMENT 01/2020

1.1 Option 3 is correct. This is a primary function of any internal auditing department.
Option 1 is incorrect. Only significant audit findings should be discussed with the audit
committee. Option 2 is incorrect. Internal auditors are not required to report deficiencies in
regulatory compliance to the appropriate agencies. However, IIA members and Certified
Internal Auditors (CIAs) may not knowingly be involved in illegal acts. Option 4 is incorrect.
This is not a primary objective of the internal auditing department. It is a budgetary control
that management may require on a periodic basis.

1.2 Option 4 is correct. The IIA Standards specifies that an auditor who has been
promoted to an operating department should not continue on an audit of the new department.
Option 1 is incorrect. The Standards state that budget restrictions do not constitute a violation
of an auditor’s independence. Option 2 is incorrect. The Standards state that an auditor may
participate on a task force that recommends new systems. However, designing, installing, or
operating such systems might impair objectivity. Option 3 is incorrect. The Standards state
that an auditor may review contracts prior to their execution.

1.3 Option 2 is correct. The IIA Standards indicate that the auditor should inform the
appropriate authorities in the organisation if there are sufficient indicators of the commission
of a fraud. Options 1 and 3 are incorrect. The action does violate the Code of Ethics. Option 4
is incorrect. The action does violate the Code of Ethics, but the auditor should report the
unlawful activities to the appropriate personnel within the organisation, not to a regulatory
agency.

1.4 Option 2 is correct. The IIA Standards require the director to ensure that audit work
conforms to the Standards. The Standards require the department to provide adequate
supervision depending on the proficiency of the auditor. Option 1 is incorrect. The Standards
do not require all auditors to be proficient in all areas. The department should have an
appropriate mix of skills. Option 3 is incorrect. Although the Code of Ethics does not address
supervision directly, it does require the chief audit executive to follow the Standards. Option
4 is incorrect. The audit department did not follow the IIA’s Standards and Code of Ethics.

1.5 Option 1 is correct. According to the IIA Standards, objectivity may be impaired if the
bonus is based on rand recoveries or recommended future savings as a result of audits. A
bonus based on either of these criteria could unduly influence the type of audits performed or
the recommendations made. Option 2 is incorrect. According to the IIA Standards, objectivity
is not impaired if the bonus is administered by the board of directors or its salary
administration committee. Use of a board compensation committee would be an
environmental factor, which would enhance the CAE’s independence and objectivity. Option 3
is incorrect. According to the IIA Standards, objectivity is not impaired if the scope of internal
auditing work is reviewing control rather than account balances. Compensation packages are

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often tied to financial results. If the scope of work was reviewing account balances, the CAE
might be unduly influenced to report results, which would be favourable to his bonus. In
contrast, there would be less inducement if the scope of work were limited to reviewing
controls. Option 4 is incorrect since only one answer is correct.

1.6 Option 4 is correct. Because the auditor reports directly to the board of directors, he
has organisational independence. Option 1 is incorrect. Because the auditor reports directly
to the board of directors, he has independence and therefore objectivity. Option 2 is incorrect.
The auditor has objectivity because he reports directly to the board of directors. He is,
however, not exercising objectivity because he is trying to avoid conflict. Option 3 is incorrect.
The auditor has organisational independence because he reports directly to the board of
directors (the highest level in the organisation). The auditor has not exercised his
independence because, although he can render any opinion he wants, he has lost his
objectivity by adjusting his opinion.

1.7 Option 3 is correct. Within the definition of due professional care, the Standards
include the evaluation of operating standards for acceptability and determining whether they
are being met. Option 1 is incorrect. Communication between the CAE and the board of
directors is part of the Independence standard, not the Due Professional Care standard.
Option 2 is incorrect. The amount of audit time and effort required to give absolute assurance
that there are no irregularities would be so great that the audit costs would exceed the
benefits. Option 4 is incorrect. Criteria for filling internal audit positions relate to the Staffing
standard; they do not relate directly to the performance of an audit.

1.8 Option 2 is correct. Auditors sometimes must rely on outside experts; the IIA
Standards allow this reliance. Options 1, 3 and 4 are incorrect as these can compromise an
auditor’s objectivity.

1.9 Option 1 is correct. Insider trading is the use of knowledge obtained as part of the
work of an auditor for personal gain and that contravenes the Code of Ethics – Confidentiality
which states “Internal auditors shall not use information for any personal gain or in any
manner that would be contrary to the law or detrimental to the legitimate and ethical
objectives of the organisation”.

1.10 Option 4 is correct. Auditor skills become a consideration during audit scheduling.
Risk analysis is done prior to the start of an audit, where factors such as system complexity,
system changes, and results of prior audit are very important to consider. These factors
determine whether an auditable area is high risk, medium risk, or low risk. Options 1, 2 and 3
are incorrect as these are considered in performing a risk analysis exercise.

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1.11 Option 4 is correct. The Institute of Internal Auditors provides the following purposes
of the Standards:

1. Guide adherence with the mandatory elements of the International Professional

Practices Framework.
2. Provide a framework for performing and promoting a broad range of value-added
internal auditing services.
3. Establish the basis for the evaluation of internal audit performance. (option 4)
4. Foster improved organisational processes and operations.

1.12 Option 4 is correct. The IIA Standards say that persons transferred to the internal
auditing department should not be assigned to audit those activities they previously
performed until a reasonable period of time (that is one year) has elapsed. Option 1 is
incorrect. The IIA Standards says the internal auditor’s objectivity is not adversely affected
when the auditor reviews procedures before they are implemented. Option 2 is incorrect.
Standards say the internal auditor’s objectivity is not adversely affected when the auditor
recommends standards of control for systems before they are implemented. Option 3 is
incorrect. Use of staff from other areas to assist the internal auditor does not impair
objectivity, especially when the staff is from outside of the area being audited.

1.13 Option 3 is correct. The auditor should accept the engagement, assign staff with
sufficient control knowledge, and make recommendations where appropriate. This would not
impair objectivity. Option 1 is incorrect. The auditor should accept the engagement.
Recommending controls is not considered a violation of the auditor’s independence or
objectivity. Option 2 is incorrect. The auditor should accept the engagement. Auditors should
have control knowledge that is not limited to accounting controls. Option 4 is incorrect. The
audit is not impaired by making control recommendations.

1.14 Option 3 is correct. Per the IIA Standards, the chief audit executive is responsible for
providing appropriate audit supervision. Option 1 is incorrect. Although the audit committee
may determine whether due care is being exercised by the chief audit executive, audit
supervision is not the committee’s responsibility. Option 2 is incorrect. Although the audit
supervisor may act on behalf of the director, the director is ultimately responsible for audit
supervision. Option 4 is incorrect. It is the senior or in-charge auditor who is in need of
supervision, for which the director is responsible.

1.15 Option 4 is correct. The IIA Standards 2040 states that “the chief audit executive must
establish policies and procedures to guide the internal audit activity”.

1.16 Option 2 is correct. According to IIA Standards 2050, “the chief audit executive
(option 2) should share information, coordinate activities, and consider relying upon the work

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of other internal and external assurance and consulting service providers to ensure proper
coverage and minimize duplication of efforts”.

1.17 Option 4 is correct. According to IIA Standards 2050, “The chief audit executive must
report periodically to senior management and the board on the internal audit activity’s
purpose, authority, responsibility, and performance relative to its plan (option 4) and on its
conformance with the Code of Ethics and the Standards. Reporting must also include
significant risk and control issues, including fraud risks, governance issues, and other
matters that require the attention of senior management and/or the board”.

1.18 Option 1 is correct. The external auditor assesses the objectivity and competence of
the internal auditors only if he/she intends to rely on their work.

1.19 Option 4 is correct. The IIA Standards, not the Code of Ethics, requires internal
auditors to communicate audit results. Option 1 is incorrect as it refers to the Integrity
principle of the Code of Ethics. Option 2 is incorrect as it refers to the Objectivity principle of
the Code of Ethics. Option 3 is incorrect as it refers to the Competency principle of the Code
of Ethics.

1.20 Option 1 is correct. According to the King IV Report, it states “Ethical leadership is
exemplified by integrity, competence, responsibility (Option 2), accountability, fairness (Option
4) and transparency (Option 3)”. Therefore, option 1 is correct, since it is not identified in the
King IV Report.

1.21 Option 2 is correct. According to the King IV Report, it states “King IV has moved from
‘apply or explain’ to ‘apply and explain’.

1.22 Option 2 is correct. According to Section 36 of the PFMA, it states “Every department
and every constitutional institution must have an accounting officer. (a) the head of a
department must be the accounting officer for the department; and (b) the chief executive
officer of a constitution institution must be the accounting officer for that institution”.

1.23 Option 3 is correct. The question requires you to identify the option that is not an
objective of King IV. According to King IV, it states that the “objectives are to

 Promote corporate governance as integral to running an organisation and delivering

governance outcomes such as ethical culture (Option 2), good performance, effective
control and legitimacy (Option 4).

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 Broaden the acceptance of the King IV by making it accessible and fit for
implementation across a variety of sectors and organisational types.

 Reinforce corporate governance as a holistic and interrelated set of arrangements to

be understood and implements in an integrated manner.

 Encourage transparent and meaningful reporting to stakeholders (Option 1).

 Present corporate governance as concerned with not only structure and process, but
also with an ethical consciousness and conduct”.

Therefore, option 3 is correct since it is not included as an objective of the King IV.

1.24 Option 1 is correct. SOX has placed more responsibilities upon the audit committee,
including the following:

 Establishing a code of conduct for corporate executives.

 Launching a whistleblower function.

 Supervising the formal assessment of internal controls.

 Approving all non-audit services of the external auditors.

 Understanding the financial and internal control issues. One of the independent
audit committee directors should therefore be a financial expert. Therefore,
option 1 is correct.

Option 2 is incorrect. The audit committee, not senior management, should approve all non-
audit services of the external auditors. Options 3 and 4 are incorrect. SOX requires that one
of the audit committee members be a financial expert. Therefore, it is not required that the
chairman or majority of the members need be financial experts.

1.25 Option 4 is correct. The initial step for governance is leadership. King IV states:
“Corporate governance, is defined as the exercise of ethical and effective leadership by the
governing body (board)”. A company has to look at their ownership/leadership structure
before being able to understand the reality of corporate governance in their company. Option
1 is incorrect. Reading and understanding the relevant reports would be subsequent steps in
understanding the reality of corporate governance. Option 2 is incorrect. Consulting with
external auditors on compliance with SOX would not assist in understanding the reality of
corporate governance. Option 3 is incorrect. Reading the statement of internal control would
be a subsequent step in understanding the reality of corporate governance.

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UNISA 2020

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