Phil was unaware that in a private conference call the chairman of the BOD would soon lambast the plant controller. Seconds after the call, the controller walked up to Phil and had only two words to say – “get out.”

Three days later Phil was called in to the CAE’s office. The CAE described how he personally went to the plant the next day after Phil’s visit and performed the capital-asset audit himself. The CAE found that there were a number of reasonable explanations for the differences between the original proposal and the actual expenditure. To begin with, the company that sold the machine would not discount the price until the BOD approved the contract.  Competing bids drove the cost of the machine from $1.1 million to $850,000. However, there were several factors that offset these savings.

Originally, the setup of the new machine was projected to take a week and a half but ended up taking a month. No one really knew how difficult it was going to be to remove the old machine that was embedded in the concrete floor (to minimize vibration). This removal took additional time and outside labor. Also, the new machine was to be put in the same area where the old machine was located. Since the plant could not afford to shut down for any extended length of time, the old machine was moved over the Thanksgiving Day holiday when labor rates were doubled. In addition, while the new machine was being tested, the old machine had to be kept running in its temporary location. During the time that both machines were running, machine operators and supporting personnel (e.g., those loading and unloading the conveyors) worked double shifts in order to test the new machine. This parallel process took longer than expected because the plant engineers were not familiar enough with the new machine to deal with minor problems. Also, special outside consultants were hired for the first two weeks to set up the machine.

Another unexpected cost arose because the new machine put out a greater number of larger pieces of wood requiring required an additional conveyor belt to accept and carry the larger pieces. The savings from the discount was used to purchase this necessary piece of equipment. In sum, all of these additional and unexpected outlays were very expensive and brought the total to just under the original proposed cost of $1.1 million.

The CAE went on to explain to Phil that the reason for the abnormally large number of invoices was an endless stream of trips to the local electrical and hardware stores to buy the necessary parts and supplies to keep the transition from the old to the new machine moving smoothly. As it turned out, the controller of the plant actually did a commendable job in overseeing the project and keeping accurate records of the disbursements. In fact, the controller created a specialized installation guide that will probably save the company hundreds of thousands of dollars when the remaining plants order more of these machines.

Required

1. Comment on Phil’s preparation for and conduct of the audit. What should Phil have done differently?
2. Discuss all the possible violations of the IIA Code of Ethics and/or International Standards for the Professional Practice of Internal Auditing that Phil committed.