Internal Audit Exam Questions

INSTRUCTIONS

You can use any of the references from weeks 1-7 in our classroom including discussion postings and the links to the COSO internal control and ERM materials.  The responses must be in your own words.  I do not expect citations.  You must submit your responses in a Word document.  Questions 1, 2, 3 are worth 25 points.  The other three questions are worth 25 points in total.

ESSAYS/SHORT ANSWERS

1) UMGC Industries capital-asset procurement policy requires the board of directors (BOD) approve any single acquisition over $500,000. If the BOD approves a project, then the treasurer will transfer the funds to the respective plant. Within one year, the internal auditing function is charged with reviewing each acquisition to check the propriety of the purchase and disbursal of funds.

UMGC Industries plant controller prepared the first proposal for a DEK cutting machine. Other plants were told to wait until internal auditing could inspect the documentation associated with the acquisition and evaluate the project’s operating effectiveness and efficiency. The plant’s proposal was the second largest proposal ever submitted in the company’s history and it totaled $1.3 million dollars. The cost of the new machine by itself was listed in the proposal at $1.1 million. Labor and other costs necessary to remove the old machine and install the new machine totaled $200,000.

The internal auditor assigned to the investigation was Phil Ramone. Phil had been with the company four years performing mostly production operational audits (on existing processes) and internal control payroll audits. Phil’s considerable experience in these areas led him to believe that the procedures associated with this capital-asset audit would be as simple and routine. This was not Phil’s first visit to the plant. In fact, Phil had performed an audit on the plant’s payroll system only a year ago. Phil’s recollection of the experience was not a pleasant one. He had several confrontations with the plant controller, mostly as a result of personality clashes. While all the payroll issues were easily resolved, Phil felt there was still an adversarial relationship between him and the controller and was on guard for any preemptive strikes this time around by the controller.

It was a long drive to the plant so when Phil arrived a little late the day of his audit he was greeted by the controller with a perceived air of indifference and promptly led to a secluded office. The controller calmly explained that he was extremely busy and would answer any questions at the end of the day. Phil merely nodded his head and sat down in front of several tall piles of invoices, which the controller stated was the documentation supporting the purchase, set up, and testing of the new machine. Phil was somewhat surprised, fully expecting to see only a handful of invoices, but did not ask for any explanations. As Phil began looking through the myriad of statements and canceled checks, he soon found one particular invoice near the top of the first pile that indicated the actual price paid for the machine itself was only $850,000.

Phil’s first reaction was to call the CAE of auditing. When he found that the CAE was out for the day and could not be reached, he then decided to call the VP of Operations at corporate headquarters. Phil was critical of the plant controller when describing the seriousness of his suspicions based on this preliminary information. Phil didn’t know that there was a BOD meeting that day and that the news would be passed on to them. The members of the BOD were outraged, screaming over the alleged misuse of the funds and possible fraud.