Internal Audit and Risk Management: Quality Measurement and Assurance Engagement Process

Question 1:
1. Professional Skepticism:
(Pcaobus.org, 2018) As per AS 1015, professional skepticism is defined as an attitude
that includes a question mind, being alert to the conditions which might indicate
possible misstatetement due to error or fraud, and a critical assessment of audit
evidence. (G and B, 2015) Professional skepticism, if adopted throughout the audit,
avoids the following errors usually committed by auditor.
 Overlooking unusual circumstances
 Over-generalizing when drawing conclusions from audit observations;
 Using inappropriate assumptions in determining nature, timing and extent of
the audit procedures and evaluating the results thereof.
The auditor shall plan and perform an audit with professional skepticism recognizing
the circumstances which may exist that causes the financial statements to be
materially mis-stated.
2. The Wichita Store manager found the opportunity to commit the fraud in the
absence of proper internal controls. Allocation of duty of collection of payments to
some other person, system requiring periodic reconciliation of general ledger with
subsidiary books and periodic accounts confirmation with clients should have
mitigated this opportunity to commit fraud. Further a policy of acceptance of
payments in cash also lead to an opportunity.
3. Firstly while scrutinizing the ledgers, there was an adjustment entry to tally general
ledger balances with subsidiary ledger balances. Later during the analytical
procedures, the staff auditor found deviation in gross profit percentage between
main stores and branch. Later during discussion of audit findings, it was confirmed
that the representation given by stores manager is unreliable and then the audit
team has to expand their field work and trace the customer payments to subsidiary
ledger and general ledger.
4. The staff auditor clearly lacked professional skepticism since he accepted the
explanation offered by the store manager without performing further audit
procedures to obtain evidence that support claim of stores manager.
5. Companies undertook following measures to minimize ‘pressure’ and
‘rationalization’ sides of fraud triangle (Strategic Finance, 2015).
Reduction of ‘pressure’ dimension: The focus is shifted to include accomplishments
of more ethics-based matters than performance based matters (like total
shareholders return, or other financial performance metrics) when considering the
senior executives incentives and pay programs
Reduction of ‘rationalization’ dimension: Companies have included number of
programs into the list of efforts to avoid rationalization of improper behavior such as
ethics training tailored to the organization, annual surveys of employee attitudes,
and effective whistle blowing programmes.

Question 2:
a. (Pcaobus.org, 2018) As per Para 22 of AS.13, the Auditor’s Responses to the Risk of
Material Misstatement, procedures auditor can perform to test the operating
effectiveness include a mix of inquiry of appropriate personnel, observation of the
company’s operations, inspection of relevant documentation, and re-performance of
the control.
In the given situation, the operating effectiveness can be tested by inspecting the
documentation such as vendor invoices and purchase orders.
b. The appropriate sample size as per the attribute sampling sample size table is 88
c. If the actual no. of defectives found are 3, the upper limit of deviation is 7.6 (refer
the table) and since the upper limit of deviations is greater than the tolerable limit,
the auditor should consider controls to be ineffective and would advise the
management not to rely on them.

Question 3:
1. Audit Evidence: Audit evidence in the context of internal audit refers to
(Ipc.nsw.gov.au, n.d.) “the information internal auditors obtain through observing
conditions, interviewing people, and examining the records.’’ The term gathering
information refers to performing audit procedures such as inspection, observation,
external confirmation, recalculation, re-performance, analytical procedures and
inquiry and accumulating the information which is sufficient, relevant, reliable and
useful for achieving the objective of engagement.
2. The auditor may adopt following audit plan to verify whether employees are
stealing small items of equipment:
a. The auditor should assess the internal controls existing to control purchase,
preserve, allot to employees and collection from employees of these items;
b. The auditor should verify whether there are sufficient records which captures
the information of employee wise tools allocated for completion of task and
also records which capture the return of such tools by the employees;
c. The auditor should ensure whether such process is verified and authorized by
any person and whether there exists a policy in this regard; and
d. The auditor may physically count the tools and verify whether they tally with
the numbers in records
3. Vouching: Vouching refers to assessing the authenticity of a transaction by verifying
the supporting documentary evidence which suggests the occurrence, appropriate
treatment and authority of the transaction. For example, if we consider advertising
expenses, we can adopt vouching to determine the authenticity of the transaction
by verifying the supportive documents such as
a. Invoice – to establish the occurrence of the transaction;
b. Purchase Order – to establish whether the transaction was sanctioned by
appropriate authority; and
c. The voucher – to inspect whether appropriate personnel has entered the
entry into books of accounts.
4. Analytical Procedures:
(G and B, 2015) Analytical procedures means evaluation of financial information
through analysis of plausible relationships among both financial and non-financial
data.
Anomaly means a deviation or mis-statement which demonstrably does not
represent the population. In simple terms anomaly is a result which is different from
what is expected from the population chosen for audit.
Analytical procedures include procedures such as ratio analysis, trend analysis and
reasonable tests. All these procedures are directed towards anticipation of possible
outcomes and then comparison of actual results with anticipated outcomes. Since
auditor has an expected outcome, he can clearly identify the outcome which is
substantially and demonstrably different from the actual outcome. This results in
earlier identification of differences in the financial statements and evaluation of
whether these differences are anomalies or results of potential mis-statements can
be done.