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Auditing: Material weakness, change control risk, internal a

1. Fisher, Inc. is a large corporation that is regularly audited by a public accounting firm. Fisher, Inc. also maintains an internal auditing staff.
Which do you think matters more to Fisher's board of directors: internal or external auditing? Why do you think so?
Which do you think matters more to Fisher's stockholders: internal or external auditing? Why do you think so?

2. The CEO of your company has asked you to help prepare for the upcoming company audit. One of the items the CEO has asked you to do is suggest a number of sources in which you could get information that would be needed to prepare the description of internal control in the audit working papers.
Prepare a memo that you will present to the CEO in which you do the following: Suggest the sources from which you can obtain information that would be needed to prepare the description of internal control in the audit working papers.
Explain what potential ethical and legal issues could be presented if these sources are not found.
Develop solutions for those issues.

3. Depending on the results of their tests of control, the auditors may restrict substitutive procedures.
Discuss and contrast the following concepts: the planned assessment of control risk
the revised assessment of the risk after tests of controls have been performed

4. It has come to the CEO's attention that Sally, a company salesperson, grants the rights to wholesalers to return unsold product. He asks you to discuss the following at the next board of directors meeting: In the system of internal control, are Sally's actions a significant deficiency or a material weakness?
Explain your reasoning and rationale.

5. This is the first year that you have audited Hurst & Johnson Corporation. You discovered that the company is carrying its property, plant, and equipment at appraisal values and determines depreciation on the basis of these values. This is considered a very large scope-limitation, and you have not been able to form an opinion on the financial statements taken as a whole.
Discuss the ethical issues involved with this situation.
Explain how you should handle this situation.
Explain what type of report you should issue and why.

Solution Preview

1. Fisher, Inc. is a large corporation that is regularly audited by a public accounting firm. Fisher, Inc. also maintains an internal auditing staff.
Which do you think matters more to Fisher's board of directors: internal or external auditing? Why do you think so?

The internal auditor matter more because they have a wider range of influence, have single loyalties, and have access to more areas of the business. Therefore, except for perhaps the audit committee of the board, the board is more interested in the internal auditor.

One reason is that the internal auditor has a broader purpose than the external auditor. That is, the internal auditor investigates business, regulatory and safety risks and not just financial reporting risks. The external auditor is focused on financial reporting risks, a much more narrow area. The internal auditor meets with the board and discusses all the potential risks and comes up with a plan to monitor the risk and communicate any threats or failures. Further, they can help identify new risks because they travel around and are the eyes and ears of management at remote locations.

A second reason that the board pay very close attention to the internal auditor is that they have access to a much wider array of information because they are part of the firm and not an "outsider." They can see all the records without having to justify access, unlike an external auditor who must make the case that they need the data to verify the reported financial statement assertions.

Finally, the internal auditor has no divided loyalty, materiality constraint, or need to maintain confidentially. They are not limited to material events and can follow up on any threat or series of threats that the board wishes to pursue. The external auditor, as a practical matter, is limited to material events because they are very costly. In addition, they are always versed in the company strategy and so may not know what kinds of errors are central to the mission. Internal auditors, as insiders, are well aware of the initiatives that are critical to mission success.
The external audit is a compliance task, with admittedly high stakes outcome (clean opinion) but rarely is it important to safe, profitable, and mission aligned activity. This is the goal of the internal auditor.

2. The CEO of your company has asked you to help prepare for the upcoming company audit. One of the ...

Solution Summary

Your discussion is 1,189 words plus two references. It discusses how internal audit is more important and why with examples. The impact of a change in assessed control risk is discussed. The criteria for a significant deficiency versus a material weakness are discussed and then applied.

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