Question

4. In exhibit 3-4 the internal audit function is included in the assurance box. In light of this assurance role, discuss the pros and cons of the chief audit executive (CAE)reporting to the board of directors (or one of its committees) versus the chief financial officer Relate your answer to the concepts described in Standard 1100: Independence and Objectivity

6. The General Auditor’s Office (CAO) of ABC jurisdiction issued a report on the XYZ Electric Corporative a large member-owned utility. This report reviewed the work of MNO Consulting MNO found numerous internal control weakness. The GAO concurred with MNO’s conclusion and recommendations regarding the overall lack of effective internal controls. In particular, the GAO went on the recommended that the ABC   jurisdiction’s legislature should require by law that each cooperative;

• Create a board of directors (board) and maintain a separate audit committee.
• Employ an internal auditor who reports to the board. A reporter for the local newspaper has a couple of questions for you.

1. Typically, what is the governing board’s responsibility for internal controls?
2. Why would the GAO want each cooperative board to employ an internal audit?

Answer 1

Chief Audit Executive Reported to following authorities

1. Chief Financial Officer(CFO)

2.Audit Committee

3. Board of Directors or one of them

4. Chief Executive Officer

5.Other Governing Authority

Pros and Cons reported to Board of Directors and one of them

Pros

1. If Chief Audit Executive Report to board of directors directly is more advantageous for his independence and his internal audit accessibility.

2. Chief Audit Executive(CAE) works under management. Whole control on audit is under management.

3. If there is fall in company's performance then it is necessary to report to management regarding internal auditing. So, management can take better decisions related with improvement.

4. If there is a conflict between Chief Audit Executive and Chief Financial Officer regarding any fraud then CAE can reported to Board of Directors directly. This is beneficial for company's actual performance determination.

Cons

1. If Chief Audit Executive(CAE) always reported to Board of Directors rather than Chief Financial Officer or his Auditing Committee then management can mistrust internal auditor, because he is not a member of management or Board of Directors.

2. Sometimes management take decisions on behalf of CAE reports, but there may be a fall in performance of company.

Pros and Cons when Chief Audit Executive reported to Chief Financial Officer

Pros

1. traditionally, Chief Audit Executive reporting to Chief Financial Officer. This process will save time and improve collaboration between Auditing authorities. if they will work with collaboration, accuracy in auditing work is increased.

2. There is proper understanding regarding the concepts of auditing is between Chief audit Executive and Chief Financial Officer.

3. It is a level of responsibility to report higher authorities. Responsibility to report Chief Financial Officer will improve performance and work will done on time.

Cons

1. If Chief Audit officer is not reported to Chief Financial Officer, then he is free to work, may lead to errors in auditing process.

2. There is small decrease in independence of Chief Audit Officer when he is reporting to Chief Financial Officer. Sometimes Accounts department can arise issues regarding auditing process.

Compare with Standard 1100 independence and objectivity

Independence- According to standard 1100 internal auditing is independent. Auditors are work independently without any fear and with unbiased manner. According to Reporting to CFO (Chief Financial Officer), it some extent independence is decreased which is necessary according to standard 1100 of independence and objectivity. This is done due to financial or accounts department intervention regarding financial data. If an auditor directly reports to board of directors, he can do his work independently.

Objectivity- Auditor should have objectivity in his work according to standard 1100. Objectivity is unbiased mental character of auditor. Auditor works independently and cannot change his decision on behalf of others intervention. He should make reports on the behalf financial data provided by accounts department. But now a days. CAE (Chief Audit Executive) represent his reports to CFO (Chief Financial Officer), auditing committee and Board of Directors.

Ans. (a)Governing body responsibility for internal control

Management is responsible for maintaining a proper system with control over the entire organization. Management should control on employees, production activities of producing electric products, all functions and functional areas, costs and finance. Management should responsibility to control and manipulate costs. Management would always try to generate great profits.

Responsibilities related with internal control are

1. Control whole environment inside organization- Management control environment by their attitude, communication, policies, delegation of authorities, and by integrity.
2. Protection of assets- protection of assets and properties is a responsibility of governing body. Governing body can delegate authorities to staff regarding make storage and protection of company’s assets and finished goods (electrical products).
3. Responsibility regarding finance- Governing body is responsible for decisions regarding finance. Governing bodies can take decisions in case shortage of finance, credit decisions, working capital, issue of company’s stock and cost related activities.
4. Decisions on behalf of reports- Management can take decisions on behalf of reports presented by various department. i.e. Reports by accounting or finance department, auditing reports, reports from cost and profit centers and reports by production department
5. Monitoring- Governing bodies monitor the whole environment. Monitor and control operational and production activities, official activities, finance and sales activities. If governing authorities are not monitoring it slows down production activities, frauds are increased due to irresponsibility of authorities, People due not work properly. So, monitoring and control by management is necessary for growth a company.
6. Follow law, rules and regulations- Governing authorities make policies of company according to law. Management make it necessary for everyone to follow rules and regulations of the company.
7. Improve effectiveness and efficiency of company- Management try to improve company’s effectiveness and efficiency by motivate manpower, replacing non- working equipment by working equipment, proper utilization of resources and by follow new and appropriate technology and methods.
8. Profit maximization- Governing body directs departments regarding decrease and control costs. They follow operational and optimal methods for minimize costs and maximize profits.
9. Risk determination and assessment- Governing bodies follows evaluation methods for calculation and determination of risks. Management try to reduce risk by making policies and using appropriate methodology.
10. Fulfill goals and objectives of company – Management always ready for achieve company’s target. Division of work can be done according to individual and department’s specialization. An individual set his own goals. He would to achieve his own as well as company’s goals.

Ans.- (b) - GAO want each cooperative board to employ an internal audit

                Internal auditing is an important part of corporate governance. Internal auditors work with board of Directors, Auditing committee and senior authorities. Auditor prepares auditing reports from financial data of organization. These auditing reports help management regarding decision making, risk management, monitoring and control. So according to General Auditor’s Office (GAO), it is necessary for every organisation to appoint a internal audit for prepare auditing reports for management, which are helpful for decision making.