Question

"Audit Judgment"  Please respond to the following:

• From the case study, evaluate the quality of REDTOP’s internal audit function. Based on your evaluation, recommend at least two (2) changes that you would make in order to improve the quality of REDTOP’s internal audit function. Provide a rationale to support your response.
• From the case study, give your opinion as to whether or not your external audit engagement team could use REDTOP’s internal audit function in another fashion, as opposed to merely relying on existing internal audits in order to perform the overall audit of REDTOP Sports Company. Recommend one (1) alternative to using the work that the internal audit has already yielded as part of your external audit. Provide a rationale to support your response.

Answer 1

ANSWER:-

1) The internal audit program of is satisfactory because the company knows the potential risk area i.e. existence and valuation of receivables and cut off of sales. The company laid emphasis on both the factors quite impressively in their internal audit function. In other words, the company has established comprehensive , complex and computerised internal audit and control system for sales and account receivables.

The following are the changes we should work upon to improve the quality and mechanism of internal audit function.

REASON 1: Appointment of accountant and professionals with more experience as said internal auditor have only Two to three year's experience. since the company is market leader and doing good in terms of volume, profitability and growth. The company needs professionals with good experience to have robust internal audit function.

REASON 2: Since the power of appointment and termination of audit director lies in the hands of CEO of the company. There may be chances that CEO may dominates director on personal or unethical grounds. Some modifications are suggestied with regard to power function.

2) I do agree that the external audit engagement team can use the REDTOP's internal audit function if they work and prove on the following issues of internal audit function

-In case of minor imperfections which are suggestied by periodical reviews, timely action should be taken. As in the present case, now written action had yet been developed.

- in case of test of control with regard toreceivables, the sample size should be increased to provide more validity and accuracy.

- Comprehensive check on director and CEO of the company for the objective working of the internal audit function.

- More Stress on pricing errors

- More improvement is required in the response rate