Question

1. In anticipation of an upcoming engagement, an internal audit team recently toured the company’s receiving, warehousing, and production facilities to obtain a better understanding of day-to-day operations. Listed below are selected items noted by the internal audit team during the tour:

• A large quantity of materials was sitting in a corner near the unloading docks. The receiving manager informed the audit team that the delivery trucks had already left. The materials had not yet been counted or inspected.
• One section of the warehouse contained large quantities of items with inventory tags from several physical inventory counts. The warehouse manager told the audit team that this was the company's inventory of spare parts that it was required by law to keep on hand for specified time periods.
• Hazardous chemicals are used in the inventory finishing process. Waste chemicals are stored in large plastic barrels in a designated area of the factory before being shipped for disposal.

For each item noted by the internal audit team:

1. Describe the potential business risk(s) associated with the item.
2. Discuss how the internal auditors’ knowledge of the risks identified might affect a subsequent audit of the materials acquisition and production processes.

2. A staff internal auditor found the following possible deviations from prescribed controls and documented them in her working papers.

Invoice Number	Prescribed Control	Possible Deviation
248	Written authorizations of sales by sales order department.	Verbal authorization by phone by sales order department.
333	Verification of sales order quantities and prices.	No evidence of verification; quantities and prices are incorrect.
377	Verification of sales order quantities and prices.	No evidence of verification, but quantities and prices are correct.
617	Billing department verification of unit prices.	Price verification indicated on invoice; the prices do not agree with the price list in effect at the time of sale.

For each of the items listed above, indicate whether there is or is not a deviation from a prescribed control. Briefly explain your answer.

Answer 1

Invoice 248

Since prescribed control is written authorization by sales department, verbal authorization on phone is a big deviation .

As whole audit is done on basis of written audit evidence , here there is no audit evidence to verify the same as authorization was verbal.This is conrol deficiency and stronger internal control should be put in purchase department , An ERP sysytem could be placed where orders can only be placed through erp sysytem.

Invoice 333

Prescribed Control was Verification of sales order quantities and prices..

No audit evidence is available to verify the same this is deviation from the prescribed control. If quantitites and prices are not verified it could lead to theft or collusion by some one from purchase department by inflating the price. And they were subject to fraud or theft as therer quantities and prices were incorrect .As we saw that delivery trucks unloaded and left and material was not checked , Its open to theft or seller could send less quantities and bill for more

Invoice 377

Prescribed control was Verification of sales order quantities and prices.

Although price and qty. were correct but they were not verified hence its a deviation . A control is something which is not optional it have to be applied on each and every transaction . If it would have been optional entity will never apply controls on transaction of colorable nature.

Invoice 617

Prescribed control was Billing department verification of unit prices.

Here all though prices were verified but they donot agree with price list in effect at the time of sale. Here controls were applied hence its not deviation. Billing department verified the price ,there could be multiple reason for not matchin with sale price list as it could be qty discount, etc. Auditor can verify the same through other paudit procedures but is not the deficiency control here