Question

1. What is Internal Auditing base on the case provided? (5 pts)

2. 2. What is the Management Objective? Is the management objective clear? Explain your answer. (5 pts)

3. 3. Should the auditor accept or reject the engagement? Cite in the context the basis of your answer and relate it with the concept of our discussion (10 pts)

4. Give atleast 3 approaches/audit activities that the auditor should take for Tokyo on the assumption that the engagement was accepted?Explain your answers (10 pts)

Case Analysis

The group internal audit department of a domestic products multinational company headquartered in London is undertaking an audit engagement of the multinational’s operating unit in Tokyo. At an early point in the planning process of this engagement, the audit team establishes who has oversight responsibility for the Tokyo operating unitThe production director has a number of direct reports spread across the world, with oversight responsibility for each. The production director needs to know that all is in order within each of these operating units. He or she can go and find out for himself or herself. But the production director will
rarely find the time to do so, and would hardly know how to set about doing so effectively. Internal audit looks round corners that management are unable easily to look round for themselves. At a later stage, the emerging audit findings will be discussed with the head of the Tokyo operating unit, whose responses will be built into the final audit report; the audit report will be addressed to the production director in London who may be regarded as the main client of this particular audit engagement. The report will be copied to the head of the Tokyo operating unit. In this way, the audit findings will be addressed to the level of management that needs to know and that is capable of ensuring appropriate action on audit findings is taken. Should the production director fail to ensure this, the chief audit executive will then need to consider whether the audit results, together with reference to the CAE’s view that insufficient action has been taken upon them, should be communicated to an even higher level. However, the CAE may consider that the degree of importance of the audit findings, when matched to the seniority of the production director, means that escalation above the level of the production director is not warranted as it may be legitimate for the production director to decide whether to live with a level of risk identified during the audit engagement. Meanwhile, early during the planning of the audit engagement, having established that the production director has oversight responsibility for the Tokyo operating unit, the audit team arrange to meet with the production director. Initially the auditors ask the production director to explain: “What are your objectives for the Tokyo operation?” As with all information offered to the audit team during the course of the audit engagement, the auditors will consider how they can independently verify the validity of the statement of management’s objectives that the team has been given. If the production director points out to the audit team that he or she has not thought much about the Tokyo operation for a while and cannot immediately recall whether there are any established objectives for Tokyo, then audit findings are already starting to emerge as clearly this is unsatisfactory. Nevertheless, the audit engagement cannot proceed further until the audit team has hammered out with the production director an agreed upon set of objectives for the Tokyo operation. Next, in effect the audit team asks the production director the following question: “OK, we are agreed on your objectives for the Tokyo operating unit. What information do you need to be receiving so that you know whether these objectives are being achieved?” Again, if the production director is uncertain, then further provisional audit findings are starting to emerge—even though this discussion is taking place only during the planning phase of the audit engagement, before the audit team have left London for Tokyo. But planning the engagement cannot proceed further until the audit team has hammered out with the production director an agreement on the nature of the information he or she needs to be in receipt of in order to monitor whether management’s objectives for the Tokyo operation are being achieved. The next step is for the audit team to ask to see the information the production director is receiving: “OK, we are agreed on the information you need to get from Tokyo to monitor that management’s objectives for Tokyo are being achieved. Can you show us the information you are receiving about the Tokyo operation, please?” When the audit team reviews this information they may discover that it is incomplete, unclear, inconsistent or untimely. So, further important provisional audit findings are starting to emerge. Nevertheless, the audit team endeavours to interpret the information so as to determine the most valuable focus for the audit fieldwork in Tokyo—that is, their audit objectives. They will discuss their proposed audit objectives with the production director with the intention of getting his “buy-in” to them.But being an assurance engagement, not the provision of a consulting service, it should be the decision of the chief audit executive what the audit objectives are to be: internal auditors do not subordinate their judgement on professional matters to that of others

1. What is Internal Auditing base on the case provided?

2.    What is the Management Objective? Is the management objective clear? Explain your answer.

3.    Should the auditor accept or reject the engagement? Cite in the context the basis of your answer and relate it with the overview of the audit process

4. Give atleast 3 approaches/audit activities that the auditor should take for Tokyo on the assumption that the engagement was accepted? Explain your answer.

Audit activities:
Initiating the audit
Preoaring audit activities
Conducting the audit activities
Preparing and disyributing the audit report
Completing the audit
Conducying audit follow up

Answer 1

1. Every organisation decides to get an internal audit done to avoid fraud, mispresentation of financial statement and enable taking correct management decision. Also, if there was any window dressing with respect to finanical statements , the audit committee will instantly point it out and take necessary action against it. In this case, the MNC headquartered in London is conducting an internal audit on Tokyo operating unit to ensure that all the objectives and goals have been met effectively and efficiently. The management at London will be ensured that investment made in Tokyo wasn't a complete lose and will benefit them in long run. In other word, audit helps identify whether a particular unit must be further continued or not.

Following are the reasons to conduct an internal audit within an organisation( in this case Tokyo operating unit):

• Ensure strong internal control systems
• Safeguarding of assets
• Minimize the risk of accidental or deliberate errors and omissions.
• To ascertain if there is compliance with internal operating policies and guidelines
• Key Control Arears are monitored effectively

The recommendations in an internal report will help the organization achieve effective and efficient governance, financial and management reporting objectives, risk and control processes associated with operations objectives,and legal/regulatory compliance objectives, etc.

2. The management plays a vital role for the survival of an organisation. Its main function is to plan, coordinate, direct, staff and control. Thus, they must set "SMART" objectives in order to run the firm smoothly and achieve desired result. For this to happen, the management objectives must be in sync with the organisational objectives. Few of the objectives could be optimum utilisation of resources,better quality product, retaining talent, growth of business etc.

The audit team verifies certain facts and objectives of the organisation and whether the Production Director is well aware of them or not. If the Director fails to recall or state the objectives of Tokyo operating unit, it would be certain that the work was not taken seriously with respect to this unit. Or the correct information was not provided to the Production Director. This shows that a proper hierarchy with standardized rules need to be implement so that the activities at Tokyo are monitored and runner smoothly.

Although now the interrogation has been done and the required information obtained from the production director will help the audit team to enable comparison between what is said by production director and what is the actual scenario at Tokyo. Further investigation will help in analysising the accuracy of the data been collected. Merely setting defined objectives are not as important as much as planning short or long actions are executed by all the level of management in order to achieve them. In this case, since it is initial stage of audit, the production director has now stated the objectives. A more detailed analysis is yet to be done.

3. The auditor must certainly accept the engagement. Auditing is not a short process, it takes months to draft a final report only after a detailed analysis of all the financial statements are completely done. Firstly, after conducting an preliminary planning and information gathering phase.The auditor must define the audit objectives and plan a course of program. Further issue an audit engagement letter to the client or the certained authority regarding audit objectives and how they plan to conduct audit program tailored to their specific needs.

Further, the auditor gathers information and performs audit testing in order to gain an understanding of internal controls from the auditee( Authority of Tokyo operating unit). They examine documents and other records for evidence to determine whether effective internal controls are in place, also perform detailed testing of transactions, evaluate compliance with existing policies and adherence to external regulations, etc.If the audit team identifies potential control weaknesses, policy violations, or other areas of concern during the inspection, they are discussed with the auditee. A final report is submitted and communicated to the management. The management is expected to review audit issues and recommendations for completeness and accuracy and prepare a formal response and action plan.

4. Audit must be done in the respective field: Tax, Financial, Management, Stock, and Risk. To ensure that all the factors have been properly calculated and desired outcomes have been achieved. The auditor must set its objectives very clearly and communicate the same to the auditee. Also the audit program must be designed in sync with the objectives set and tailored to the auditee 's organisational needs. This two initial steps are very essential to draw a final verdict. Without them, audit is absolutely of no use and the risks and violations will not be ascertained entirely if there is any. Further more its important to have open discussion with the auditee regarding all the key control areas to help the auditee understand the firms been running smoothly and if there is any deviation, what necessary actions needs to be taken to stop it completely or if not completely, then reduce it impact. A final report is drafted to further help the management with decisions making.