Question

a.     A Chicago area Governmental Agency has an Internal Audit Department.  The Director of Internal Audit (“Audit Pro”) makes it very clear he believes his boss is the Agency’s Chief Executive Officer (“Mr. Big”).  Audit Pro runs the Internal Audit Department as though it was an Asset Recovery Unit – to the exclusion of virtually everything else (i.e. it only seeks to recover duplicate payments or identify unbilled revenue items).  Before joining the Internal Audit Department, Audit Pro never worked in auditing – he was employed as the supervisor of Accounts Payable at a related Governmental Agency.

A fraud is uncovered due to the actions of a whistle-blower.  Mr. Big initiated fraudulent documents to the payroll department and thereby received $500,000 in additional vacation pay he was not entitled to.  Mr. Big commits suicide minutes before the Board of Directors was going to fire him for fraud and theft.  

Question:  What was wrong with the set up and operation of the Internal Audit Department, including Audit Pro’s role?  (5 Points)   

Answer 1

The following points are not considered in setting up internal audit department:

1. The members of the internal audit department should have a basic knowledge of commerce, laws, taxation, cost accounting, economics,quantitative methos & EDP Systems .

But in the given case Audit pro doesnt seems to be a qualified person to become a member of internal audit department.

2. Scope of internal audit department is Custodian and safeguarding of assets.

In the given case Audit pro runs the internal audit department as Asset recovery unit which is not tenable.

3.The role of internal auditor is to maintain adequate system of internal conrol by continuous examation of accounting procedures, receipts & disbursements & to provide adequate safeguards aganist misapporiation of assets.

But the audit pro concentrated on recovery of duplicate payments and unbilled revenue items.

4.There was a policy of whistle blower in the organisation but it failed to know the fraud commited by Mr. Big

5. For removal of director before the term of his tenure prior approval of C.G is required and he should be removed only at AGM  but BOD failed to obtain C.G approval and decided to remove Mr. Big in the Board meeting.