BEHEMOTH CORPORATION I Background I You have just been appointed as the Director of Internal Auditing for the Behemoth Corporation, a multinational manufacturer headquartered in New York City with manufacturing sites and sales offices in seventy-five countries throughout the world. ‘.
I I You report directly to the Chief Financial Officer (CFO) who has charged you with the task of ensuring that the internal audit staff operates in a cost effective manner and adheres to the Institute of Internal Auditors’ Standards for theProfessional Practice of Internal Auditing.
I Audit staff members have their performance formally evaluated each year. The evaluations are based on checklists filled out periodically by lead auditors or supervisors as appropriate. The checklists take into account audit related attributes I exhibited by auditors during their assignments. The attributes include items such as leadership, knowledge of accounting and auditing theory and practice, inquisitiveness, cooperation, energy, tact, communication skills and workpaper completeness. Merit I raises and promotion are awarded to the auditors on the basis of their evaluations.
The audit staff numbers eighty-five (exclusive of the CFO) including yourself I and secretarial support, as depicted in Exhibit I. Your predecessor informs you that your Assistant Manager for international audits has been tentatively approved toI accept an opportunity in the Comptroller’s function. However, the transfer has beendeferred pending your review and concurrence. Your Assistant Manager handling domestic audits informs you that he expects to retire in six months. The staff I contains a sufficient number of competent auditors so that succession is not asignificant problem.
I Management Reports I You meet with the Audit Committee of the Board of Directors twice each year and provide its members with information concerning the state of the company’s internal controls; principal audit findings; internal auditing’s plans; operating budget and expenses; and staff member’s qualifications.
I I Each calendar quarter you provide the CFO with a report summarizing the status of the annual audit plan, staffing changes and lists of audits in progress, and audits scheduled for the following quarter including special projects planned to commence or to continue into the next quarter.
I The audit managers who report to you provide a monthly status report covering their areas of responsibility similar in content to the quarterly report you render to the CFO. They also provide you with monthly headcount and absentee reports which you I consolidate and forward to the Company’s Human Resource Department. Each auditor submits an absentee report at the end of the month and an AuditI23. 1I Completion Report at the conclusion of each audit project. The managers hand post I the names of the auditor and the total days expended on each audit per the completion reports to a master log of all the audits in their area of responsibility. The completion reports are then filed and retained for five years. The master logs contain I ten years of audit history and are maintained on thirteen-column accounting paper.
You review the master log and a representative sample of the Audit Completion I Reports with the following res4. lts:o A high percentage (48%) of the individual audit assignments used more I workdays than were budgeted.o Those regularly scheduled audit assignments which exceeded the budget had overruns that averaged 50% of the budgeted workdays.Io The explanations for the overruns provided by the lead auditors on the Audit Completion Reports usually cited (1) additional work done to expand and follow-up on findings. and (2) an insufficient workdayIbudget.RequiredI1. Assuming each auditor spends 220 workdays per year (net of vacations. training. etc.) on audit assignments. determine how many auditors are neededIeach year just to handle overruns.
I2.Discuss ways to reduce the overruns. 3.Discuss ways to modernize and use the master log. I4. Determine what course of action you will take with respect to the pending transfer of the Assistant Manager-International. I5. Determine what course of action you will take concerning the position of Assistant Manager. I6. Redraw the Organization Chart as you deem appropriate.
I Audit Cycle and Plan Internal audits are done on a two-year cycle. Le. each auditableIlocation/function is scheduled every other year without regard to the materiality of the operation or the quality of its products. managers. or employees. The majority of audits require fifty to sixty workdays to complete and are usually staffed by a team ofItwo auditors. Most audit reports are published and distributed an average of two months after completion of the audit work. The time between completion of the work and distribution of the report is spent editing and rewriting drafts of the report untilIeach succeeding level of supervision is satisfied that the report meets their standards for a quality product. Under current procedures. your personal approval will be required to release each audit report for distribution.
I23.2 I II I Exceptions to the two-year cycle are finished Inventory storage locations which are audited each year. This inventory is stored at four hundred U.S. locations that are owned and operated by the Company and consigned to three hundred internationalI locations owned and operated by independent businesses which make sales and deliveries for the Company’s account. Inventory audits require an average of three days to complete and are principally concerned with agreeing the physical inventory to the centralized books of record. The shrinkage history is contained in Exhibit II.I ‘.I Management request audits are scheduled as soon as possible after the request is made. Request audits are sometimes delayed several months to minimize disruption of audits in progress. Fraud investigations are begun as soon as notice of suspicion is received. These investigations frequently result in disruptions of audits in progress to I make staff available. These disruptions also impact the planning schedules which then must be revised. Often. regularly scheduled work has to be put off until the following year because of the schedule disruptions.
I1. Discuss possibilities to increase the cost effectiveness of the present two-year audit cycle.I2. Determine whether the audit process can be sped up so that the information and findings contained in the audit report will be as current as possible.
I3. Determine whether any efficiencies are possible with the frequency of audits scheduled at inventory locations.
II 4. What can be done to improve the response time to management request audits and to minimize the disruptions to the planning schedules caused by fraud investigations