Two items concern Mark. First, there was a material dollar amount of inventory of part number A2 still carried on the Avil books at year-end, despite the fact that the Fast-tac machining component in which part A2 was used is now considered first generation and is no longer manufactured.
Company policy requires an immediate write-off of all obsolete inventory items. Second, some accounts receiv- able still carried as collectible at year-end were more than 180 days old. All receivables are due in 30 days, which is standard for the industry. Mark believes many of these old accounts are uncollectible.
Mark Hobson is an internal auditor employed by Com- stock Industries. He is nearing completion of an audit of the Avil Division conducted during the first five weeks of the year. The Avil Division is one of three manufacturing divisions in Comstock and manufactures inventories to supply about 50 percent ofComstock's sales. In addition to the manufacturing divisions, Comstock has two market- ing divisions (domestic and international) and a technical service division that offers worldwide technical support.
Each customer is assigned to the most suitable manufac- turing division, which functions as the supplier for that customer. The manufacturing division then approves the customer's credit, ships against orders obtained by the sales representatives, and collects the customer receiv- ables when due. This allows order-to-order monitoring of customer credit limits against customer orders received.
CASE 112
THE INTERNATIONAL PROFESSIONAL PRACTICES FRAMEWORK: AUTHORITATIVE GUIDANCE FOR THE INTERNAL AUDIT PROFESSION 2-45 Use the KnowledgeLeader website and perform the fol- lowing:
A. Authenticate to the KnowledgeLeader website using your username and password.
B. Perform research and define what it means for an internal auditor to be independent. Contrast internal audit independence with internal auditor objectivity. Why is it important for an internal audit function to be independent and internal auditors to possess objectivity?
C. Submit a brief write-up indicating the results of your research to your instructor.
Knowledgeleader Practice Case:
Internal Auditor Independence
&
Objectivity
Background Information
As indicated in the Standards, the internal audit func- tion must be independent, and internal auditors must be objective in performing their work. As indicated in the chapter reading, independence and objectivity together represent one of three pillars supporting effective internal audit services. It is also important to note that indepen- dence and objectivity are two distinct, yet interrelated, concepts that are fundamental to providing value-adding internal audit services.
CASE 2
B. Discuss how the ethical dilemma Mark faces might have been avoided. In other words, discuss specific things Comstock's management and/or the internal audit function might have done to reduce the risk of such a situation arising.
C. Clearly indicate what you would do if you found yourself in Mark's position. Briefly explain why.
"Well, do what you have to," Gail ended the discussion.
"But I insist that you submit a report that Hal agrees to and has signed. I don't want to stir up hornets and then have to try to explain my loose cannon to the board when everyone is howling about the bonus problem."
A. Refer to The IIXs Code of Ethics. Identify three specific Rules of Conduct relevant to this case. Using the Rules of Conduct you identify as the context, dis- cuss the ethical issues raised in the case.
"I know you've been trying to put us on a better footing, Gail, but Hal is intractable. As far as he is concerned, the only observation he will accept in the report is that of deficient policy, with nothing mentioned about the inven- tory or receivables needing adjustment."
"Mark, Hal is right. If you, in essence, blow the whistle on management bonuses this year, we can kiss goodbye all the goodwill I've been struggling to build for this depart- ment. It will all go out the window."
The Internal Audit Director
Concerned, Mark delayed finalizing his report and dis- cussed the draft with Gail Wu, director of internal audit.
Gail is not trained as an auditor and was promoted to director of internal audit from corporate finance so that she might develop a better understanding of operating relationships. Still, Gail is very smart and Mark has always respected her opinion. The discussion was by telephone, with Mark still at the Avil Division headquarters and Gail at the corporate office.
"Well, Hal, I could word my observations as they are in the draft but include your response." Hal was suddenly angry. "What? And let the audit committee decide the issue? They have nothing to do with this. They accepted the CPXs report. If you want to make the audit commit- tee happy, you'll accept it, too, and leave this adjustment stuff alone."
what little bonuses they have coming. If we write down as you suggest, those bonuses will go and the stockhold- ers will lose too. Earnings per share (EPS) will drop like a rock. They might even close this division. Now you don't want that, do you, boy?"
3-1 Any successful organization must establish a basic framework through which both
long-term and day-to-day decisions will be made. Think about how a university is structured, or the business through which you gained your first part-time job.
Reflect on any clubs or athletic teams in which you participated. All had some form of structure that helped them be successful. In most organizations, internal audit can be a key enabler to that success. Before you can fully understand how an internal audit function can serve such a role, it is important first to understand how organizations are structured and operate to achieve success. Although the actual organizational structure will vary from one organization to the next, each must establish an overall governance structure to ensure key stakeholder needs are met. This governance structure provides direction to those executing the day- to-day activities of managing the risks inherent in an organization's business model. These day-to-day activities represent internal control. These elements are depicted in exhibit 3-2.
• Standard 2010 - Planning
• Standard 2100 - Nature of Work
• Standard 2110 - Governance
EXHIBIT 3-1
IPPF GUIDANCE RELEVANT TO CHAPTER 3 Define governance and contrast the different roles and responsibilities within governance.
Articulate the different enterprisewide governance principles.
Describe the changes in regulations and how governance has evolved into its present state.
Describe the role of the internal audit function in the