Lajod Company has an internal audit department consisting of a manager and three staff auditors. The manager of internal audits, in turn,reports to the corporate controller. Copies of audit reports are routinely sent to the auditcommittee of the board of directors as well as to the corporate controller and the individualresponsible for the area or activity being audited.The manager of internal audits is aware that the external auditors have relied on theinternal audit function to a substantial degree in the past. However, in recent months,the external auditors have suggested there may be a problem related to the objectivity ofthe internal audit function. This objectivity problem may result in more extensive testingand analysis by the external auditors.The external auditors are concerned about the amount of nonaudit work performedby the internal audit department. The percentage of nonaudit work performed by theinternal auditors in recent years has increased to about 25% of their total hours worked.A sample of five recent nonaudit activities are as follows:1. One of the internal auditors assisted in the preparation of policy statements oninternal control. These statements included such things as policies regardingsensitive payments and standards of control for internal controls.2. The bank statements of the corporation are reconciled each month as a regularassignment for one of the internal auditors. The corporate controller believes thisstrengthens internal controls because the internal auditor is not involved in thereceipt and disbursement of cash.3. The internal auditors are asked to review the budget data in every area each yearfor relevance and reasonableness before the budget is approved. In addition, aninternal auditor examines the variances each month, along with the associatedexplanations. These variance analyses are prepared by the corporate controller’sstaff after consultation with the individuals involved.4. One of the internal auditors has recently been involved in the design, installation,and initial operation of a new computer system. The auditor was primarily concerned with the design and implementation of internal accounting controls and the computer application controls for the new system. The auditor also conductedthe testing of the controls during the test runs.5. The internal auditors are often asked to make accounting entries for complextransactions before the transactions are recorded. The employees in the accountingdepartment are not adequately trained to handle such transactions. In addition,this serves as a means of maintaining internal control over complex transactions.The manager of internal audit has always made an effort to remain independent ofthe corporate controller’s office and believes that the internal auditors are objectiveand independent in their audit and nonaudit activities.a. Define objectivity as it relates to the internal audit function.b. For each of the five situations outlined, explain whether the objectivity of LajodCompany’s internal audit department has been materially impaired. Consider eachsituation independently.c. The manager of internal audit reports to the corporate controller.(1) Does this reporting relationship result in a problem of objectivity? Explain youranswer.(2) Would your answer to any of the five situations in requirement b. have changedif the manager of internal audit reported to the audit committee of the board ofdirectors? Explain your answer.*
Lajod Company has an internal audit department consisting of a manager and three staff auditors. The manager of internal audits, in turn,
reports to the corporate controller. Copies of audit reports are routinely sent to the audit
committee of the board of directors as well as to the corporate controller and the individual
responsible for the area or activity being audited.
The manager of internal audits is aware that the external auditors have relied on the
internal audit function to a substantial degree in the past. However, in recent months,
the external auditors have suggested there may be a problem related to the objectivity of
the internal audit function. This objectivity problem may result in more extensive testing
and analysis by the external auditors.
The external auditors are concerned about the amount of nonaudit work performed
by the internal audit department. The percentage of nonaudit work performed by the
internal auditors in recent years has increased to about 25% of their total hours worked.
A sample of five recent nonaudit activities are as follows:
1. One of the internal auditors assisted in the preparation of policy statements on
internal control. These statements included such things as policies regarding
sensitive payments and standards of control for internal controls.
2. The bank statements of the corporation are reconciled each month as a regular
assignment for one of the internal auditors. The corporate controller believes this
strengthens internal controls because the internal auditor is not involved in the
receipt and disbursement of cash.
3. The internal auditors are asked to review the budget data in every area each year
for relevance and reasonableness before the budget is approved. In addition, an
internal auditor examines the variances each month, along with the associated
explanations. These variance analyses are prepared by the corporate controller’s
staff after consultation with the individuals involved.
4. One of the internal auditors has recently been involved in the design, installation,
and initial operation of a new computer system. The auditor was primarily concerned with the design and implementation of internal accounting controls and the computer application controls for the new system. The auditor also conducted
the testing of the controls during the test runs.
5. The internal auditors are often asked to make accounting entries for complex
transactions before the transactions are recorded. The employees in the accounting
department are not adequately trained to handle such transactions. In addition,
this serves as a means of maintaining internal control over complex transactions.
The manager of internal audit has always made an effort to remain independent of
the corporate controller’s office and believes that the internal auditors are objective
and independent in their audit and nonaudit activities.
a. Define objectivity as it relates to the internal audit function.
b. For each of the five situations outlined, explain whether the objectivity of Lajod
Company’s internal audit department has been materially impaired. Consider each
situation independently.
c. The manager of internal audit reports to the corporate controller.
(1) Does this reporting relationship result in a problem of objectivity? Explain your
answer.
(2) Would your answer to any of the five situations in requirement b. have changed
if the manager of internal audit reported to the audit committee of the board of
directors? Explain your answer.*
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