A member of the audit committee questioned the director of internal auditing about how the company’s internal auditing function is being developed. The director of internal auditing answered that the primary factor in the development of the function is risk to the organization. The audit committee member appeared a little confused by this answer and asked, ‘How can you develop the entire function based solely upon the principle of risk?”

Required:

Flowchart the steps included ‘in directing the audit function. Identify those steps that help auditors to

(a) locate the areas of greatest risk,

(b) determine the order of audit areas, (c)

examine and evaluate the risks, and

(d) decide and report on how to manage the risks.