3) Role of internal audit function

30 Chapter 1: Auditing and Internal Contrel Management ii External auditor i Internal audit To whom should the Director of Internal Audits report. Explain your answer. Comment on the audit committee member's per- spective as to the committee's current composition. 3. Role of Internal Audit Function Nano Circuits Inc. is a publicly traded company that pro- duces electronic control circuits, which are used in many products. In an effort to comply with SOx, Nano is in the process of establishing an in-house internal audit function, which previously had been outsourced. The company began this process by hiring a Director of Internal Audits. Nano Circuits' CEO recently called a planning meeting to- discuss the roles of key corporate participants regarding the implementation and maintenance of internal controls Central to this decision is the organizational placement of the future internal audit function and to whom the new Director of Internal Audit should report. In addition, Internal Auditor Independence Technical Solutions, Inc. is expanding and reorganizing its IA function. Currently the Director of Internal Audit Sharon Kalafut, reports to the corporate controller, who receives and reviews all internal audit reports. Kalafum forwards copies of the internal audit reports to the audit committee of the board of directors and to the manager directly responsible for the function being audited An issue of contention among the managemens team pertains to which department or function th Director of Internal Audits should report. Marti. Stevens the CEO wants to ensure that Technical Solu tions complies with the SOX and that the internal aud department is structured such that it strengthens th company's internal control system. Also, an overarchir objective for the reorganized audit function is that t external auditors are able to rely on the work perform= by the internal audit department to a substantial degra Arguments put forth by interested parties as to whe the IA department should be organizationally locat are presented next: 4. Nano Circuits considered the need to reconstitute its Board of Directors Audit Committee. Participants at the meeting included the company president, the chief finan- cial officer, a member of the audit committee, a partner from Nano Circuits external audit firm, and the Director of Internal Audits. Expectations and concerns presented by the meeting participants are summarized next CEO: The CEO expressed concern that Nano Cir- cuits complies with SOX and PCAOB requirements and recommendations. The internal audit function should strengthen the organization's internal control system by developing control policies and procedures and by detecting violations of policies and procedures. CFO: The CFO saw the role of the internal audit function as one that should be focused primarily financial issues and therefore, the director of Internal Audits should report to the CFO. Audit committee member: The committee mem- ber felt strongly that the Audit Committee as currently constituted is appropriate and no changes need to be made. Although none of the committee members are trained accountants they all have extensive industry experience, they have all been associated with Nano Cir- cuits in various capacities for many years, and are well qualified to fulfill their policy-oversight responsibilities. External audit partner: The external audit partner pointed out that the internal audit function should be organized such that it supports a close working relation- ship with the external auditors. This would include monitoring internal control systems on a continuing basis to provide a body of evidence on which the exter- nal auditor can rely. Director of Internal Audits: The Director of Inter- nal Audits argued that the new IA function should focus more on operational auditing issues, but it also should play a role in the review of internal controls over finan- cial reporting on Chief Operations Officer (COO). John Sween the COO of Technical Solutions, believes that Director of IA should report to him. Under t arrangement the IA staff members would involved in the preparation of policy statements internal control regarding safeguarding of assets a in the design of business processes. Chief Information Officer (CIO). Larry Rich, CIO, has pushed hard to have the IA func report to him and take on an active role in design, installation, and initial operation of a computerized systems. IA staff will be prima concerned with the design and implementatio internal accounting controls and conduct the ev ation of these controls during the test runs audits. Corporate Controller. The controller, L Johnson, believes the IA group should rem within her functional area. Currently the IA performs a number of controller related t These include Internal auditors reconcile bank statemer the corporation each month. The cont believes this strengthens the internal cc function because the internal auditor i- Required Describe the role that each of the following areas has in the establishment, maintenance, and evalua- tion of internal control