AUDIT REPORT ASSIGNMENT

Required Please read the case and all of the requirements carefully. Make sure your paper addresses each item. . Part 2 of the requirements must be written as a formal audit report.

2) You are writing your report for senior management and the audit committee of the board of directors. Your audit report must have the following sections: audit scope, background, executive summary with your overall conclusions (internal controls and whether a fraud has been committed), and findings and recommendations. For your opinion on whether a fraud has been committed, you need to explain how you arrived at your conclusion. What evidence supports the allegation? Is it firm enough to convict the person(s) in court? There are many different ways to write an audit report. You are free to choose a format which works for you.

I want the focus of the audit report to be on the internal control weaknesses and recommendations for improvement. There are a lot of significant internal control weaknesses in this case. You need to identify the ten most significant internal controls weaknesses in the Loom Reclamation Program. Give it a lot of thought. Ask yourself some questions. Here are a couple of suggestions to get you started. What are the objectives of the loom reclamation program? What is preventing Tarheel Textiles from realizing the full benefits of the program? You may want to flow chart the process as a way of identifying where controls are lacking. I want you to write a specific audit comment for each item which includes your recommendation. You should use what you learn in week 7 to formulate your audit comments. When you describe an internal control weakness, make sure your intended audience will be able to understand it (i.e., senior management). For example if you believe there is a segregation of duties issue, you need to indicate where and why it is a problem.

Case Study: Tarheel Textiles (The IIA Research Foundation, Case Studies in Internal Auditing, Volume 4, 2004) Background

Many of Tarheel Textiles' old Draper looms have recently been replaced with more modern and efficient weaving machines. Instead of being junked or scrapped, these surplus looms are sent by the plants to the Supply Support Division where they are stripped of all useable parts. These parts are reconditioned, stored, and placed on perpetual inventory records as used supply items.

Manufacturing facilities within Tarheel route all of their purchase orders for Draper loom parts through the Supply Support Division. This includes orders made out to Draper Company and all other vendors from whom Draper parts can be purchased. Supply Support reviews its inventory records (and will hold the order for no more than one day) to determine the availability of used parts generated from the loom stripping program. If parts are available within Tarheel, the purchase order to the vendor is altered and the Supply Support Division ships the available parts automatically to the ordering plant. The altered purchase order is then sent to the vendor. This program has resulted in substantial savings to Tarheel. Also, many of these older parts are in short supply and are, therefore, difficult to obtain within a reasonable delivery time.

Operation

The Loom Reclamation Program operates as follows:

Receiving 1. Plant sends to the Supply Support Division all surplus Draper looms. These looms may or may not be operative, but would have been scrapped at the plant, or otherwise disposed of, had they not been shipped to Supply Support. 2. Plant prepares a shipping document, which accompanies each shipment of looms. This shipping document lists each asset shipped, identified with the Tarheel fixed asset tag number. 3. The shipping plant prepares the necessary reports to transfer these surplus items to the Supply Support Division fixed assets ledger. 4. The looms are transferred, unloaded, and placed in a 3-1/2 acre fenced-in field. 5. Shipping documents are sent to the administrative office, where looms listed on the shipping document are compared to the quarterly printout received from Corporate Accounting which lists all assets transferred to Supply Support during the quarter. 6. The administrative area keeps a manual listing of looms. This list is reconciled quarterly with the computer-generated fixed asset ledger received from Corporate Accounting.