Case 1 Answer questions A,B, and C

the goodwill I've been struggling to build for this depart- ment. It will all go out the window." "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." A Authenticate your usernam B. Perform rese an internal au internal audit objectivity. W function to be int possess objecte c. Submit a briel your research "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 IIAS Code of Ethics. Identify three specifie 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 ease. 8 PC H write down stockhold- all drop like a. Now you B. Discuss how the ethical dilemma Mark faces might have been wonded. In other words, discuss specific things Comstock 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 Markl position. Brietly explain why. they are in as suddenly decide the ey accepted dit commit adjustment CASE 2 Knowledge Leader Practice Case: Internal Auditor Independence & Objectivity in the third world, that are finding thousecond third-geration machines pretty expensive to mainta I mean, there be a polley that states obsoletely should be written off but there is no polley defining wote part "And as for those reliables Brenda continued, the certainly udgment call to Who knows if the ces will be collected Wehen sich recesito When things plek we'll probably set a few. There ne a polley in this dis writing office dice. Nothing to write them off. where you to have to CASE 12 Mark Heralditor employed by Com ewing completion of an audit of the vil vise od during the first le weeks of the year. The Av Dom one of three manufacturing divisin tocka manfactors inventories to wpply about so percent of Contales. In addition to the facturing division, Comstock has two mart dodot hd international and technical vidivis that offers worldwide technical support Bachome ined to the meat suitablemente uring division, which function as the supplier for that customer. The macturing division the approves the "rendbe straight. You know the parts will be stomer credit his against onders obtained by the Another receivableware bad Se tives, and collects the story de This allows order to order motoring of & Man Benda fully bargained only two Inedit sit store recent work the deather. Late these items ride till after the do that we get their home Two Potential Observations Then I place fresh look at both mento The coven Man. First, there was a materiallar andreeables 11 write thindowsfer year after of your mimber Astill carried on the tical reported. No one will know. And bevat ward despite the fact that the Fitte terboot moment to which part was editation and is not The Division Manager Le reprendiste wie off all Mate continua a draftext his report caining moyen Sandi come me was die al year-end were the ovations wetel to the inventory and receive, andrewwede port with the division manage al In receivables are due 36 ay which is with disturbed theastry Markery at the old e, Maik, this cito't have come ata me award Thands file. Charles Just passed muster by the independent two move the on There was a great here for our men Hand The November, and Brenda ready sent her If the present endnet les to corporate head- No one up there OUP on the CPA the last critical to raising The Auditee's Comments big teulaty rw the independent outside Mischen ih or will is writing or usentory and they just and there will be hell to pay And Mark this OG MARIN Thes mean eithe bow for We ait to pense bied. Rich the of the work ar inted to fight to 10 10.400 expensive to maintain obsolete inventore no polley defining a B. Dis ha 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?" auc enda continued, the Who know if the a slight recensioni Bly collect few. There a on writing off roce ave to write them of sud C. Cle JOE "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 CPA's report. If you want to make the audit commit- tee happy, you'll accept it, too, and leave this adjustment stuff alone home parts will never be ables are bad Sanguined, only two et let the tems ride gone their bone 100k at both inventories down after year end after No one will know. And, The Internal Audit Director Concerned, Mark delayed finalizing his report and dis- cussed the dritt with Gail Wu, director of internal audit. Gail is not trained is 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 Mak has always expected her opinion. The discussion was by telephone, with Mark still at the Evil Division headquarters and Gail at the corporate office CAS Know Intern Objec Backg) As indi tion mu objectis chapter represen audit see dence a concepts interna vited bile containing Inventory and receivables the division manager. Hal be Use the lowing Mark. Hal is right. Il 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. ent A. Auti your B. Per an in Wome wkward muster by the dependent you here for me and ready sent her ale tomated our or on the CPA hitel 11 weep Sider "I know you've been trying to put us on a better footing. Gail, but Halls intractable. As far as he is concerned, the only observation he will accept in the report is that of delictent policy, with nothing mentioned about the inven- tory or receivables needing adjustment. obes funct POSNE Subm int there ter th pon calling 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 Refer to The IIA's Code of Ethics. Identify three specific Rules of Conduct relevant to this case. Using the Rules of Conduct you identify as the context, din the ethical issues raised in the case wo CASES CASE 13 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 of Comstock 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 manufae 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 receive ables when doe. This allows order-to-order monitoring of customer credit limits against customer orders received Two Potential Observations 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-tae 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. The division manager's administrative assistant, Brenda Wilson, performed the aging of accounts receivable rather than the division accountant, as is standard practice. The division accountant refused to discuss the circumstances of Brendas actions. in the third world, that are finding those second and third-generation machines pretty expensive to maintain I mean, there is a policy that states obsolete inventor should be written off, but there is no polley defining obsolete part." "And as for those receivables, Brenda continued, the is certainly a judgment call, too. Who knows if the accounts will be collected? We're in a slight recession When things pick up, we'll probably collect a few. There isn't even a polley in this division on writing offre ables. I checked. Nothing says I have to write them off who are you to say I have to?" "Brenda, be straight. You know those parts will never be used. And you know those receivables are bad." "Look, Mark," Brenda finally bargained, "it's only two weeks from the close of the year. Let's let these items ride till after the close so that everyone gets their bonuses Then, I promise I'll take a fresh look at both inventories and receivables. I'll write them down after year-end, after the financial reports are issued. No one will know. And, after all, whols to be hurt?" The Division Manager Mark continued his audit, drafted his report containing observations related to the inventory and receivables, and reviewed the report with the division manager, Hal Wright. Hal was visibly disturbed. The Auditee's Comments Mark scheduled a meeting with Brenda to discuss his "Gee, Mark, this couldn't have come at a more awkward time. Our figures just passed muster by the independent outside auditors. There was a guy out here for our inven tory count in November, and Brenda already sent her spreadsheet on year-end receivables to corporate head- quarters. No one up there, in our group or on the CPA audit team, was the least bit critical. If you go raising a big stink, particularly now, the independent outside auditors will catch us writing off inventory and recei ables, they'll adjust protit, and there will be hell to pay for all of us. And, Mark, this is no clear-cut ise either I mean, I can see how you can write a report calling for clearer policy, but not one calling for specific write downs. That's way out of your jurisdiction. But still, 1 promise, we'll look at all this after our statements go to bed. Right now, I feel the managers of this division have worked their hearts out and I intend to fight to protect concerns. "Well, Mark," Brenda responded, "I know that policy requires that obsolete inventories be written off, but part A2 is just not being used at present. We might start to make those Fast-tae components again. Who knows? Wide ties are coming back again, aren't they? Past-tae could, too. There are plenty of customers, especially 2-44 INTERNAL AUDITING ASSURANCE & ADVISORY SERVICES the goodwill I've been struggling to build for this depart- ment. It will all go out the window." "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." A Authenticate your usernam B. Perform rese an internal au internal audit objectivity. W function to be int possess objecte c. Submit a briel your research "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 IIAS Code of Ethics. Identify three specifie 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 ease. 8 PC H write down stockhold- all drop like a. Now you B. Discuss how the ethical dilemma Mark faces might have been wonded. In other words, discuss specific things Comstock 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 Markl position. Brietly explain why. they are in as suddenly decide the ey accepted dit commit adjustment CASE 2 Knowledge Leader Practice Case: Internal Auditor Independence & Objectivity in the third world, that are finding thousecond third-geration machines pretty expensive to mainta I mean, there be a polley that states obsoletely should be written off but there is no polley defining wote part "And as for those reliables Brenda continued, the certainly udgment call to Who knows if the ces will be collected Wehen sich recesito When things plek we'll probably set a few. There ne a polley in this dis writing office dice. Nothing to write them off. where you to have to CASE 12 Mark Heralditor employed by Com ewing completion of an audit of the vil vise od during the first le weeks of the year. The Av Dom one of three manufacturing divisin tocka manfactors inventories to wpply about so percent of Contales. In addition to the facturing division, Comstock has two mart dodot hd international and technical vidivis that offers worldwide technical support Bachome ined to the meat suitablemente uring division, which function as the supplier for that customer. The macturing division the approves the "rendbe straight. You know the parts will be stomer credit his against onders obtained by the Another receivableware bad Se tives, and collects the story de This allows order to order motoring of & Man Benda fully bargained only two Inedit sit store recent work the deather. Late these items ride till after the do that we get their home Two Potential Observations Then I place fresh look at both mento The coven Man. First, there was a materiallar andreeables 11 write thindowsfer year after of your mimber Astill carried on the tical reported. No one will know. And bevat ward despite the fact that the Fitte terboot moment to which part was editation and is not The Division Manager Le reprendiste wie off all Mate continua a draftext his report caining moyen Sandi come me was die al year-end were the ovations wetel to the inventory and receive, andrewwede port with the division manage al In receivables are due 36 ay which is with disturbed theastry Markery at the old e, Maik, this cito't have come ata me award Thands file. Charles Just passed muster by the independent two move the on There was a great here for our men Hand The November, and Brenda ready sent her If the present endnet les to corporate head- No one up there OUP on the CPA the last critical to raising The Auditee's Comments big teulaty rw the independent outside Mischen ih or will is writing or usentory and they just and there will be hell to pay And Mark this OG MARIN Thes mean eithe bow for We ait to pense bied. Rich the of the work ar inted to fight to 10 10.400 expensive to maintain obsolete inventore no polley defining a B. Dis ha 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?" auc enda continued, the Who know if the a slight recensioni Bly collect few. There a on writing off roce ave to write them of sud C. Cle JOE "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 CPA's report. If you want to make the audit commit- tee happy, you'll accept it, too, and leave this adjustment stuff alone home parts will never be ables are bad Sanguined, only two et let the tems ride gone their bone 100k at both inventories down after year end after No one will know. And, The Internal Audit Director Concerned, Mark delayed finalizing his report and dis- cussed the dritt with Gail Wu, director of internal audit. Gail is not trained is 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 Mak has always expected her opinion. The discussion was by telephone, with Mark still at the Evil Division headquarters and Gail at the corporate office CAS Know Intern Objec Backg) As indi tion mu objectis chapter represen audit see dence a concepts interna vited bile containing Inventory and receivables the division manager. Hal be Use the lowing Mark. Hal is right. Il 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. ent A. Auti your B. Per an in Wome wkward muster by the dependent you here for me and ready sent her ale tomated our or on the CPA hitel 11 weep Sider "I know you've been trying to put us on a better footing. Gail, but Halls intractable. As far as he is concerned, the only observation he will accept in the report is that of delictent policy, with nothing mentioned about the inven- tory or receivables needing adjustment. obes funct POSNE Subm int there ter th pon calling 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 Refer to The IIA's Code of Ethics. Identify three specific Rules of Conduct relevant to this case. Using the Rules of Conduct you identify as the context, din the ethical issues raised in the case wo CASES CASE 13 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 of Comstock 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 manufae 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 receive ables when doe. This allows order-to-order monitoring of customer credit limits against customer orders received Two Potential Observations 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-tae 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. The division manager's administrative assistant, Brenda Wilson, performed the aging of accounts receivable rather than the division accountant, as is standard practice. The division accountant refused to discuss the circumstances of Brendas actions. in the third world, that are finding those second and third-generation machines pretty expensive to maintain I mean, there is a policy that states obsolete inventor should be written off, but there is no polley defining obsolete part." "And as for those receivables, Brenda continued, the is certainly a judgment call, too. Who knows if the accounts will be collected? We're in a slight recession When things pick up, we'll probably collect a few. There isn't even a polley in this division on writing offre ables. I checked. Nothing says I have to write them off who are you to say I have to?" "Brenda, be straight. You know those parts will never be used. And you know those receivables are bad." "Look, Mark," Brenda finally bargained, "it's only two weeks from the close of the year. Let's let these items ride till after the close so that everyone gets their bonuses Then, I promise I'll take a fresh look at both inventories and receivables. I'll write them down after year-end, after the financial reports are issued. No one will know. And, after all, whols to be hurt?" The Division Manager Mark continued his audit, drafted his report containing observations related to the inventory and receivables, and reviewed the report with the division manager, Hal Wright. Hal was visibly disturbed. The Auditee's Comments Mark scheduled a meeting with Brenda to discuss his "Gee, Mark, this couldn't have come at a more awkward time. Our figures just passed muster by the independent outside auditors. There was a guy out here for our inven tory count in November, and Brenda already sent her spreadsheet on year-end receivables to corporate head- quarters. No one up there, in our group or on the CPA audit team, was the least bit critical. If you go raising a big stink, particularly now, the independent outside auditors will catch us writing off inventory and recei ables, they'll adjust protit, and there will be hell to pay for all of us. And, Mark, this is no clear-cut ise either I mean, I can see how you can write a report calling for clearer policy, but not one calling for specific write downs. That's way out of your jurisdiction. But still, 1 promise, we'll look at all this after our statements go to bed. Right now, I feel the managers of this division have worked their hearts out and I intend to fight to protect concerns. "Well, Mark," Brenda responded, "I know that policy requires that obsolete inventories be written off, but part A2 is just not being used at present. We might start to make those Fast-tae components again. Who knows? Wide ties are coming back again, aren't they? Past-tae could, too. There are plenty of customers, especially 2-44 INTERNAL AUDITING ASSURANCE & ADVISORY SERVICES