internal audit

MacDonald Farm Tractors Inc. (MFT) produces tractors and related equipment for both consumer and commercial use. Annual sales typically exceed $35 million across North America. However, recently sales stopped increasing. Shephard, a CIA and the CAE for MFT, has overseen the completion of the audit of the production function as part of the approved audit plan. The audit work consisted of reviewing a number of reports regarding results of the 9 production runs completed over the past year. Typical information included variances between budget and actual costs for production runs, quality control reports of the number of defects and returns for a given product, and variances of budgeted versus actual time to completion for a given product. The result of this review indicated that 4 of the 9 production runs had missed their deadlines. Further analysis revealed that for the 5 production runs that were completed on schedule, 2 of them were over budget with respect to total cost. In addition, the quality control reports showed a number of defects and customer complaints regarding some of the products. As a result, Shephard performed some benchmarking to industry standards. His conclusion was that MFT's production department was higher than average in regards to the number of defects and returns. To validate and better understand the circumstances regarding the information contained in the reports, Shephard met with the production manager. The production manager explained that his job was often difficult to manage because the process was very labour intensive and he often had to deal with the union and related issues. This was in contrast to their competitors, who had already automated the majority of their production functions. Therefore, cost overruns, in his opinion, were primarily attributable to labour costs. In particular, the 2 production runs that were over budget resulted from overtime payments to workers. The production manager indicated this had to be done as in the past some production runs had missed their deadlines. Missed deadlines, he felt, were the result of ambitious planning by the marketing department as well as a failure on his part to stress the unrealistic goals for the expected completion time for certain types of tractors. Failure to coordinate the resources of the 2 departments resulted in unrealistic goals and inevitably missed deadlines. The production manager felt that there were 2 main reasons for the quality-control issues. The first was that there were not sufficient resources available to conduct proper quality-control checks to identify problem areas. The second reason was the poor-quality parts purchased for use in production. In particular, one vendor often provided low-quality parts. Despite this, the purchasing department continued to deal with this vendor. The production manager indicated that this information had not been reported directly to the purchasing department but that it was mentioned in management meetings as a contributing factor to the issue of poor product quality. The production manager also advised Shephard that there had been other problems with purchasing. One vendor, he remembered, had on at least 3 separate occasions shipped parts late, causing costly delays. Shephard carried out audit procedures to substantiate the statements of the production manager. Having completed the examination phase, Shephard must now write the internal audit report on the production function at MFT Tractors. Required: 1. What goals should Shephard have for his internal audit report? (4 marks) 2. Write a draft of the objective, scope and observations section of internal audit report identifying three findings from the scenario provided in the pdf document. (17 marks) 3. After the internal audit report has been issued, the next step is the monitoring phase. Explain the importance of this phase of the audit. (2 marks)