Susan was recently appointed as a non-executive member of the internal audit committee of ABC Berhad, a public listed company producing complex engineering products. Barney is the executive finance director who chairs the committee, had always viewed the purpose of internal audit as primary financial in nature and as long as financial controls are seen to be fully in place, he is less concerned with other aspects of internal control. When Susan asked about operational controls in the production facility Barney said that these were not the concern of the internal audit committee. This, he said, was because as long as the accounting systems and financial controls were fully functional., all other systems may be assumed to be working correctly.

Susan, however, was concerned with the operational and quality controls in the production facility. She spoke to production director Aaron, and asked if he would be prepared to produce regular reports for the internal audit department on levels of specification compliance and other control issues. Aaron said that the internal audit department had always trusted him because his reputation as a manager was very good. He said that he had never been asked to provide compliance evidence to the internal audit department and saw no reason as to why he should start doing so now.

At board level, the non-executive chairman, George, said that he only instituted the internal audit department in the first place in order to be seen to be in compliance with the stock markets requirement that ABC Berhad should have one. He believed that the internal audit department didnt add materially to the company. They were, he believed, one of those outrageous demands that regulatory authorities made without considering the consequences in smaller companies nor the individual needs of different companies. He also complained about the need to have an internal auditor. He said that ABC Berhad used to have a full time internal auditor but when he left a year ago, he wasnt replaced. The audit committee didnt feel it needed an internal auditor because Barney believed that only financial control information was important and he could get that information from his management accountant.

Susan asked George if he recognized that the company was exposing itself to increase market risks by failing to have an effective audit committee. George said he didnt know what a market risk was.

Internal control and audit are considered to be important parts of sound corporate governance.

Required:

1. Explain the organizational factors that determine the need for internal audit in public listed companies. [20 marks]
2. Criticise the internal audit arrangements at ABC Berhad as described in the case scenario.

[5 marks]