AUI3701
The Internal Audit Process: Planning the
Engagement
Assignment 2
by
(Student number: 43273017)
Department of Auditing
Question 1
Identify four (4) weaknesses in the control environment based on the
information given and described the risk resulting from the identified (12)
weaknesses.
Weakness Risk identified from weakness
High Staff Turnover and Lack of Training. Inadequate Skillset and Knowledge Gaps:
There is a high staff turnover, especially High turnover and lack of training can
in the accounting department. Staff feel lead to a deficiency in the necessary skills
overworked and underpaid, and there is and knowledge required for accurate and
no formal career development or training effective accounting and financial
program in place. Employees are management. This could result in errors in
expected to self-identify training needs financial reporting, decreased efficiency,
and learn from their own experiences and increased risk of non-compliance with
financial regulations. The lack of formal
training also hampers the development of
internal controls and processes,
potentially leading to mismanagement or
fraud
Performance-Based Management Short-Term Focus and Manipulation: The
Bonuses Linked to Profit Targets. incentive structure might encourage
Management bonuses are awarded management to manipulate financial
, based on the achievement of profit results or make decisions that artificially
targets. This could potentially incentivize boost profits in the short term, at the
management to focus solely on short- expense of long-term sustainability and
term profit achievements ethical considerations. This could lead to
financial misstatements, increased risk of
fraud, and a misalignment of
management actions with the company’s
overall objectives.
Discrepancies Between Physical and Inventory Mismanagement and Financial
Accounting Inventory Records Misstatements: The lack of regular
The physical inventory records do not inventory counts and reconciliations
match the accounting records, and there increases the risk of inventory
are no regular inventory counts or mismanagement, including theft, loss, or
reconciliations performed. Management errors in recording. This can lead to
does not recognize the need for inventory inaccurate financial statements, which in
reconciliations turn affects financial reporting and
decision-making. Inaccurate inventory
records also impair financial control and
may result in financial losses or
discrepancies that could go undetected.
Lack of Internal Controls and Increased Risk of Errors and Fraud:
Reconciliation Procedures. Without established internal controls and
There is a general absence of internal regular reconciliation procedures, there is
control procedures, specifically related to a heightened risk of errors, fraud, and
inventory management and reconciliation mismanagement within the organization.
processes The absence of these controls means that
discrepancies and irregularities in
financial records or inventory might not be
detected in a timely manner, potentially
leading to significant financial losses or
legal issues.
The Internal Audit Process: Planning the
Engagement
Assignment 2
by
(Student number: 43273017)
Department of Auditing
Question 1
Identify four (4) weaknesses in the control environment based on the
information given and described the risk resulting from the identified (12)
weaknesses.
Weakness Risk identified from weakness
High Staff Turnover and Lack of Training. Inadequate Skillset and Knowledge Gaps:
There is a high staff turnover, especially High turnover and lack of training can
in the accounting department. Staff feel lead to a deficiency in the necessary skills
overworked and underpaid, and there is and knowledge required for accurate and
no formal career development or training effective accounting and financial
program in place. Employees are management. This could result in errors in
expected to self-identify training needs financial reporting, decreased efficiency,
and learn from their own experiences and increased risk of non-compliance with
financial regulations. The lack of formal
training also hampers the development of
internal controls and processes,
potentially leading to mismanagement or
fraud
Performance-Based Management Short-Term Focus and Manipulation: The
Bonuses Linked to Profit Targets. incentive structure might encourage
Management bonuses are awarded management to manipulate financial
, based on the achievement of profit results or make decisions that artificially
targets. This could potentially incentivize boost profits in the short term, at the
management to focus solely on short- expense of long-term sustainability and
term profit achievements ethical considerations. This could lead to
financial misstatements, increased risk of
fraud, and a misalignment of
management actions with the company’s
overall objectives.
Discrepancies Between Physical and Inventory Mismanagement and Financial
Accounting Inventory Records Misstatements: The lack of regular
The physical inventory records do not inventory counts and reconciliations
match the accounting records, and there increases the risk of inventory
are no regular inventory counts or mismanagement, including theft, loss, or
reconciliations performed. Management errors in recording. This can lead to
does not recognize the need for inventory inaccurate financial statements, which in
reconciliations turn affects financial reporting and
decision-making. Inaccurate inventory
records also impair financial control and
may result in financial losses or
discrepancies that could go undetected.
Lack of Internal Controls and Increased Risk of Errors and Fraud:
Reconciliation Procedures. Without established internal controls and
There is a general absence of internal regular reconciliation procedures, there is
control procedures, specifically related to a heightened risk of errors, fraud, and
inventory management and reconciliation mismanagement within the organization.
processes The absence of these controls means that
discrepancies and irregularities in
financial records or inventory might not be
detected in a timely manner, potentially
leading to significant financial losses or
legal issues.
