5. 5
Learning Objectives for Today
◦ LO # 1: Independence/Conflict of Interest
◦ LO # 2: Understanding of Internal Control Processes
Independence
Internal Controls
6. 6
Introduction to the “Exciting” Audit World
◦ Definition of an Audit
“An official inspection of an individual’s or
organization’s accounts, typically by an independent
body.”
◦ Purpose of an Audit
Provide assurance to third parties and other
stakeholders of the individual or organization that the
financial statements are free from “material” errors.
Independence
Internal Controls
8. 8
LO # 1: Independence/Conflict of Interest
In fact and in appearance
Have to appear “independent” to third parties
Crucial for current times/era of litigation
◦ Enron represents an example
Independence
Internal Controls
9. 9
LO # 1: Independence/Conflict of Interest
The downfall of Enron
Independence
Internal Controls
10. 10
LO # 1: Independence/Conflict of Interest
Scenario # 1
◦ You are auditing your sister’s company and she is
the exclusive owner and shareholder of this
company
Independence
Internal Controls
11. 11
LO # 1: Independence/Conflict of Interest
Scenario # 2
◦ You are auditing one of your biggest audit clients
but you go out with the senior management team
every Friday afternoon for a golfing session and
some lunch and drinks after a long day of golfing.
Independence
Internal Controls
14. 14
LO # 2: Internal Controls
◦ Definition of Internal Controls
Internal control, is a process for assuring
achievement of an organization's objectives in
operational effectiveness and efficiency, reliable
financial reporting, and compliance with laws,
regulations and policies.
◦ Imperative that auditors gain understanding of an
organization’s internal control processes
Independence
Internal Controls
15. 15
LO # 2: Internal Controls
Example of a “Perfect” Sales Cycle
Sales clerk Generate
Sales Invoice
Approval of Sales
Invoices over $1,000 by
Finance Manager
Accounting clerk enters
sales invoice in financial
system
Financial Analyst prints
out weekly sales report
for mgmt review
Independence
Internal Controls
16. 16
Your supervisor assigns you the audit of ZK
Corporation as your first audit client.
your sister owns about 55% of the shares of
the company.
Independence
Internal Controls
17. 17
LO # 2: Internal Controls
ZK CORPORATION – Purchasing Process
Purchasing clerk receives
invoice from Vendor
Invoice Entered in Financial
System by Purchasing Clerk
Purchasing Clerk issues
cheque to vendor from system
Independence
Internal Controls
18. 18
Wrap up of Learning Objectives for Today
◦ LO # 1: Independence/Conflict of Interest
◦ LO # 2: Understanding of Internal Control Processes
Questions?
Independence
Internal Controls
19. 19
Thank you for your time today
Independence
Internal Controls
Editor's Notes
Ensure Participants are enabled for annotation
Intro
Rules – cell phones on vibrate
Questions – raise hand or put in chat
Get everyone to raise hand to test – invite them to use feature to ask questions
Visual Poll
Enable Drawing Visual polling of where everyone stands on a whiteboard with this diagram
Ask people to place initials
Speaker Notes
Discuss results
Poll using emotions:
I know and understand why audits are performed? Click on the emotion
Agree
Disagree
So I can get a sense of everyone’s prelim knowledge before we begin thank you
Get everyone to clear status
Layout – PowerPoint Slide and Discussion
Some of the main guidelines auditors have to adhere to for life (codes of conduct) are the following so these will be our learning objectives
Why do you care? Buy in - As an intern auditor this is crucial for your success in this job
Layout – PowerPoint Slide and Discussion
Speaker Notes
Integrate results of polls from prior slides if possible
Not going to read definitions – you will have access to these slides after
But basically:
audits are done in the context we are speaking – by third parties on a company’s financial records to provide “assurance” of some form that their
financial records are relatively accurate
Purpose of audit can vary depending on situation give some examples
companies do audits so their stakeholders can rely on financials to make decisions
for example banks require audited financial statements for some of their clients to assess whether to give a loan or not to a company
public companies need audits as their shareholders rely on audited financial statements to make their investment decisions
Health care orgs require audits so Ministry can view their financials to assess future funding decisions
For info purposes we are only talking about financial audits – in real world terms there are so many different kinds of audits out there like audits of water management, energy conservation techniques, internal processes and controls, lists goes on and on.
Layout – Powperpoint Slide & Discussion
Layout – PowerPoint Slide & Discussion
Speaker Notes
Auditors have to be independent of their audit clients BOTH IN FACT AND APPEARANCE to THIRD PARTIES
For example if I was auditing my dad’s company would I be independent
Independent in fact – no
In appearance - no
Give ANOTHER example: if I spent a lot of time socializing with my audit client for dinners and drinks in public would I be in fact independent?
Address to group via main chat
Independent in fact - yes
But would I appear to be independent to third parties - NO
Have to appear independent to third parties
3RD BULLET POINT - Unique Vulnerability of Accountants to Lawsuits
Any stakeholder that relies on audited statements we prepare as auditors can sue us for lack of independence/conflict of interest
Which is what happened with Enron
Speaker Notes
First address group – who has heard of the Enron scandal (raise hands for those who have)
One of the biggest reasons Enron downfall was a lack of independence between their auditors as they were both consultants and auditors to Enron
View video
Main cause was lack of independence (consulting arm and audit/assurance practice both providing service to Enron mgmt)
Changed the audit industry COMPLETELY – share your personal story
Layout – Agree/Disagree
Scenario # 1 – 1st poll
The auditor independent in fact?
Agree or Disagree
Scenario # 1 – 2nd poll
The auditor independent in appearance?
Agree or Disagree
Open discussion with group with mics unmuted and discuss why they responded the way they did
Layout – 2 poll layout
Scenario # 2 – 1st poll
The auditor independent in fact?
Agree or Disagree
Scenario # 2 – 2nd poll
The auditor independent in appearance?
Agree or Disagree
Open discussion with group with mics unmuted and discuss why they responded the way they did
Speaker Notes
now I’ll discuss what internal control processes are and how crucial they are to your role as new auditors
PowerPoint Slide with Main Chat/poll
Main Chat- What kinds of internal control processes are you familiar with if any?
Speaker Notes
DO NOT READ DEFINITION – JUST DISCUSS AS PER BELOW
Basically internal controls are internal company processes that help make the entity’s records dependable and their assets protected
Simple Example – petty cash process
A good internal control process is where a company has a great process/system for tracking petty cash deposited and taken out
So for every petty cash expense someone authorizes the expenditure – keeps a record of the expense and disburses funds out
A poor process is when a company does not track how much petty cash goes out
** for example you know that if the company’s internal processes are strong then you can place more reliance on the numbers and do less “down and dirty testing” – substantive work like viewing invoices
Beneficial to client as well because in the long run saves money
The client I have used to have poor controls putting more pressure on auditors to do more work to verify accuracy of numbers leading to huge audit bills. When I joined I helped them gain more control over their internal processes (like all purchases are now approved and double approved so you have some comfort as an auditor that the expenses incurred are somewhat legitimate
personal story Kraft/Nabisco sales cycle before the merger
Whiteboard layout with this cycle on it – so I can highlight each circle when discussing
Speaker Notes
Explain why a good process
** segregation of duties
** approvals along the way
** monitoring of sales levels regular basis by mgmt
Checks and balances in system throughout
So risk of fraudulent sales going into financial system is relatively low
And notice different people at each stage of process
Combination Multiple Choice/Short Answer Poll Layout with PowerPoint slide in Middle
Would you accept the audit as your first client? Why?
Speaker Notes
Speaker Notes
now you’ve been asked to review this client’s internal control processes to see what is wrong and recommendations you have after learning a bit more
about I/C
2 group chat layout (break team into 2 group chat rooms) while this slide appears in middle
Would like to discuss this in 2 group chats and then at end compare to initial whiteboard discussion on slide 8
Break participants into 2 groups
1st Chat room – discuss what is wrong with the current purchasing process and why?
2nd Chat room – recommendations you may have for client?
discuss impact on the financials and numbers with given process – risks that can arise
COMPARE WITH INITIAL WHITEBOARD DISCUSSION AT BEGINNING OF TRAINING
Answers/Discussion points
=====
Who receives the vendor invoice
Who enters in system – segregation of duties concern
No approval process for expenses or invoice
Risk of purchasing clerk issuing cheque and generating invoice
Who is reconciling the bank?
Wrap up/Questions
Here I would like to open up the floor for questions
For such a small group would rather just leave mic unmuted and have open forum of questions/discussions
Share story – funny one time permitting
Feedback/wrap up
