Audit Judgment: Please Respond To The Following From The Cas

Audit Judgmentplease Respond To The Followingfrom The Case Study

Evaluate the quality of REDTOP’s internal audit function based on the case study. Recommend at least two (2) specific improvements to enhance the internal audit function’s quality, providing a rationale for each. Additionally, assess whether the external audit team can utilize REDTOP’s internal audit work differently than relying solely on it for the overall audit. Propose one (1) alternative approach to using the internal audit work, with supporting rationale.

Paper For Above instruction

The assessment of REDTOP Sports’ internal audit function reveals a mix of strengths and areas needing improvement. The internal audit department, comprised of four staff auditors, a manager, and a director, operates with a degree of independence, reporting directly to the CEO and having access to the audit committee. Their responsibilities include operational and compliance audits, alongside financial controls. However, their processes and quality assurance practices suggest significant scope for development, especially given the critical role internal auditors play in key financial areas such as accounts receivable.

Firstly, the internal audit function’s organizational structure and reporting lines are appropriate, but the lack of formalized audit procedures undermines consistency and comparability. The absence of standardized audit programs means that each staff auditor develops audit procedures tailored to specific engagements, often leading to inconsistent quality and difficulty in reviewing work comprehensively. Standardized audit programs, aligned with best practices and industry standards such as those outlined by the Institute of Internal Auditors (IIA), would improve consistency, facilitate training, and enhance overall audit quality. A recommendation, therefore, is to develop and implement standardized audit programs for recurring audits, especially those involving financial controls like accounts receivable.

Secondly, the internal audit team’s limited use of computer-assisted auditing techniques (CAATs) restricts efficiency and effectiveness. Currently, they largely rely on basic spreadsheet and word processing tools, without employing generalized audit software or data analytics, which are essential tools in modern internal auditing. Incorporating CAATs would enable the auditors to perform more comprehensive testing, such as sampling and data analysis, thereby improving detection of anomalies, like pricing errors or unrecorded receivables, while reducing manual effort. This upgrade would align their practices with contemporary standards, increasing accuracy and efficiency in testing controls and balances.

Another area for improvement concerns the internal audit quality assurance process. Although a quality assurance program exists, it is limited to internal reviews by staff members without reviewing their own work, and has identified only minor improvements. Developing a formal, documented external quality assessment conducted periodically by an independent reviewer — as recommended by the IIA’s International Standards for the Professional Practice of Internal Auditing — would significantly enhance objectivity and credibility of the audit function. A structured action plan based on these assessments would provide clear benchmarks for continuous improvement, better assurance to management and the audit committee, and mitigate risks of overlooked deficiencies.

Regarding the utility of internal audit work in the external audit, the current level of testing by REDTOP’s internal auditors shows some reliability but also notable weaknesses. Their confirmation procedures for accounts receivable had a lower-than-normal response rate, and follow-up was insufficient in some cases, which could compromise the sufficiency of audit evidence. While internal auditors’ review of controls over accounts receivable is useful, their failure to perform critical tests such as cutoff testing increases vulnerability to misstatements raised by timing differences at period-end. Therefore, the external team should consider the internal audit work as preliminary and supplement it with additional testing to ensure quality and sufficiency of evidence.

An alternative to reliance on internal audit work is to perform independent substantive procedures on the accounts receivable, such as reconciling year-end balances with subsequent collections, performing complete cutoff testing, and expanding direct confirmation sampling. These procedures would provide more reliable evidence on existence and valuation assertions. The rationale is that internal audit’s current procedures, although useful, do not fully substitute for the comprehensive testing necessary for the external audit’s conclusions, especially given the noted deficiencies in documentation and follow-up procedures.

In summary, REDTOP’s internal audit function demonstrates a solid organizational structure but needs substantial enhancements in standardization, technology adoption, and quality assurance. Improving these areas will elevate the reliability of internal audit work, thus better supporting both internal controls assessment and external audit procedures. The external auditors should view internal audit as a supportive source rather than a substitute for comprehensive substantive testing, particularly in high-risk areas like accounts receivable, where internal procedures show gaps in coverage and documentation.

References

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