Tutorial 8/9/16

The purpose of an internal audit report is to identify the existing management practices and
procedures in specific parts of the organization. The internal audit report should communicate on
the findings and make recommendations to improve the effectiveness and efficiency of the
operations that is adding value to the organizations.
REQUIRED:
a)

Discuss the steps in preparing an internal audit report.

b)

Explain the concept of Audit risk:

(15 marks)

i) At the level of financial statements

ii) At the level of account balance and class of transactions.

(10 marks)

(Total: 25 marks)

Answer
Discuss the steps in preparing an internal audit report:
The first step is field audit exit meeting. This is where the auditor in charge will meet
with management to discuss the audit observations. The purpose of the exit meeting is to obtain
further information from the management of the department being audited. The second step is to
prepare the draft audit report. The report includes an action plan that summarizes each of the
recommendations. The draft report contains both audit observations and recommendations made
by internal auditors.
The third step is to get the departments responses where the management of the
department should consider the likely recommendations that have arisen from the fieldwork. The
responses must be submitted to the CEOs office. The fourth step is to prepare the final audit
report. This report is finalized to include the observations, recommendations, departments
responses and auditors conclusion.
The fifth step is performing post audit survey. The internal audit department will carry
out a post audit survey by sending survey forms to department being audited for feedback and
comments on the audit process. As for the last step is to perform follow-up audit. Internal
auditors will perform a follow-up audit to review and report on the extent of implementation of
recommended corrective actions from the previous audit.

Part A
Audit risk is considered at the financial statement level during the audit planning process. At
this time, the auditor should undertake an overall audit risk assessment based on his knowledge
of the clients business, industry, management, control environment and operations. Such an
assessment provides preliminary information about the general approach to the engagement, the
auditors staffing needs and the framework within which materiality and audit risk assessment
can be made at the individual account balances or class of transactions level.
For assessing the inherent risk, the auditor uses professional judgement to evaluate numerous
factors. For examples, the management integrity, experience, knowledge and changes during the
period. This is when the inexperience of management may affect the preparation of the financial
statements of the entity.
The last factor is the unusual pressure on management. This is where the nature of entitys
business, for instance, its technological obsolescence of products and services, complex capital
structure, significance of related parties and the number of locations and geographical spread of
its production (facilities), or factors affecting the industry in which the entity operates.
Part B
Majority of audit procedures are directed to, and carried out at the account balance and
class of transactions level. Accordingly, audit risk should be considered by the auditor at this
level taking into account the results of the overall audit risk assessment made at the financial
statement level.
To assess inherent risk, the auditor uses professional judgement to evaluate numerous
factors. First is the complexity of underlying transactions which might require the use of the
work of an expert. Next is the susceptibility of assets to loss or misappropriation. Third is the
completion of unusual and complex transactions, particularly at or next year end, and lastly is
the transactions not subjected to the normal processing mode.