ACC311 Fundamentals of Auditing Assignment 1 Solution Spring 2013

Nabi Buksh Chartered Accountants (NBCA) is a large audit firm having specialization in the audit of
large specialized retailers. NBCA has been working as auditor of Multi Food Company (MFC) – a large
fast food chain store for the last five years. Recently, MFC’s main competitor – Hot Food Company
(HFC) has also approached NBCA to act as their auditors. Both the companies are highly competitive
and upon sensing this deal, MFC is keenly concerned about its business secrets which are likely to leak.

This year MFC’s internal audit department is overly stressed due to lack of employees and this
department is unable to cop it. Therefore, MFC management is considering either to hire more
employees or outsource the functionality of this department. Hiring option requires extensive training
of new recruits but the year closing is on, whereas, the outsourcing requires experts to visit regularly to
test controls both at the outlets and head office. In this regard, MFC is considering NBCA for
outsourcing its internal audit functions while letting NBCA to remain its external auditors.

The managing director of MFC has just recruited his eldest son – Mr. Big as the company’s purchase
manager. He would receive company’s shares in place of monetary salary as his compensation. Mr. Big
has suggested to his father – the Company’s MD to appoint NBCA as internal auditors on the
condition that their remuneration will be equal to 5% of the company’s yearly profits. He is of the view
that this deal would certainly align the interests of NBCA and MFC.

1. How NBCA can assure MFC over up-keeping of its business secrets? (4 marks)

auditors are expected to apply and uphold the following principles:

  1. Integrity
    The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment.
  2. Objectivity
    Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.
  3. Confidentiality
    Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
  4. Competency
    Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services.

2. What are the pros and cons of outsourcing for MFC of its internal audit functions? (5 marks)

Advantages of Internal Audits

1. The biggest advantage of internal audit is that it will lead to discovery of errors and therefore when external audit is done those errors which were discovered during internal audit would have been rectified by then.

2. Since internal audit is done by the employees of the company there is no additional cost involved which again is a big advantage for a company which is doing internal audit.

3. As internal audit is a constant procedure where records are checked regularly it ensures that accounting staff of a company keep the records up to date.

Disadvantages of Internal Audits

1. Internal audits report is not accepted by either the shareholders or tax authorities, it is the external auditor report which is required to be submitted to these parties.

2. Since internal audit is done by the employees of the company chances are that it may be biased and therefore company cannot depend on such reports.

3. Since an internal audit is not done by the professional auditor chances of internal auditor not detecting the errors are high.
3. Is it appropriate for NBCA to work as internal auditor of MFC? Why and why not? (5 marks)

4. Should NBCA accept Mr. Big’s offer. Why and why not? (6 marks)