F8 SCENARIO QUESTION DISCUSSIONS – Q4 (b), June 2008

This is a discussion relating to Q4 (b), June 2008. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2008_jun_q.pdf

Since part (a) is theoretical, we will omit it from this discussion and go straight to the scenario.

FOCUS

Our focus is on a large company called Montehodge.

QUESTION

We are asked to discuss the reasons FOR and AGAINST having an internal audit department in Montehodge.

The way to go about this is to study the scenario and find important points that relate to the question.

You receive up to TWO marks for each well explained point, so THREE well explained points FOR and THREE AGAINST will be enough to gain full marks, for example.

A read through paragraph one tells us the following:

– Montehodge are a large, global organisation.
– Montehodge provide various financial services for both individuals and small to medium-sized companies.
– Montehodge is a family owned business.
– Montehodge is not listed on the stock exchange.
– Montehodge requires an annual audit by statute.

Paragraph two:-

– Most employees work with on-line, real-time computer systems.
– Income is based on FEES GENERATED FROM INVESTMENT ADvICE.
– Expenditure is mainly fixed.
– Internal control systems are limited.

Paragraph three:-

– Chairman and CEO are the same entity,.
– The financial accountant is not qualified.

Already, when we look at paragraph three, we can spot two advantages of an internal audit department.

1) The Chairman and CEO being the same does not comply with good corporate governance practice. While there is no need for M’hodge to follow good CG practice, it would still be useful for them to do so. A good IA dept could recommend policies for good CG, like splitting the chairman and CEO.

2) Having an IA Dept could provide assistance for the unqualified financial accountant.

Now, go back to paragraph one, and you will see that M’hodge provides FINANCIAL SERVICES; a very regulated sector. Hence we have advantage…
(3) An IA Dept can ensure M’hodge consistently comply with regulations.

Onto paragraph two, where we note that most employees are provided with computer systems, and that internal control is limited. Here alone we have two advantages of an IA Dept;
(4) IA can review the effectiveness of backup and recovery for the computer systems;
(5) IA can check if there is a need for basic control systems in M’hodge, and make recommendations for improvement as appropriate.

So, in short, we have found the following advantages:
(1) Recommendations for good corporate governance;
(2) Financial assistance;
(3) Compliance with regulations in the nature of the industry;
(4) Review of effectiveness of backup for the computer systems;
(5) Improvement of internal control systems

There are also more general advantages to be found, such as (6) the Value For Money (VFM) services the audit may provide, or (7) the improvement the IA will give Montehodge’s image.

Now, let’s discuss the case AGAINST an internal audit dept.

Look at paragraph one and you will see that:
– Montehodge is a family business;
– Various financial services are provided to individuals;
– There is a statutory requirement for an audit, yes – but not an INTERNAL AUDIT DEPT.

Already, we can draw three disadvantages from these points.

(1) Being a family business, there is no need to assure other shareholders on the effectiveness of internal control or financial systems;
(2) The services for individuals may not necessarily need complex accounting systems, meaning that directors will see no need for an IA dept to review their operations.
(3) No statutory requirement for an IA Dept means directors may see it as a waste of time and money.

There are also more general points such as (4) additional COST of establishing internal audit, and (5) the fact that directors may feel threatened by an IA Dept reviewing their work.

Consider the above points when answering this part of the question.

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Hope this helps!

Si80