Qn 4b June 2008

MonteHodge Co has a sales income of $253 million and employs 1,200 people in 15 different locations. MonteHodge Co provides various financial services from pension and investment advice to individuals, to maintaining cash books and cash forecasting in small to medium-sized companies.

The company is owned by six shareholders, who belong to the same family; it is not listed on any stock-exchange and the shareholders have no intention of applying for a listing. However, an annual audit is required by statute and additional regulation of the financial services sector is expected in the near future.

Most employees are provided with on-line, real-time computer systems, which present financial and stock market information to enable the employees to provide up-to-date advice to their clients. Accounting systems record income, which is based on fees generated from investment advice.

Expenditure is mainly fixed, being salaries, office rent, lighting and heating, etc. Internal control systems are limited; the directors tending to trust staff and being more concerned with making profits than implementing detailed controls.

Four of the shareholders are board members, with one member being the chairman and chief executive officer. The financial accountant is not qualified, although has many years experience in preparing financial statements.

Required:
Discuss the reasons for and against having an internal audit department in MonteHodge Co. (12 marks)

My answer is as follows:

REASONS FOR :

Regulations compliance :
An I.A dept would ensure monte hodge co. Has complied with the relevant authority in the financial services sector as it is dealing with with providing various financial services like pension and investment advice to individuals, to maintaining cash books and cash forecasting and the it also expects additional regulations from this sector

Accounting systems :
I.A dept will ensure accounting systems are working properly eg in accurate fee income based investment advice is calculated. So ensures it is understood by the management and not complex.

Computer systems and internal control effectiveness :
Since monte hodge is provided with real time online computer systems which present financial and stock info to provide necessary advice to clients, it will ensure necessary backup and data recovery steps are in place to avoid vital data loss
Also since the company is quite diverse in terms of services it provides, the controls are limited, so it is very important for necessary controls in place which I.A dept can recommend and nonitor

REASONS AGAINST :

No statutory requirement :
There is no statutory requirement for an internal audit dept to be established for the company. But it is still recommended by corporate governance requirements, especially incase of listed entities. However monte hodge co. Has no intentions of being listed hence it might be seen as a waste of resources and time of the company

Family business :
As all of the 6 shareholders of monte hodge co. Is originating from the same family there is no need to provide assurance services to them on the effectiveness of controls and accuracy of accounting systems

Potential cost :
There would be a potential cost for monte hodge co. For establishing and maintaining of an I.A dept which may be too costly or not in the budget to afford.

How much can I score in this question out of the 12 marks from my answer above? Can I get all the 12 marks? Please advise sir if my answer is well explained for the question requirement. I do not plan to see the respective answer as I want to know how I would be marked from an acca marker/examiners view point.