inventory control procedures should provide better support for the close-out of
Specific audit checklists for controlling
the transfer of fixed assets and special procedures to ensure a continuing focus on
collection of receivables are also necessary.
A review of accounts payable should be
conducted to identify any inappropriate
payments to vendors, employees, or
employees’ family members.
Finally, it is still important to review the
new materials-management system and its
effect on production planning. This will
have ramifications for the close-out period
and will be useful information for the company as it moves forward with new system
A plant shutdown is a significant issue
and a real learning opportunity for auditors. Morale will be very low, and many
employees may feel the company owes
them. Special controls and procedures are
required to ensure a disciplined, controlled
shutdown. This represents an opportunity
for Janice to react quickly to the business
need and provide assurance that the company assets are adequately controlled during the shutdown.
After screaming to herself, “Why didn’t
anyone tell me before we spent 20 hours
traveling?” Janice should first find out what
time it is. She may still have time to call
the office — where it will probably be the
end of the workday — communicate the
news, and determine next steps. Also, now
that Janice is the acting chief audit executive (CAE), it’s important to call the external audit partner and explain the situation.
The external audit firm could have some
important input on the overall materiality of the plant and how their own audit
procedures might help or how internal
auditing’s work might be modified under
the circumstances. It sounds as if the plant
will still be on the books at year-end, so all
of the inventory issues and external audit
concerns are still very valid. To me, this
would suggest that at least some internal
audit work should go on.
Second, there may be very valid reasons for not being told in advance that
the plant was closing. This decision could
have just been made or made while Janice was en route. Depending on the size
of the plant, the decision may not have
even been communicated to the corporate offices, the finance function, or to
What’s done is done. Janice needs to
move on mentally and figure out a reasonable course of action. Though the plant
closing is not really her concern, she may
be able to cut back her work in a way that
would reduce disruption during the closing process. Also, many new audit issues
and risks now present themselves, which
may revise her approach.
The external audit firm
could have some
important input on the
overall materiality of the
plant and how their own
audit procedures might
help or how internal
auditing’s work might be
modified under the
Third, Janice could take this opportunity to make lemons out of lemonade.
Clearly, some work should be done if the
issues of inventory and information technology controls are significant on a consolidated basis. But, new circumstances
may provide an opportunity to investigate
other issues as well. For example:
Can the audit be revised to address new
and different risks related to the plant
Are there sale, scrap, write-off, or valuation issues?
Are there restructuring charges and severance calculations that need to be developed, tested, or evaluated?
Are there record-retention issues and
Does plant management have any suggestions on how Janice can be valuable, yet still
operate within her internal audit mission?
Are there any plant employees that
should be considered for joining Janice’s
internal audit group?
ASK THE EXPERTS
Finally, she should certainly enjoy the
scenery. If everything above fails, Janice
should see how much vacation she has
accrued and consider seeing the South
Island for a week. The fjords, mountains,
and wilderness are breathtaking!
Vice President, Internal Audit
Janice needs to work through the issues
to come up with the best solution. This
is a fine opportunity for her to showcase
her skills and ability as an executive. She
needs to stay calm and be flexible. As the
CAE, she will be constantly challenged to
change direction as the business and its
requirements and risks change. She needs
to show that she can respond maturely
and with consideration for the total company’s needs.
Janice needs to think risk, value, and
alternatives. She should talk with the rest
of her team, the external auditors, and various customers, and listen to their wisdom.
What are the risks and how have they
changed? Has the planned closure mitigated the risks the audit was planned to
address? Are there new risks that merit
Where is the most value to the company
as a whole? Is it in leaving, in staying and
doing the planned work, or in changing the scope, which could include covering less and leaving early? What do
Janice’s customers want and value?
Remember that her customers include
not only the audit committee, the CFO,
and the external auditors, but also the
COO and the plant manager.
What alternatives does Janice have for
her time? Are there other high-risk areas
that she did not expect to be able to
address due to limited resources and now
has the opportunity to audit by canceling the Auckland engagement?
Janice needs to take a look at the big picture, consider all of her options, and discuss the options and recommendation with
key customers. Welcome to executive decision-making.
If you have a case that you’d like a panel of
experts to review in “Ask the Experts,” send it to
Joanne Hodges, The IIA, 247 Maitland Ave.,
Altamonte Springs, FL 32701 USA;
Please e-mail your comments or suggestions
about this column to firstname.lastname@example.org.
FEBRUARY 2004 INTERNAL AUDITOR