Internal Auditing Case Study

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Steve Smith

Advanced Auditing

Module 6 Case Study

* Case 4.1:

2. Control environment is the attitudes and actions of the management that would affect the effectiveness of the internal controls. The “tone from the top” is part of the control environment. The control environment is important at a client like Enron because the ethics of the top executives played a big role in the company’s downfall. Enron relied too much on revenue metrics when it came to executive compensation so the CEO and CFO cooked the books to increase the revenue.

4. The audit committee plays an important role in the financial reporting process. They are in charge of the internal auditors who should first and foremost be making sure that the internal controls are adequate and are being followed. They are also in charge of hiring and communicating with the external auditors. They will receive reports about the audit and the recommendations that they suggest. It is their job to implement the changes and to follow up with the internal auditor.

* Case 4.2:

2. I believe that IT general controls have a pervasive effect on the reliability of financial reporting. Almost all accounting done today is done with computers. If people could not rely on the computer systems where accounting is being done they will not be able to trust that the financial statements are a proper reflection on the state of the company. In the case of Waste Management, management did not have reliable financial information because of an improper conversion of the financial systems.

* Case 4.3:

4. I do not believe that Arthur Andersen responded appropriately to Karen Paetz’s allegations of improper accounting practices. They did not mention it in the audit work papers or did not include the meetings in the fraud risk analysis. All they did was request the documentation of the shell corporations and when the company refused they did not press the issue any further.

Case 4.4:

1. The internal audit department...