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- 10 Marks
Question
Adepa Ltd, a fruit processing company, has been in operation for many years. It has managed to grow the business over the years and now has eight branches, four in rural areas and four in urban towns in addition to the head office. The management and those charged with governance are looking forward to the company adopting the latest technology in production – Advanced Technology Manufacturing (ATM) – and marketing and sales through the internet.
During the last audit of the financial statements of the company, the Managing Director suggested to the Senior Partner an assessment of the need for an internal audit department in the company. You were the audit manager who led the engagement team to do the audit. The Senior Partner has therefore asked you to carry out the assignment to assess the need for an internal audit in Adepa Ltd.
Required:
Draft a report to the Senior Partner on the assessment of the need for an internal audit department for Adepa Ltd., highlighting the factors to be considered in such assessment. (10 marks)
Answer
REPORT ON ASSESSMENT OF THE NEED FOR INTERNAL AUDIT IN ADEPA LTD.
To: Senior Partner
Date: 15th September, 2015
Introduction:
In assessing the need for an internal audit function in Adepa Ltd., several factors should be considered to determine whether it is beneficial for the organization to establish such a department.
Factors to Consider:
- Cost vs. Benefit Analysis:
- The cost of setting up an internal audit department versus the predicted benefits.
- Potential savings in external audit fees if the internal audit department can handle certain tasks currently outsourced.
- Complexity and Scale of Operations:
- The complexity and scale of Adepa Ltd.’s activities and the systems supporting those activities, particularly given the company’s growth and desire to use modern technology.
- Management’s Perceived Need:
- Management’s attitude towards risk management and internal controls, which could indicate their perceived need for an internal audit department.
- Skill Availability:
- The ability of existing managers and employees to carry out tasks that internal audit may perform, or whether specialized skills are necessary.
- Outsourcing vs. In-house:
- Whether it would be more cost-effective or desirable to outsource the internal audit work.
- External Stakeholder Pressure:
- Pressure from external stakeholders (e.g., investors, regulators) to establish an internal audit department.
- Long-term Benefits:
- Establishing an internal audit department can help maintain a group of highly skilled people, contributing to the company’s development.
- The internal audit function can serve as a training ground for future senior executives.
Conclusion:
Considering these factors, Adepa Ltd. management will be in a better position to decide whether to establish an internal audit department.
Signed:
Audit Manager
- Tags: Audit report, Internal Audit, Management, Needs Assessment
- Level: Level 3
- Topic: Internal audit and outsourcing, Practice management
- Series: MAY 2016
- Uploader: Joseph