Dalubhasaan ng Lungsod ng Lucena

Operations Auditing
Case Study:
The International Professional Practices Framework:
Authoritative Guidance for the Internal Audit Profession

Mark Heras is an internal auditor employed by ComCast Industries. He is nearing

completion of an audit of the Advil Division conducted during the first five weeks of the
year. The Advil Division is one of three manufacturing divisions in ComCast and
manufactures inventories to supply about 50 percent of ComCast’s sales. In addition to
the manufacturing divisions, ComCast has two marketing divisions (domestic and
international) and a technical service division that offers worldwide technical support.
Each customer is assigned to the most suitable manufacturing division, which functions
as the supplier for that customer. The manufacturing division then approves the
customer’s credit, ships against orders obtained by the sales representatives, and
collects the customer receivables when due. This allows order-to-order monitoring of
customer credit limits against customer orders received.

Two Potential Observations

Two items concern Mark. First, there was a material peso amount of inventory of part
number A2 still carried on the Advil books at year-end, despite the fact that the Fast-tac
machining component in which part A2 was used is now considered first generation and
is no longer manufactured. Company policy requires an immediate write-off of all
obsolete inventory items. Second, some accounts receivable still carried as collectible
at year-end were more than 180 days old. All receivables are due in 30 days, which is
standard for the industry. Mark believes many of these old accounts are uncollectible.

The division manager’s administrative assistant, Georgina Wilson, performed the aging
of accounts receivable rather than the division accountant, as is standard practice. The
division accountant refused to discuss the circumstances of Georgina’s actions.

The Auditee’s Comments

Mark scheduled a meeting with Georgina to discuss his concerns.

“Well, Mark,” Georgina responded, “I know that policy requires that obsolete inventories
be written off, but part A2 is just not being used at present. We might start to make
those Fast-tac components again. Who knows? Wide ties are coming back again, aren’t
they? Fast-tac could, too. There are plenty of customers, especially in the third world,
that are finding those second- and third-generation machines pretty expensive to
maintain. I mean, there is a policy that states obsolete inventories should be written off,
but there is no policy defining an obsolete part.”

“And as for those receivables,” Georgina continued, “that is certainly a judgment call,
too. Who knows if those accounts will be collected? We’re in a slight recession now.
When things pick up, we’ll probably collect a few. There isn’t even a policy in this
division on writing off receivables. I checked. Nothing says I have to write them off. So
who are you to say I have to?”

“Georgina, be straight. You know those parts will never be used. And you know those
receivables are bad.”

“Look, Mark,” Georgina finally bargained, “it’s only two weeks from the close of the year.
Let’s let these items ride till after the close so that everyone gets their bonuses. Then, I
promise I’ll take a fresh look at both inventories and receivables. I’ll write them down
after year-end, after the financial reports are issued. No one will know. And, after all,
who’s to be hurt?”

The Division Manager

Mark continued his audit, drafted his report containing observations related to the
inventory and receivables, and reviewed the report with the division manager, Leften
Wright. Leften was visibly disturbed.

“Gee, Mark, this couldn’t have come at a more awkward time. Our figures just passed
muster by the independent outside auditors. There was a guy out here for our inventory
count in November, and Georgina already sent her spreadsheet on year-end
receivables to corporate headquarters. No one up there, in our group or on the CPA
audit team, was the least bit critical. If you go raising a big stink, particularly now, the
independent outside auditors will catch us writing off inventory and receivables, they’ll
adjust profit, and there will be hell to pay for all of us. And, Mark, this is no clear-cut
issue either. I mean, I can see how you can write a report calling for clearer policy, but
not one calling for specific writedowns. That’s way out of your jurisdiction. But still, I
promise, we’ll look at all this after our statements go to bed. Right now, I feel the
managers of this division have worked their hearts out and I intend to fight to protect
what little bonuses they have coming. If we write down as you suggest, those bonuses
will go and the stockholders will lose too. Earnings per share (EPS) will drop like a rock.
They might even close this division. Now you don’t want that, do you, boy?”

“Well, Leften, I could word my observations as they are in the draft but include your
response.” Leften was suddenly angry. “What? And let the audit committee decide the
issue? They have nothing to do with this. They accepted the CPA’s report. If you want
to make the audit committee happy, you’ll accept it, too, and leave this adjustment stuff
alone.”

The Internal Audit Director

Concerned, Mark delayed finalizing his report and discussed the draft with Ow Wu,
director of internal audit. Ow is not trained as an auditor and was promoted to director of
internal audit from corporate finance so that she might develop a better understanding
of operating relationships. Still, Ow is very smart and Mark has always respected her
opinion. The discussion was
by telephone, with Mark still at the Advil Division headquarters and Ow at the corporate
office.
“Mark, Leften is right. If you, in essence, blow the whistle on management bonuses this
year, we can kiss goodbye all the goodwill I’ve been struggling to build for this
department. It will all go out the window.”

“I know you’ve been trying to put us on a better footing, Ow, but Leften is intractable. As
far as he is concerned, the only observation he will accept in the report is that of
deficient policy, with nothing mentioned about the inventory or receivables needing
adjustment.”

“Well, do what you have to,” Ow ended the discussion. “But I insist that you submit a
report that Leften agrees to and has signed. I don’t want to stir up hornets and then
have to try to explain my loose cannon to the board when everyone is howling about the
bonus problem.”

Requirements
1) Refer to The IIA’s Code of Ethics. Identify three specific Rules of
2) Discuss how the ethical dilemma Mark faces might have been avoided. In other
words, discuss specific things ComCast’s management and/or the internal audit function
might have done to reduce the risk of such a situation arising.
3) Clearly indicate what you would do if you found yourself in Mark’s position. Briefly
explain why.