AUI3703 Assignment 2 Semester 1 2024F2

AUI3703 ASSIGNMENT 2
SEMESTER 1 2024
(773183)- DUE 24 APRIL
2024
Musyokah11@gmail.com
+254792947610 [Company address]
AUI3703 Assignment 2 Semester 1 2024 (773183)- DUE 24
April 2024
QUESTION 1 15 marks
Gas Ltd is a company that is responsible for refuelling empty gas bottles. Gas Ltd
has operations in various parts of the country. The company conducts its business
with a variety of customers from individual households and small retailers to big
manufacturing companies. Gas Ltd recently established an internal audit activity.
As the senior internal auditor, you tasked one of the junior internal auditors to do a
presentation to the senior management outlining the role, purpose and authority of
the internal audit activity in the company. The junior internal auditor presented the
following statements, which he would like to include in his presentation, to you:
1. Risk management, control and governance processes may be regarded as
effective if such processes are planned and designed in a manner that provides
reasonable assurance that all irregularities will be eliminated.
2. Internal auditors may provide consulting services that add value and improve an
organisation’s operations. The performance of these services should be consistent
with the internal audit activity’s empowerment reflected in the internal audit
charter.
3. The internal audit activity customarily has a dual relationship with management
and the audit committee. This means that the accuracy of engagement
communication should be verified with management and the internal audit activity
should then report to management and the audit committee.
4. Recommendations in audit reports may or may not actually be implemented.
The internal auditor has no role to play in this regard and follow-up is the sole
responsibility of management.
5. “To determine whether document flow and the provision of management
information throughout the delivery department is optimised” is an audit objective
that relates to the efficiency of the process.
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6. The two broad groupings of information systems control activities are general
controls and application controls. General controls include controls for developing,
modifying, and maintaining computer programs.
7. The main purpose of the internal audit activity is to evaluate the organisation’s
compliance with relevant regulations and guidelines, be they internal or external.
8. An internal audit carried out to determine whether an entity is managing and
controlling its resources economically, efficiently, and effectively, would most
likely be classified as a programme results audit. 4
9. Performance evaluation, identifying opportunities to make improvements and
making suggestions to improve existing procedures and future actions can be seen
as the general objectives of operational auditing.
10. Pressure on individuals, uncontrolled access to organisational assets and
personality disorders are all factors that could be prevented by a good internal
control system.
REQUIRED Marks
1.1 Indicate for each of the statements listed above (1-10) whether it is true or
false. Where you have indicated false, provide a brief statement as to why the
statement is false. (15)
Statement Review for Internal Audit Presentation
Here's a breakdown of each statement with a "True" or "False" indication and an
explanation for the answer:
False. Risk management, control, and governance processes can significantly

reduce irregularities, but eliminating them entirely is unrealistic.
True. Internal audit consulting services can add value and improve operations, as
long as they align with the internal audit charter.
True. Internal auditors have a dual reporting relationship - to management and the
audit committee. Communication accuracy should be verified, but reporting
typically goes to both parties.
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False. While implementing recommendations is management's decision, internal
audit should follow up to assess progress and ensure accountability.
True. Analyzing document flow and information provision for optimization relates
to process efficiency.
True. General controls cover application development, modification, and
maintenance.
False. While compliance is important, internal audit also evaluates effectiveness,
efficiency, and risk management.
True. A program results audit assesses resource management's economic, efficient,
and effective aspects.
True. Performance evaluation, improvement opportunities, and procedural
suggestions align with operational audit objectives.
False. Internal controls can mitigate these factors, but not completely prevent them.
QUESTION 2 28 marks
Part A
Adisa Dlamini is the owner of Gas Ltd. You as the senior internal auditor of Gas
Ltd is in the process of setting up the internal audit activity. You had an initial
meeting with Adisa and one of her major questions was around assurance and
consulting services. During the follow-up meeting, you need to provide clarity
regarding what is expected from the internal audit activity regarding assurance and
consulting services. Adisa is still unsure whether the following activities will be
classified as assurance services or consulting services:
1. Conducting control self-assessment training.
2. Assisting in developing and drafting policies.
3. Assessing that management’s policies and procedures are adhered to.
4. Providing advice to management on risk management, control, and governance
issues.
5. Examining whether control procedures are mitigating the risks identified.
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REQUIRED Marks
2.1 Define assurance services and consulting services according to the glossary to
the Internal Auditing Standards and for each of the activities listed above (1-5),
indicate whether the activity can be classified as an assurance of consulting
activity. (8)
Assurance vs. Consulting Services for Gas Ltd.
Definitions:
• Assurance Services: According to the Internal Auditing Standards
glossary, assurance services involve the internal auditor's objective
assessment of evidence to provide opinions or conclusions regarding
an entity's governance, risk management, and control processes.
• Consulting Services: The glossary defines consulting services as advisory
services provided by internal auditors to improve an organization's
governance, risk management, and control processes. Consulting services
are forward-looking and focus on improvement opportunities.
Activity Classification:
Here's a breakdown of each activity and its classification:
1. Conducting control self-assessment training. - Consulting
Service: Training falls under advisory services and focuses on improving
management's self-assessment capabilities.
2. Assisting in developing and drafting policies. - Consulting
Service: Drafting policies is an advisory function aimed at improving
governance processes.
3. Assessing that management’s policies and procedures are adhered
to. - Assurance Service: Evaluating adherence to policies involves
examining evidence to provide an opinion on control effectiveness.
4. Providing advice to management on risk management, control, and
governance issues. - Consulting Service: Offering advice is forward-
looking and aims to enhance these processes.
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5. Examining whether control procedures are mitigating the risks
identified. - Assurance Service: This activity involves evaluating evidence
to assess control effectiveness in mitigating risks.
Part B
Adisa Dlamini, the owner of the company, has requested the team to conduct a
performance audit on the refuelling department. AUI3703/1/2024 5 The main
activity of the refuelling department is to fill the empty gas bottles and seal the
filled bottles. The sealed bottles are then forwarded to the distribution department
for delivery. You have arranged a meeting with the Chief Operations Officer
(COO) and the initial discussions revealed the following:
1. It was noted that currently there are three vacancies in the refuelling department.
The COO is unsure of when the vacancies will be filled.
2. The biggest size gas bottles are 48 kg and are procured from Trenten Ltd on a
monthly basis.
3. Targets for the refuelling department are set monthly and communicated to all
staff members in the department.
4. The refuelling department does some activities that are not broken down into
simple tasks, and the procedures are set out by way of drawings.
5. The warning stickers that are put on the filled gas bottles are ordered from a
family friend of Adisa.
6. The filled gas bottles should be delivered to the distribution department within
24 hours of being filled to ensure that deliveries are made as soon as possible.
7. Monthly reports are completed for the refuelling department. In the monthly
reports, the set targets for the refuelling department are compared to the actual gas
bottles filled.
8. The biggest portion of the budget for the refuelling department is spent on
buying empty gas bottles for refilling.
REQUIRED Marks
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2.2 For each of the statements listed above (1-8), indicate whether it relates to
effectiveness, efficiency or economy and formulate an audit procedure for each of
the statements that you can use to complete the audit. Present your answer in a
tabular format: Statement number Effectiveness, efficiency or economy (1 mark)
Audit procedure (1½ marks) (20) 6
Gas Ltd. Refuelling Department Performance Audit -

Procedures
Statement
Effectiveness Efficiency Economy Audit Procedure
Number
- Review human
resource records to
determine the
duration of
vacancies and their
impact on
1 Effectiveness
department output. -
Interview
department staff to
assess the impact of
staffing shortages
on meeting targets.
- Analyze
procurement
records to
determine if Gas
Ltd. is getting a
competitive price for
2 Economy
the largest gas
bottles from Trenten
Ltd. - Consider
investigating
alternative suppliers
for comparison.
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- Review monthly
targets and
compare them to
actual performance
in monthly reports
(statement 7). -
3 Effectiveness
Assess if targets are
realistic and
achievable based
on staffing levels
and department
capabilities.
- Review the
drawings outlining
procedures for
complex tasks. -
Observe staff
performing complex
tasks to identify
4 Effectiveness Efficiency
potential bottlenecks
or areas for
improvement. -
Consider if breaking
down complex tasks
could enhance
efficiency.
- Investigate the
process for
selecting the
supplier of warning
stickers. -
5 Economy Determine if a
competitive bidding
process is used or if
there's potential for
a more economical
supplier,
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considering factors
like quality and
delivery times.
- Review delivery
records to assess
the percentage of
filled gas bottles
delivered within 24
hours. - Investigate
reasons for delays
6 Effectiveness Efficiency
exceeding 24 hours.
- Identify
opportunities for
improvement in
internal processes
to ensure timely
deliveries.
- Review monthly
reports (statement
7) to assess the
format and clarity of
target vs. actual
performance
7 Effectiveness
comparisons. -
Interview
department staff to
understand how
they use the reports
for improvement.
- Analyze the cost

breakdown of empty
gas bottles
8 Economy compared to the
overall refuelling
department budget.
- Investigate if there
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are opportunities to
negotiate better
pricing with
suppliers or explore
alternative sources
for empty gas
bottles.
QUESTION 3 10 marks
Rethink Limited is negotiating contracts with an international company who is
interested in buying the plastic brick Rethink produces from the recycled plastic.
The chief operating officer (COO) explained that the new contracts entered into
will have an impact on the audit plan for the year as two new departments will
have to be added to the internal audit plan. The new departments will be the
contract department as well as the treasury department. The contract department
will be responsible for the international contracts, licensing agreements, rental
agreements, sales orders, and so forth. The treasury department will form part of
the finance department and will be responsible for foreign exchange transactions.
REQUIRED Marks
3.1
3.2 Briefly describe the role of the internal auditor with regard to:
a) Treasury auditing
b) Contract auditing The role of internal auditing in contract auditing involves four
distinct phases.
List the four (4) phases of contract auditing. (6) (4)
Internal Audit Roles and Contract Auditing Phases
3.1 Internal Auditor Roles:
a) Treasury Auditing:
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• Evaluating Internal Controls: Reviewing controls over cash receipts,
disbursements, bank reconciliations, foreign currency transactions, and
financial instruments.
• Identifying Risks: Assessing risks related to fraud, errors, inefficiencies,
and non-compliance with regulations in treasury processes.
• Ensuring Accurate Financial Reporting: Verifying the accuracy and
completeness of financial statements related to treasury activities.
b) Contract Auditing:
• Pre-Award Phase: Reviewing contract terms and conditions for clarity,
completeness, fairness, and alignment with company policies.
• Award Phase: Assessing adherence to internal procurement policies and
procedures during contract selection and award.
• Post-Award Phase: Monitoring contract performance, vendor compliance
with terms, and adherence to agreed-upon pricing and delivery schedules.
• Contract Closeout Phase: Evaluating the finalization of contracts, ensuring
all deliverables are received, and payments are settled appropriately.
3.2 Four Phases of Contract Auditing:
1. Pre-Award Phase: This phase focuses on reviewing contract terms before
signing.
2. Award Phase: Here, the focus is on ensuring proper procedures are
followed during contract selection and award.
3. Post-Award Phase: This phase involves monitoring contract performance
and vendor compliance throughout the contract period.
4. Contract Closeout Phase: The final phase ensures proper contract
completion and settlement of obligations.
QUESTION 4 20 marks
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Part A
John Mabida is the manager of the deliveries department of Gas Ltd. It is John’s
responsibility to ensure that all the processed orders received from the distribution
department are delivered on time. The following information was brought to your
attention: John Mabida has full control over all deliveries, delivery vehicles and
drivers. When questioned, John explained that he believes that it is better to do all
the work himself, as he then knows that the work gets done properly. One of the
drivers mentioned that John makes daily deliveries himself, even if it is not part of
his responsibilities. He further mentioned that when John makes the deliveries, he
loads additional gas bottles on the delivery vehicle that are not part of the order to
be delivered. The driver suspects that John delivers the additional gas bottles to
friends and family and receives cash payments for the bottles. The driver further
mentioned that he is too scared to report his AUI3703/1/2024 7 suspicions as John
is known as “the killer” and will ensure that he is fired or removed from his
position. Every driver should have a logbook to log all kilometres travelled and the
amount of petrol that they put into the vehicles. When John does deliveries, he
refuses to complete any logbook as he feels that he is the manager and not a driver.
The drivers feel that this is unfair and decided not to complete logbooks anymore.
John agrees with the drivers and indicates he knows what is happening in his
department and there is no need for logbooks. Reconciliations should be completed
monthly between the bottles received from the distribution department, the
deliveries made, and the bottles stored in the warehouse ready for delivery. When
asked for the reconciliations, John mentioned that he believes that the
reconciliations were a waste of time. He fully trusts his employees. It was also
noted that there are no policies and procedures for the delivery department. John
lives a very extravagant lifestyle. He owns several upmarket properties as well as a
fleet of luxury cars. John feels that he deserves the luxuries in life and states that he
is just a “lucky” person. The management of Gas Ltd has instructed you to
complete an internal audit on the delivery department and whilst busy with the
audit, to also investigate to allegations made against John Mabida.
REQUIRED Marks
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4.1 Indicate how the tasks of the internal auditor during a fraud investigation
would differ from the tasks performed during a normal internal audit assignment of
Gas Ltd. Indicate four tasks for each. (8)
4.2 Identify six (6) weaknesses from the scenario that indicate a breakdown in
internal controls. For each of the weaknesses, identified, recommend an internal
control that should be put in place to avoid similar control breakdowns or fraud.
Structure your answer in the following table format: No Weakness identified
Recommend internal control 1. (1 mark) (1 mark) (12)
Internal Audit and Fraud Investigation in Gas Ltd. Delivery Dept.
4.1 Differences in Tasks:
Normal Internal Audit:
1. Review and assess internal controls.
2. Evaluate adherence to policies and procedures.
3. Test the effectiveness of operational processes.
4. Analyze financial and non-financial data for trends and risks.
Fraud Investigation:
1. Secure potential evidence (logbooks, receipts, delivery records).
2. Interview relevant personnel (drivers, managers, John Mabida).
3. Analyze data for anomalies and inconsistencies (delivery logs,
reconciliations).
4. Trace suspicious transactions (cash payments, luxury purchases).
4.2 Weaknesses and Recommendations:
No Weakness Identified Recommend Internal Control
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Segregation of Duties: Separate
Concentration of
order processing, delivery
1. Duties: John controls all
execution, and record-keeping
aspects of deliveries.
functions.
Lack of Segregation of Mandatory Logbook

Duties: John makes personal Completion: Enforce logbook
2.
deliveries and avoids completion for all deliveries,
logbooks. including John's.
Management Override: John Management Review &

ignores internal control Oversight: Implement regular
3.
procedures (reconciliations, reviews of departmental controls
logbooks). and adherence to procedures.
Develop and Implement Policies

Absence of Policies and
& Procedures: Establish clear
Procedures: No formal
4. policies and procedures for
guidelines for delivery
deliveries, including personal
processes.
deliveries.
Unexplained Wealth of Key Implement Surprise Inventory

Personnel: John's extravagant Checks: Conduct regular
5.
lifestyle contradicts his official unannounced checks of gas bottle
income. inventory to ensure accuracy.
6. Employee Establish a Whistleblower

Intimidation: Drivers fear Hotline: Implement a confidential
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retaliation for reporting reporting system for employees to
suspicions. report suspected fraud.
QUESTION 5 10 marks
After the recent completion of the delivery department, you realised that some of
the junior internal auditors did not formulate the findings correctly. The following
information was obtained: 8
1. There is currently a delay in the delivery of the refilled gas bottles.
2. The target of the delivery department is to complete all deliveries within 48
hours after the order has been received.
3. Penalties are payable on all orders delivered after the 48-hour turnaround time.
4. The reputation of Gas Ltd will be negatively affected by the late deliveries.
5. Logbooks are not completed for deliveries and there is no record keeping of the
kilometres travelled.
6. Exception reports, highlighting late deliveries, should be completed monthly and
reasons for the late deliveries should be obtained.
7. Procedures should be implemented to ensure that all logbooks are completed on
time and submitted to the finance department on a weekly basis.
8. All the drivers employed in the delivery department should have a valid driver’s
license. Once the findings have been completed and the report finalised, you as the
internal audit manager need to present the internal audit report to the management
team of Gas Ltd.
REQUIRED Marks
5.1 From the information provided in the scenario, for each of the statements
provided (1-8), indicating the element of an audit finding that the statement most
likely represents. Your answer should be presented in the following format.
Statement number Element of an audit finding 1. Element of the finding (1) (8)
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5.2 List two (2) reasons why you as the internal audit manager would choose to
communicate the internal audit report in the form of a presentation. (2)
AUI3703/1/2024 9
Audit Finding Elements and Report Presentation
5.1 Finding Elements:
Statement
Element of Audit Finding
Number
1. Condition: Delay in delivery of refilled gas bottles.
2. Criteria: Delivery target is 48 hours.
3. Impact: Penalties for late deliveries.
4. Impact: Negative impact on Gas Ltd.'s reputation.
Condition: Logbooks not completed and no record of

5.
kilometres travelled.
Recommendation: Implement exception reports for late

6.
deliveries.
Recommendation: Procedures to ensure timely logbook

7.
completion and submission.
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8. Criteria: Drivers require valid licenses.
drive_spreadsheetExport to Sheets
5.2 Reasons for Presenting the Report:
1. Enhanced Clarity and Understanding: A presentation allows for visuals,
explanations, and Q&A to ensure clear communication of complex internal
audit findings.
2. Two-Way Communication and Engagement: Presentations facilitate
interaction with management, encouraging discussion, feedback, and buy-in
for recommendations.
QUESTION 6 17 marks
PART A Due to the major increase in online shopping, Rubber Limited decided to
establish a whole new distribution department. The distribution department will be
situated in Cape Town. A new online ordering system will be implemented, and
the orders will be processed by the head office in Gauteng. The following controls
will form part of the new system:
1. Rubber Limited appointed a committee to monitor and advise on the specific
risks in the implementation of the new online ordering system.
2. The company makes use of firewall and anti-virus software.
3. All data in the supplier database and supporting files are kept up to date.
4. Back-up copies of all masterfiles are to be stored off-site.
5. Exception reports are printed on a weekly basis and reviewed by management.
6. All parties involved in the testing of the new system should give final approval
before the system is implemented.
7. Certain controls should be embedded in the application program code and
applied by the computer.
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8. In terms of company policy, if an employee discloses their confidential
password to another employee, disciplinary action is taken against such an
employee.
REQUIRED Marks
6.1 Distinguish the differences between general controls and application controls in
a computerised environment. (4)
6.2 Indicate whether each of the controls listed above (1-8) for Rubber Limited, is
a general control or an application control. (8)
General vs. Application Controls in Rubber Limited's System
6.1 Distinction Between Controls:
• General Controls: These are pervasive controls that apply to the overall IT
infrastructure and environment. They are not specific to any particular
application but provide a foundation for application controls to function
effectively.
• Application Controls: These are controls embedded within a specific
software application to safeguard data integrity, processing accuracy, and
user access within that application.
6.2 Control Classification:
Control
Description Control Type
Number
1. Risk Monitoring Committee General Control
Firewall and Anti-Virus

2. General Control
Software
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Supplier Database & File
3. General Control
Maintenance
4. Off-Site Masterfile Backups General Control
Weekly Exception Reports

5. General Control
Review
6. System Testing Approval General Control
Embedded Program Code Application

7.
Controls Control
8. Password Sharing Policy General Control
PART B
An Information Technology (IT) audit is planned for Rubber Limited.
Management requested your assistance in allocating the activities mentioned below
to the correct phase of the IT audit process. 10
a) Analyse the organisation’s strategy and responsibility for managing and
controlling computer applications.
b) Assess how controls are applied, whether controls are applied consistently and
who applied the controls.
c) Perform the audit procedures to ensure that the audit objectives are met.
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d) Schedule follow-up activities and ensure that appropriate action was taken to
address the findings raised.
e) Select the audit team and identify the tasks that should be performed during the
audit.
REQUIRED Marks
6.3 Allocate each of the audit activities in the list above (a-e) to the correct phase
in the IT audit process. Your answer should be in a tabular format as indicated
below:
IT Audit Process Phases for Rubber Limited
IT Audit Process Phase Activity Description
Planning and a) Analyse strategy and responsibility for

Scoping application controls.
Testing and b) Assess control application, consistency, and who

Evaluation applied them.
Testing and c) Perform audit procedures to meet audit

Evaluation objectives.
Reporting and d) Schedule follow-up activities and ensure

Follow-up findings are addressed.
Planning and
e) Select the audit team and identify audit tasks.
Scoping
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AUI3703 ASSIGNMENT 2

False. Risk management, control, and governance processes can significantly

Gas Ltd. Refuelling Department Performance Audit -

- Analyze the cost

Lack of Segregation of Mandatory Logbook

Management Override: John Management Review &

Develop and Implement Policies

Unexplained Wealth of Key Implement Surprise Inventory

6. Employee Establish a Whistleblower

1. Condition: Delay in delivery of refilled gas bottles.

2. Criteria: Delivery target is 48 hours.

3. Impact: Penalties for late deliveries.

4. Impact: Negative impact on Gas Ltd.'s reputation.

Condition: Logbooks not completed and no record of

Recommendation: Implement exception reports for late

Recommendation: Procedures to ensure timely logbook

1. Risk Monitoring Committee General Control

Firewall and Anti-Virus

4. Off-Site Masterfile Backups General Control

Weekly Exception Reports

6. System Testing Approval General Control

Embedded Program Code Application

8. Password Sharing Policy General Control

Planning and a) Analyse strategy and responsibility for

Testing and b) Assess control application, consistency, and who

Testing and c) Perform audit procedures to meet audit

Reporting and d) Schedule follow-up activities and ensure

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