Audit Plan - Sebana Manufacturing Project case - Task 2 PDF

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Sebana Manufacturing Project case - Task 2...

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Audit Plan

Sebana Man

2020

Sebana Manufacturing Audit Plan

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Table of Contents Introduction................................................................................................................................................................... 1 Overview of Three Levels of Internal Audit Planning ................................................................................................. 1 Long-term Planning .................................................................................................................................................. 1 Short-term Planning .................................................................................................................................................. 2 Engagement Planning ............................................................................................................................................... 3 Conclusion .................................................................................................................................................................... 4 References..................................................................................................................................................................... 5

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Audit Plan

Sebana Manufacturing

Introduction Audit planning is one of the mandatory stages and consists of determining the audit strategy and tactics, the scope of the audit, drawing up an overall plan, developing a program and specific audit procedures. During performance of the audit, it will be very important for our team to understand Sebana Manufacturing’s internal controls. We will make sure that their internal controls are functioning effectively, and we will provide independent assurance. This document will have a brief overview of the audit planning processes, which will include: ● Long-term Planning ● Short-term Planning ● Engagement Planning The planning processes above will describe how the Accounts Receivable department is functioning.

Overview of Three Levels of Internal Audit Planning In this report our group will provide the overview of the overall planning process for the Sebana Manufacturing Accounts Receivable Department. For the purpose of the audit of the Sabana’s Accounts Receivable Department our team will be following the steps accordingly to create the engagement plan.

Long-term Planning The long-term plan for Sebana Manufacturing will be designed for a 5-year period and will ensure that all the organization's main activities are considered for analysis during this allotted time period. Due to the fluid nature and ever-changing business environment of contract manufacturing, Sebana Manufacturing’s long-term plan must be reviewed yearly to ensure that the identified activities are still relevant to achieving the organization's objectives. And ensure the audit of the key departments. Long-term planning consists of four steps: 1. The Audit Universe - Since the cost implications and hours required to audit an entire company would be astronomical, auditors break down the organization into manageable units to allow for a more precise and detailed analysis. How the groups are broken down varies from one organization to another, but auditors can use activities, locations, departments, or projects to create more feasibly sized units (Urton, 2017). For the purposes of the internal audit of Sebana Manufacturing, activities will be utilized to segment the audit activities: Accounts Receivable (A/R), Receiving, Purchasing, Accounts Payable (A/P) and Human Resources (HR). Our group will be assessing the Account Receivable department for: Presence of any misstatements either due to error or fraud; Compliance in accordance with the internal control policies; Efficiency and effectiveness of the operations. 2. Performing an Overall Risk Assessment - An overall risk assessment is completed to help pinpoint the likelihood that a specific risk(s) will occur, the over impact of the identified risk event(s), and the organization's ability to control said risk(s). Inherent, internal control and detection risks are 1

Audit Plan

Sebana Manufacturing

all considered to ensure a thorough review of the organization's risk matrix. By ranking risks as low, medium, and high, auditors will know which areas to focus on more inadeptly (Urton, 2017). The Risk assessment Matrix will be used to correctly evaluate the level of overall risk for the company. Rating: High (5), Medium (3) and Low (1): Audit Area

Control Rating

Likelihood Weakness

Accounts Receivable

High (5)

High (5)

of Impact of Overall Weakness Risk High (5)

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It was identified that the overall risk assessment for Accounts Receivable is high risk, and this will be the focus of the short-term plan for Sebana Manufacturing. Other areas of high risk include Receiving, Purchasing, A/P and HR. 3. Determining the Frequency of the Audits - Based on the work performed in step 2, auditors plan to audit areas of greater risk more frequently (multiple times a year), while those areas determined to be less risky are only audited once every 3 to 5 years (Urton, 2017). For Sebana Manufacturing, areas identified as high risk will be reviewed annually. Those with low levels of risk are to be reviewed every 3-5 years depending on the severity of the risk, the organization's ability to combat it and the potential overall effect of the risk. 4. Preparing and Approving the Long-Term Audit Plan - The final stage of the long term plan, Senior management, the Board of Directors and/or the Audit Committee must approve the long term plan and ensure appropriate authority has been granted and that adequate financing is available to accomplish the plan (Urton, 2017).

Short-term Planning Based on the organization's long-term plan, short-term audit plans must identify which areas are to be audited in the current year, why these specific areas have been chosen for audit in the short term, and what the expected time frame to completion is. All short-term plans require approval by the organization's Board of Directors or Audit Committee and Senior Management to ensure that the necessary authority can be granted to the auditors and that adequate funding is available to finance the audit activities (Upton, 2017). For the audit purpose Sebana will be divided into separate departments. The short-term plan for Sebana Manufacturing as prepared by our group, will focus on the review of the Accounts Receivable department over the next 12-month period. Groups 1 through 4 will develop short-term plans that will focus on their identified area of high risk (A/P, Purchasing, Receiving and HR). All areas have been chosen because they have all been identified as being high risk in the risk assessment completed during the long-term planning stage. The Accounts Receivable department was specifically chosen for the audit because this is the department that could be one of the weakest departments for error and fraud. Our team will be checking the common malpractice such as Accounts Receivable lapping.

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Engagement Planning The engagement planning will provide an understanding of Sebana’s objectives. Assurance will be attained by control, risk management and governance. Here are the steps to be taken to develop the engagement plan for the Accounts Receivable department: 1. Obtaining specific knowledge about the unit to be audited - Before building an engagement plan, the auditors must have a thorough knowledge of the organization. To do this they will use all possible tools to become better acquainted with all aspects of the organization being audited. These tools include organizational charts, mission statements, previous internal and external audit working papers, policies and procedures, management reports, and budgets (Upton, 2017). For this audit, the audit team will be reviewing Sebana's organizational chart and their outline showing of delegation of authority. The team does not have access to a mission statement or any past internal or external audit working papers. Policies and procedures are described in the front half of the case for each department with AR on P.19-21, as well as financial statements for the year 2014 and 2015 are available in appendix 3 (Bergstrom, 2013). 2. Establishing audit objectives and scope -

3. Designing an appropriate overall audit methodology - During this phase of engagement planning, the audit approach will be determined using these 3 steps: i. Understand the goals and results of the areas activities ii. Identify strengths and weaknesses and their impact on the organization iii. Assess the extent to which the systems and procedures are in place and functioning The goals of the accounts receivable or A/R is to process invoices, send them promptly to customers and receive payment promptly, whether it is by cheque (mail) or electronic payment. The A/R department is also responsible for reminding customers to pay once customers are past their thirty days terms, and they are responsible for sending bills to collections if customers are refusing to pay. If customers do not pay, it may be necessary to cut off credit for future purchases, subject to management's discretion. The strength of the department is that it is absolutely necessary for business to collect payments for services rendered. If A/R is not able to collect on bills promptly, the organization risks running into cash flow issues, affecting profitability, and staying in business. Based upon an initial understanding of the procedures and systems within the A/R department as from the Sebana case (Bergstrom,2013), there does not appear to be any significant issues. The invoicing generation is completed using computers that are connected to the shipping doc, 3

Audit Plan

Sebana Manufacturing

minimizing data entry error. There is adequate backup in place when invoices are generated. There may be additional controls required to ensure that cheques are entered into the system correctly once received. Based on the current assessment, collection of payment is very high, thus indicating that the controls in place are functioning properly. The audit approaches used will include sampling, inquiry, observation, recalculation, computation, and confirmation. 4. Setting audit criteria - There is no formal, universally accepted criteria for internal audit work, and as such, management and the auditor must agree upon the standards, acceptable ranges and benchmarks which will help discern when things are not working as they optimally should. Auditors can utilize laws, regulations, policies and procedures manuals, previous audit work (both internal and external), previous professional experiences and current trends to help establish criteria for the audit (Upton, 2017). With regards to the collection of A/R, a benchmark should be in place for reference that can be decided by the controller or can be set by the internal auditors. For example, 80% A/R should be collected fully within thirty days of the invoice date. All Invoices printed out by the A/R clerks should be received by customers within three to five business days, allowing for reasonable delivery time.

5. Prepare staffing plans and time budgets - When designing a staffing budget the auditor must identify the required number of staff, the level of experience/education/training necessary for the required auditors and the time necessary to complete this portion of the audit work. Staffing and time budgets can help to keep audit on track by creating a reference point and implementing an optimal timeline (Upton, 2017). For the current task, the staff necessary to complete the audit will be three junior internal auditors. Our team will sustain the high level of independence and professional due care required. There are no additional costs required for this audit with all staff coming from the internal audit department. The required time to complete the audit will be two to three weeks from preliminary assessment to submitting the final report to the audit committee and appropriate senior management.

Conclusion In conclusion, the audit team has conducted thorough planning and organization of the needs of Sebana Manufacturing. Both a long-term audit plan of five years and short-term audit plan of one year has been carefully considered. High risks areas such as accounts receivable, human resources, accounts payable and purchasing will be more highly scrutinized, which leads to the first engagement of the internal audit department: accounts receivable. The engagement planning is also laid out in five steps: obtaining specific knowledge of the unit, establishing audit scope and objectives, designing an overall audit methodology, setting audit criteria, and preparing staffing plans and time budgets. The team feels very confident in its preparation and specifically its audit objectives and is ready to work on the audit program.

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References Urton Anderson, M. H. (2017). Internal Auditing . Lake Maryland : Internal Audit Foundation . Bergstrom S.,(2013) Sabana Manufacturing:an Internal Auditing Case January, 2014 edition [Case Study] Retrieved from https://learn.sait.ca/d2l/le/content/397351/viewContent/9775772/View

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