8/6/2021 Module 3: Engagement Performance Phase

Module 3: Engagement Performance Phase

Site: New Era University Printed by: Methly Joy B. Moreno

Course: ELECT4-18 - Professional Electives 4 (Operations Auditing) Date: Friday, 6 August 2021, 10:51 AM
Book: Module 3: Engagement Performance Phase

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8/6/2021 Module 3: Engagement Performance Phase

Description

Lesson 1: Title

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8/6/2021 Module 3: Engagement Performance Phase

Table of contents

1. Introduction/Overview

2. Engagement Performance Activities

3. Audit Evidence and Working Papers

3.1. Persuasiveness of Audit Evidence
3.2. Audit Procedures
3.3. Working Papers

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8/6/2021 Module 3: Engagement Performance Phase

1. Introduction/Overview

The output from planning and audit must be used to execute

the activities outlined in the work program. This includes different activities
performed to gather evidence, evaluate the results, and develop observations
and recommendations.

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8/6/2021 Module 3: Engagement Performance Phase

2. Engagement Performance Activities

Conduct
test to gather evidence. Performing the engagement involves application of
specific audit procedures to gather evidence. Procedures
include, for example,
making   inquiries, observing operations,
inspecting documents, and analyzing the reasonableness of information. A
second
important aspect of gathering evidence is documenting the procedures performed
and the results of performing the procedures.
Evaluate
audit evidence gathered and reach conclusions. Evaluating the audit evidence
gathered to determine, for example, whether controls
are designed adequately
and operating effectively requires a significant degree of professional
judgment. The internal audit team must
ultimately reach logical conclusions
based on the evidence gathered.
Develop observations and formulate recommendations.
Observations are pertinent statements of fact that emerge when criteria are
compared with the condition. Well-written audit observations contain the
following elements:
serve as your basis.
Criteria: standards, measures, or expectations used in making
an evaluation and/or verification of an observation.
Condition:
Factual evidence is identified during the course of the engagement.
Cause: Underlying
reason for the difference between the criteria and the condition
Effect risk
or exposure encountered because the condition is not consistent with the
criteria.

Recommendations are based on the internal auditor’s

observations and conclusions. Audit recommendations may be documented as part
of the audit observation or separately. Recommendations are aimed at closing
the gap between the observation criteria and condition.
Meaningful
recommendations for corrective actions address the causes of a gap between the
criteria and the condition, provide long-term
solutions rather than short-term
success, and are economically feasible. Recommendations that address symptoms
of problems rather
than root causes then to be of little value. 1. testing
-inquiry
-onservations
-inspections
AUDIT OBSERVATIONS -analytical review
gathering evidence

criteria condition

"effect" "cause"

"recommendations"

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8/6/2021 Module 3: Engagement Performance Phase

3. Audit Evidence and Working Papers

Gathering sufficient appropriate

evidence requires extensive interaction and communication with auditee
personnel throughout the engagement.
Such interactions and communications are
critical to conducting the engagement effectively and efficiently. It is
important, therefore, for internal
auditors to be open, communicative, and
collaborative. The internal auditor must always be mindful, however, that the
managers and employees
from whom evidence is gathered may not adequately
understand the purpose, objectives, and scope of the engagement, or the manner
in which
the engagement is conducted. Moreover, some managers or employees may
see the engagement as a threat to them. In other words, think that
the internal
auditors are specifically looking for things that they have done wrong.
Unfortunately, the threat of management and/or employee
errors and fraud always
exist.

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8/6/2021 Module 3: Engagement Performance Phase

3.1. Persuasiveness of Audit Evidence

Audit evidence is persuasive

if it enables internal auditor to formulate well-founded conclusions and advice
confidently. To be persuasive
evidence must be

Relevant.
Is the evidence pertinent to the audit objective? Does it logically support the
internal auditor’s conclusion or advice?
Reliable. Did
the evidence come from a credible source? Did the internal auditor directly
obtain evidence?
Sufficient.
Has the internal auditor obtained enough evidence? Do different, but related,
pieces of evidence corroborate other?

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8/6/2021 Module 3: Engagement Performance Phase

3.2. Audit Procedures

Audit procedures are specific tasks performed by the

internal auditor to gather audit evidence required to achieve the prescribed
audit
objectives. They are applied during the audit process to

Obtain a thorough understanding

of the auditee, including the auditee’s objectives, risks, and controls.
Test the design adequacy and
operating effectiveness of the targeted areas system of internal controls.
Analyze plausible relationships
among different elements of data.
Directly test recorded financial
and non-financial information for errors and fraud.
Obtain sufficient appropriate
evidence to achieve the prescribed audit objectives involved in determining the
nature, extent, and timing of audit
procedures to perform.

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8/6/2021 Module 3: Engagement Performance Phase

3.3. Working Papers

Internal auditors record the evidence they accumulate as

support for engagement outcomes.

Purposes and Content of Working Papers

Because of the many purposes working papers serve, it is

difficult to overstate their importance. For example, working papers:

Aid in planning and performing the

engagement.
Facilitate supervision of the
engagement and review of the work completed.
Indicate whether engagement
objectives were achieved.
Provide a principal support for
the internal auditor’s communications to the auditee, senior management, the board
of directors, and
appropriate third parties.
Serve as a basis for evaluating
the internal audit functions quality assurance program.
Contribute to the professional
development of the internal audit staff.

The content of internal audit engagement working papers will

depend on the nature of the engagement. They should always, however, provide
complete, accurate, and concise documentation of the engagement process.

Types of Working Papers

A wide variety of working papers are prepared

during an internal audit engagement. The following list is intended to be
illustrative rather than all-
inclusive:

Work programs used to document

the nature, extent, and timing of the specific audit procedures
Engagement time budgets and
resource allocation worksheets
Questionnaires used to obtain
information about the auditee, including its objectives, risks, controls,
operating activities, etc.
Process maps or flow charts used
to document process activities, risks, and controls.
Charts, graphs, and diagrams,
such as a risk map used to plot the impact and likelihood of business risks
Agendas for internal audit team meetings
and meetings with the auditee
Narrative memoranda used to
document the results of interviews and other meetings with auditees
Pertinent auditee organizational
information, such as organization charts, job descriptions, and operating and
financial policies and
procedures
Copies of source documents, such
as purchase requisitions, purchase orders, receiving reports, vendor invoices,
vouchers, and checks
Copies of other important
documents, such as minutes of meetings and contracts
IT-related documents, such as
program listings and exception reports
Accounting records, such as trial
balances and excerpts from journals and ledgers
Evidence obtained from third
parties, such as confirmation responses from customers and representations from
outside legal counsel
Worksheets prepared by the
internal auditor, such as a risk and control matrix used to document process-level
risks, key control descriptions,
the internal auditor’s evaluation of control
design adequacy, the tests of controls performed, and the test results
Other types of working papers
prepared by the internal auditor that reflect work performed
Evidence compiled by the auditee
and tested by the internal auditor
Controls performed by the auditee
and reperformed by the internal auditor
Written correspondence and
documentation of oral correspondence with the auditee during the engagement
The internal audit team’s write
ups of observations, recommendations, and conclusions
Final engagement communications
and management responses

Guidelines for Working Paper Preparation

Standardized working paper formats help to streamline the

audit process and facilitate consistent, high-quality work across engagements. Care
should be taken, however, not to standardize working papers so rigidly that
they inhibit internal auditor ingenuity and creativity. Appropriate
working
paper standardization may include

A uniform cross-referencing
system for all engagements
Consistent working paper layouts
Standardized tick marks
A prescription for the types of
information to store in permanent or carry forward files

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8/6/2021 Module 3: Engagement Performance Phase
Working paper files should be complete and well-organized.
At the end of an engagement, the files should be cleared out so they contain
only
the final versions of the working papers completed during the engagement. Each
individual working paper should stand on its own merits. This
means, for
example, that each working paper should:

Contain an appropriate index or

reference number
Identify the engagement and
describe the purpose or contents of the working paper
Be signed and dated by both the
internal auditor who perform the work and the internal auditor who review the
work
Clearly identify the sources of auditee
data included in the working paper
Include clear explanations of the
specific procedures performed
Be clearly written and easy to
understand by internal auditors on familiar with the work performed

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