Question

An internal auditor fails to discover an employee fraud during an assurance engagement. The nondiscovery is most likely to suggest a violation of the International Professional Practices Framework if it was the result of a

A. Failure to perform a detailed review of all transactions in the area.
B. Determination that any possible fraud in the area would not involve a material amount.
C. Determination that the cost of extending procedures in the area would exceed the potential benefits.
D. Presumption that the internal controls in the area were adequate and effective

Answer 1

The nondiscovery of employee fraud by an internal auditor that results from a presumption that internal controls were adequate and effective, without proper evidence, could suggest a violation of the International Professional Practices Framework.

Step-by-step explanation:

When an internal auditor fails to discover employee fraud during an assurance engagement, the nondiscovery could suggest a violation of the International Professional Practices Framework (IPPF) if it was due to certain failures in the audit process. Of the options provided:

• A. Failure to perform a detailed review of all transactions in the area could be due to resource constraints and may not necessarily be a violation of IPPF.
• B. Determining that any possible fraud in the area would not involve a material amount is an accepted audit practice based on risk assessment and does not typically represent a violation.
• C. Determining that the cost of extending procedures in the area would exceed the potential benefits is a consideration of efficiency in audit planning and is not a violation of IPPF principles.
• D. Presumption that the internal controls in the area were adequate and effective without sufficient evidence could lead to an oversight of potential fraud and suggests a violation of IPPF, as auditors are expected to base their assessment on evidence rather than presumption.

This relates to the challenge faced by those within a bureaucracy to report on misconduct while balancing the potential personal cost. The IPPF requires auditors to maintain professional skepticism and not assume controls are effective without proper evaluation and evidence.

Answer 2

The most likely violation of the IPPF by an internal auditor would be due to presuming the adequacy and effectiveness of internal controls without verifying them, which could lead to non-discovery of fraud.

Step-by-step explanation:

An internal auditor's failure to discover employee fraud during an assurance engagement would most likely suggest a violation of the International Professional Practices Framework (IPPF) if it was the result of the auditor's presumption that the internal controls in the area were adequate and effective (Option D). This presumption without proper assessment can lead to oversight.

According to the IPPF, internal auditors are expected to apply due professional care during their audit. This includes not assuming that internal controls are effective without sufficient evidence. Although auditors are not expected to perform a detailed review of all transactions (Option A), they are required to perform sufficient tests to ascertain the effectiveness of controls, particularly where there are indications of potential fraud. Decisions based on materiality (Option B) and cost-benefit considerations (Option C) are part of the normal scope limitations and professional judgment internal auditors must exercise in planning and conducting an audit.