During an internal audit of the manufacturing division of a defence contractor, the internal auditor discovers a scheme that appears to involve the company inappropriately adding costs to a cost-plus governmental contract. The internal auditor discusses the matter with senior management, who suggest that the internal auditor seek an opinion from legal counsel. Legal counsel indicates that the practice is questionable but that it is not technically in violation of the government contract. Based on the legal counsel’s decision, the internal auditor decides to omit any discussion of the practice in the formal internal audit report that goes to management and the audit committee, but does communicate legal counsel’s decision to management informally.

Required:

Choose the correct answer from the options provided.

Question

During an internal audit of the manufacturing division of a defence contractor, the internal auditor discovers a scheme that appears to involve the company inappropriately adding costs to a cost-plus governmental contract. The internal auditor discusses the matter with senior management, who suggest that the internal auditor seek an opinion from legal counsel. Legal counsel indicates that the practice is questionable but that it is not technically in violation of the government contract. Based on the legal counsel’s decision, the internal auditor decides to omit any discussion of the practice in the formal internal audit report that goes to management and the audit committee, but does communicate legal counsel’s decision to management informally. 
 
  Required: 
 
 Choose the correct answer from the options provided.

Accepted Answer

The internal auditor did violate the Code of Ethics. It is a violation because all important information, even if resolved, should be reported to the audit committee.

Answer

The internal auditor did violate the Code of Ethics. Internal legal counsel’s opinion is not sufficient. The internal auditor should have sought advice from an independent legal counsel.

Answer

The internal auditor did not violate the Code of Ethics. If fraud was suspected, it would be resolved at the divisional level where it was taking place.

Answer

The internal auditor did not violate the Code of Ethics. The internal auditor followed up the matter with the appropriate personnel within the organisation and reached a conclusion that no fraud was involved.

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During an internal audit of the manufacturing division of a defence contractor, ...

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