BAC 4664 Internal Auditing Tutorial 7

Question 1
You are in charge of the internal audit department of Zamrud Sdn. Bhd., a rapidly
expanding company. The company’s sales have increased by about 15% per annum
for the last five years, to the current level of RM 75 million. Net profits are also high,
with a reasonable return being provided for the ten shareholders.

The internal audit department was established last year to assist the board of directors
in their control of the company and to prepare for a possible listing on the Bursa
Malaysia. The Managing Director is keen to follow the principles of good corporate
governance with respect to internal audit. However, he is also aware that the other
board members do not have complete knowledge of corporate governance
Required:
Explain how the internal audit department can assist the board of directors in fulfilling
their obligations under the principles of good corporate governance.

Question 2
Fashion Tailors Sdn. Bhd. manufactures exclusive garments for export. The company
employs over 1,500 staff. The company is not listed; its shares are held by 10
individuals, most of them from the same family. The maximum shareholding by any
individual shareholder is 15% of the share capital.

The executive directors are drawn mainly from the shareholders. There are no non-
executive directors. The executive directors are very successful in managing the
company.

The boards of directors are considering a significant expansion of the company.

However, the company’s bankers are concerned with the standard of financial
reporting as the financial director has recently left the company. The board is delaying
providing additional financial information until a new financial director is appointed.

Fashion Tailors does have an internal audit department, although the chief internal
auditor frequently comments that the board of directors does not understand his
reports or provide sufficient support for his department. The board agrees with this
view.

Rahim & Co, the external auditors have also expressed concern in this area and the
fact that the internal audit department focuses work on control systems, not financial
reporting. The board of Fashion Tailors is considering a proposal from the chief
internal auditor to establish an audit committee.

The audit committee would consist of one executive director, the chief internal auditor
as well as three new appointees. One appointee would have a non-executive seat on
the board of directors.
Required:
Discuss the benefits to Fashion Tailors of forming an audit committee.

Question 3
Explain what are the internal auditor’s role regarding risk management and internal
controls.