3 Susan Paullaos was recently appointed as a non-executive member of the internal audit committee of Gluck and
Goodman, a public listed company producing complex engineering products. Barney Chester, the executive finance
director who chairs the committee, has always viewed the purpose of internal audit as primarily financial in nature
and as long as financial controls are seen to be fully in place, he is less concerned with other aspects of internal
control. When Susan asked about operational controls in the production facility Barney said that these were not the
concern of the internal audit committee. This, he said, was because as long as the accounting systems and financial
controls were fully functional, all other systems may be assumed to be working correctly.
Susan, however, was concerned with the operational and quality controls in the production facility. She spoke to
production director Aaron Hardanger, and asked if he would be prepared to produce regular reports for the internal
audit committee on levels of specification compliance and other control issues. Mr Hardanger said that the internal
audit committee had always trusted him because his reputation as a manager was very good. He said that he had
never been asked to provide compliance evidence to the internal audit committee and saw no reason as to why he
should start doing so now.
At board level, the non-executive chairman, George Allejandra, said that he only instituted the internal audit committee
in the first place in order to be seen to be in compliance with the stock market’s requirement that Gluck and Goodman
should have one. He believed that internal audit committees didn’t add materially to the company. They were, he
believed, one of those ‘outrageous demands’ that regulatory authorities made without considering the consequences
in smaller companies nor the individual needs of different companies. He also complained about the need to have an
internal auditor. He said that Gluck and Goodman used to have a full time internal auditor but when he left a year
ago, he wasn’t replaced. The audit committee didn’t feel it needed an internal auditor because Barney Chester believed
that only financial control information was important and he could get that information from his management
accountant.
Susan asked Mr Allejandra if he recognised that the company was exposing itself to increased market risks by failing
to have an effective audit committee. Mr Allejandra said he didn’t know what a market risk was.
Required:
(a) Internal control and audit are considered to be important parts of sound corporate governance.
(i) Describe FIVE general objectives of internal control. (5 marks)