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CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities

A charitable trust running a hospital receives a restricted grant for purchasing dialysis machines. The internal auditor finds that part of the grant was used to pay staff salaries and later replaced from general donations. Which is the most appropriate audit observation?

The auditor should report misuse of restricted funds. A grant given for dialysis machines must be spent for that purpose, and using it for salaries breaches donor conditions even if the money was later replaced. Trustees should be informed and fund-wise controls recommended, so the fungibility argument is wrong.

  1. ANo issue, because money is fungible within one trust
  2. BUse of restricted funds contrary to donor conditions, requiring reporting and corrective action even though it was replacedCorrect
  3. COnly a disclosure matter for the statutory auditor, not for internal audit
  4. DA valuation issue concerning the machines

Explanation

Restricted grants must be used for the stated purpose. Later replenishment does not cure the breach of donor conditions at the time of use. The internal auditor should report it to the trustees and recommend fund-wise controls. Treating funds as freely interchangeable ignores the restriction.

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