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CS Professional · Internal and Forensic Audit · Practices related to Internal Auditing

During an internal audit of the procurement function at Sharma Textiles Ltd, the auditor finds that purchase orders above Rs 5 lakh were issued without the second approval required by company policy. Which element of an audit finding best explains why the auditor must record the policy requirement in the report?

The policy requirement is the criteria of the finding, meaning the standard against which the actual practice is measured. Without it, the missing second approval would only be an observation, not a deviation. Cause, effect and recommendation address why, impact and remedy respectively.

  1. ACriteria, because it is the standard against which the actual practice is comparedCorrect
  2. BCause, because it explains who was responsible for the lapse
  3. CEffect, because it quantifies the loss suffered by the company
  4. DRecommendation, because it tells management what to do next

Explanation

A well-formed audit finding has condition, criteria, cause, effect and recommendation. The policy requiring a second approval is the criteria, the benchmark against which the observed condition (missing approval) is judged. Cause explains why the lapse happened and effect describes its impact, so those do not fit.

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