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Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2420 - Quality of Communications: Audit communications must be accurate, objective, clear, concise, constructive, complete, and timely.

A fair and balanced assessment ensures objectivity and builds credibility.

Reasoning:

Option B is correct because fair and balanced reporting reflects both positive and negative findings, maintaining the credibility and usefulness of the audit report.

Option A (including as much detail as possible) risks overwhelming the audience and detracting from key messages.

Option C (using technical language) can reduce clarity and accessibility for non-technical stakeholders.

Importance of Balanced Reporting:

Objective and balanced communications ensure that the audit report is actionable and supports informed decision-making by management and the board.

Comprehensive and Detailed Step-by-Step Explanation:

Enhancing Relationships: Status meetings facilitate two-way communication, keeping management informed about audit progress and fostering collaboration. Open discussions during these meetings help address concerns and strengthen the relationship between internal audit and management.

Comprehensive and Detailed Step-by-Step Explanation:

Facilitating Organizational Control Self-Assessments (CSA): This engagement helps the organization identify, evaluate, and monitor risks and controls. By facilitating CSAs, internal auditors use their expertise to highlight emerging risks and ensure that the organization proactively addresses them.

Comprehensive and Detailed Step-by-Step Explanation:

Process Narratives and Maps: These provide a comprehensive view of the process, including descriptions of risks and controls, making them the most relevant for supporting risk assessments. They help identify gaps or weaknesses in the control environment.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2120 - Risk Management: Internal audit must assess and evaluate the risk management processes of the organization.

Identifying risk scenarios supports engagement objectives by determining vulnerabilities and threats to process objectives.

Reasoning:

Option A is correct because risk scenarios provide insights into potential events or conditions that could hinder achieving objectives. This allows auditors to assess risk exposure and evaluate controls effectively.

Option B (control effectiveness) is a subsequent step in the audit process but does not explain the need for identifying risk scenarios.

Option C focuses on evaluating management’s process, which is broader than identifying specific risks for the engagement.

Practical Application:

Risk scenarios guide auditors in tailoring their approach to address areas of greatest vulnerability.

Comprehensive and Detailed Step-by-Step Explanation:

Risk Acceptance: By deciding that transactions below $50 do not require authorization, management is consciously accepting the low-level risk associated with this decision to streamline processes and reduce administrative burdens.

Comprehensive and Detailed Step-by-Step Explanation:

Opportunity Element: This element of the Fraud Triangle refers to situations where weaknesses in controls provide the ability for someone to commit fraud without being detected. Poor segregation of duties, as described in Option C, creates such opportunities.

Example: Allowing an executive assistant to authorize payments without oversight significantly increases the risk of fraud.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to Internal Control Assessment:

Standard 2130 - Control: Internal auditors must evaluate the adequacy and effectiveness of controls in mitigating risks.

COSO Framework: Proper segregation of duties is essential for preventing unauthorized transactions and fraud.

Reasoning:

Option B is correct because the lack of management review and approval for creating vendors indicates a control weakness, as it creates opportunities for unauthorized vendors or fraud. The auditor should investigate whether mitigating controls exist (e.g., periodic review of vendor lists) or recommend redesigning the process to include managerial oversight.

Option A dismisses the observation without considering its impact on control adequacy. Prompt payment alone does not address risks related to unauthorized vendors.

Option C incorrectly assumes the observation reflects adequate controls, which is not the case given the lack of management approval.

Actionable Next Steps:

Document the observation as a control deficiency.

Perform additional testing to identify whether compensating controls mitigate the risk or recommend enhancements to strengthen controls.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 1110 - Organizational Independence: Internal audit must be independent of the activities it audits to maintain objectivity.

Standard 1130 - Impairment to Independence or Objectivity: Internal audit’s independence is compromised if auditors take on roles that involve making decisions or implementing controls, as this may bias their findings.

Reasoning:

Option B is correct because setting the organization’s risk appetite is a management decision and represents a strategic role that compromises the internal audit's independence.

Option A (championing the establishment of risk management) and Option C (coordinating risk management) do not directly impair independence, though care should be taken to avoid direct involvement in risk management decisions. These activities can be part of advisory services and not necessarily a threat to independence if appropriately managed.

Maintaining Independence:

Internal auditors should provide assurance on risk management but not take on roles that involve decision-making or implementing risk management processes.

Comprehensive and Detailed Step-by-Step Explanation:

Reference to IIA Standards:

Standard 2330 - Documenting Information: Internal auditors are required to document audit evidence and processes in a way that is clear, complete, and supports audit conclusions.

Risk and control matrices are effective for documenting risks, controls, and related responsibilities in a structured way.

Reasoning:

Option C is correct because a risk and control matrix clearly documents processes, the associated risks, control activities, and ownership of each step. It is the most suitable tool for understanding risks and controls along with associated timelines and responsibilities.

Option A (process map) documents the steps in a process but does not directly link risks and controls.

Option B (detailed flowchart) is used to map the flow of a process but also lacks the structure for detailing risks and control ownership.

Best Practice for Documentation:

A risk and control matrix is the most structured and comprehensive tool for documenting complex processes that involve risks, controls, and ownership.