Learn how to properly document internal audit observations by identifying the criteria, condition, cause, and effect. Discover which critical component is missing in this exam question scenario.
Table of Contents
Question
The final engagement communication contains the following observation:
“The internal auditor discovered that three of the 10 contracts reviewed failed to meet the organization’s competitive bidding requirements. Management explained that senior management deemed these purchases to be critical and awarded them as sole-source.”
Which of the following components is missing in the documentation of the observation?
A. Criteria.
B. Effect.
C. Condition.
D. Cause.
Answer
B. Effect.
Explanation
A well-documented audit observation should include the following four components:
- Criteria: The standards, measures, or expectations used to evaluate the subject matter (what should be).
- Condition: The factual evidence found during the internal audit (what is).
- Cause: The reason for the difference between the expected and actual conditions (why it happened).
- Effect: The risk or impact of the condition on the organization (the consequence of the difference).
In the given scenario, the observation contains:
Criteria: The organization’s competitive bidding requirements.
Condition: Three out of 10 contracts reviewed failed to meet the requirements.
Cause: Senior management deemed these purchases critical and awarded them as sole-source.
However, the effect or potential impact of not following the competitive bidding requirements is missing from the observation. The effect could include financial losses, reputational damage, or non-compliance with regulations. Without stating the effect, the observation is incomplete.
Therefore, the missing component in the documentation of the observation is B. Effect.
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