Zelta Ltd. is a medium-size company involved in providing a range of specialized products and services for the aerospace industry. Just over a year ago, external consultants undertook a major review of Zelta's information systems function. Consistent with industry trends, the consultants recommended substantial downsizing of the information systems function and greater outsourcing of work. In this light, top management slashed the information systems function from 100 to 50 personnel. They also decided to outsource all programming work for medium- to large-sized projects where specialized programming expertise was required. Top management felt they were employing too many highly skilled programmers who were relatively underutilized, given Zelta's demand for their talents.

Subsequent to the review, Zelta's Board fired the vice president of information systems and went to tender for their external audit services. The Board felt they had been poorly advised by both the vice president and their auditors in that they believed Zelta had invested too heavily in information systems services without an adequate return. A new vice president of information systems was appointed. He had previously been an assistant vice president responsible for accounting and administrative information systems in a large bank. New auditors have also been appointed. You are a manager in the audit firm that has won the contract.

As part of the interim audit work, your partner has asked you to review controls over the programming work that is now outsourced. Over the past year, you find that three major software development projects have been performed by outside contractors. Although Zelta's own information systems, staff developed the requirements specifications for each of the three projects, they undertook none of the programming work. In all cases the programming work needed was somewhat specialized, and as a result contractors were employed to do the job.

After making some inquiries about the projects, you conclude none of the software developed is material from the viewpoint of errors or irregularities in the financial statements. You discover, however, that 40 percent of the information systems budget for the past year has been spent on payments to the contractors. Moreover, you find the software has been developed to provide a critical range of new services that will be offered to Zelta's customers. If the software contains errors or improprieties, Zelta's customers could be substantially disadvantaged.

During an interview with the new vice president of information systems, you ask how the contract price for each of the three projects was determined. In particular, you ask him what estimation methods had been used to deter mine the cost Zelta would likely have to bear to get the work done. He replies that no estimation methods had been used because he believed none were necessary. Because the three software contracts had been let out to tender and the lowest-price bid had been accepted in all cases, he argues Zelta would have been unable to obtain a better deal. In this light he saw little point to having Zelta estimate the cost to undertake each of the projects.

Required. You have been reflecting on your findings for the past few days to try to determine what they mean for the conduct of the remainder of the audit. Write a brief report for your partner recommending any alterations, if any, you believe should be made to the audit plan in light of Zelta's failure to undertake cost estimation for the three projects. Whether you recommend alterations to the audit plan or not, provide a brief justification for your recommendations.