Analysis and evaluation: Using AS 2605 as a guide, discuss how Leo & Lee would evaluate the internal audit function of MSI. Based on the information, make a decision regarding the use of MSI’s internal auditors and defend your decision. (PCAOB auditing standards can be accessed at www.pcaobus.org.)

Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI’s products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured.

MSI has a small internal audit department that is led by Lorenzo Mandella, a former audit senior of Leo & Lee who worked on the MSI audit. Lorenzo never took the time to sit for the CPA exam and therefore was not able to advance to manager at Leo & Lee. He was thankful that the opportunity at MSI became available. Lorenzo was hired by MSI five years ago as MSI’s first internal auditor. He was tasked with establishing the internal audit function and hiring more internal audit staff as needed. Over the past five years, he has hired three additional internal audit staff. Two of his staff are CPAs and one is a certified internal auditor (CIA). The two CPAs have 2-3 years of external audit experience from working at a mid-size public accounting firm. The CIA is a recent college graduate whose only work experience was an internal audit internship for a health insurance company.

On a day-to-day basis, Lorenzo works closely with the CFO and other accounting personnel as part of internal control monitoring. The CFO will ask Lorenzo’s group to perform audits of accounts if errors are suspected. Lorenzo reports to the audit committee as needed, particularly if there are issues with internal controls that the audit committee should be made aware of. Lorenzo and the rest of his group do not have any managerial duties outside of their internal audit role.