Case $3.$ An auditor is performing an operational audit of a division and observes that an unusually large quantity of goods is on hand in the shipping and materials rework areas. The items are labeled as reship items. Upon inquiry, the auditor is told that they are goods that have been returned by customers and have either been repaired or shipped back to the original customer or repaired and shipped out as new products because they are fully warranted.

$4.$ The auditor has not yet performed any detailed audit work. What do you think the auditor should do next to understand details of the transactions before taking any further action? Please highlight your selection:

a$.$ Report the items to divisional management and ask for their explanation before determining whether to include the findings in an audit report.

b$.$ Take a sample of the items on hand and trace to underlying documents, such as receiving reports and sales orders, to determine how the goods were handled.

c$.$ Write the finding up$,$ but do not perform any additional work without the approval of the director of internal auditing because it is clearly a scope expansion.

d$.$ Take an inventory of the goods on hand so the dollar amount could be included in the audit report along with the explanation of the problem

$2.$ The auditor later found out that most of the goods were repaired and sold as new items. Such sales are both against company policy and against governmental regulations. The auditor does not know whether fraud was involved or the extent that divisional management had been involved in the scheme. The auditor should report the finding to $($please highlight$)$:

a$.$ Divisional management only, since they are responsible for correcting the problem.

b$.$ Divisional management and relevant regulatory bodies, since it is a clear violation.

c$.$ Divisional management, the audit committee, and senior management.

d$.$ The audit committee and top management only.

$3.$ Subsequent investigation shows that previously issued financial statements were materially misstated due to the improper recognition of sales. The auditor$$s next step should be to $($please highlight$)$:

a$.$ Immediately inform the external auditor and the divisional manager.

b$.$ Inform divisional management as a preliminary finding, but wait until a formal audit report is issued to inform the audit committee

c$.$ Inform the external auditor, senior management, the board, and the audit committee.

d$.$ Inform senior management, the board, and the audit committee.

$4.$ Please cite at least two relevant IPPF Standards $($provide the Standards$$ code and name, for instance: $2040-$Policies and Procedures$)$ to support your selection of question $2$ and $3$ above:

$2$