Case Class Discussion – Farma Corporation
Do not Pass in Discussion Questions

QI: Gain an Understanding of the Client: • What does the organization do? o Farma Corporation: Farma Corporation is a pharmaceutical company headquartered in New Jersey; sales for 1982 were $2 billion. • Why were we called in? o Maintenance Cost Allocation and Quality Concerns: Managers are complaining that they are being overcharged by the in-house maintenance group for poorly-performed, nonroutine jobs. • After doing the SWOT in Appendix A, list by scope area the key problems and/or concerns. (These problems will be placed in Part I of the formal case report) o Quality of Work: ▪ Unsatisfactory Performance: Jobs have to be redone at extra cost because they are not performed correctly the first time. o Work Order Scheduling: ▪ Priority: Maintenance group can substitute routine jobs in the place of nonroutine jobs at will, thus creating backlogs. ▪ Policy: Lack of policy dictating how jobs must be classified and scheduled (routine, nonroutine, emergency, etc.). o Maintenance Staffing: ▪ Understaffed: The maintenance group was refused a staff increase at the beginning of the year, leaving them with insufficient staff. o Communication: ▪ Estimates: Requesting departments are not given estimates of how much a job will cost and are therefore unable know the potential impact on their budget. ▪ Hours Worked: Actual hours worked are not on the work order forms that the requester must sign, making it impossible for them to verify hours charged. ▪ Approval: Completed work orders are closed before the user department has verified satisfaction with the work performed. o Cost Allocation: ▪ Timecards: No controls over employee timecards to make sure hours are correct or agree with what is billed on the work orders. ▪ Estimates: Standard labor estimates for routine jobs are outdated and inconsistent with reality. ▪ Inconsistency: Identical jobs are billed at different amounts. ▪ Variances: There are often large differences between the estimated and actual costs of a workorder that are not analyzed to prevent future misjudgments, and the variances are always increases in cost rather than decreases. ▪ Prices: Prices for material and labor exceed estimates from outside vendors.

QII: Start the planning for the Audit: Based on the above problem areas, where could fraud occur and what should our audit objectives be?

When planning an audit an internal auditor must always plan for the possibility of fraud. Where could fraud occur?
|Possible Areas Where Fraud Could Occur |
|Who could do the fraud? |How could they do it? |
|Maintenance Group: Purchasing staff |Kickbacks from supply vendors for buying lower-quality |
| |products (paint, etc.) |
|Maintenance Group: Technicians |Inflate hours worked on timecards |
|Vendors |Switch correct supplies with inferior products |
|Maintenance Group: Accountants |Charge disproportionate amounts to certain divisions and |
| |less to others based on personal relationships or kickbacks |

• When planning the audit objectives for an audit an internal auditor needs to know what the department under audit should be doing. This is not what they are currently doing, but what they should be doing. Each department should have SMART Objectives that tie their departments work to the organization’s strategy and the organization’s SMART objectives. What are the most important department activities of the area under audit and what should be their targets and performance measures? Do one table for each Department. (Appendix B of the case discusses why you selected these SMART objectives and Part II presents a table outlining the SMART objectives.)

|Creation of SMART Objectives |
|Objective or Goal: |How measure it? |Target |Performance Measure |SMART Objective |
|No rework |Number of jobs that have to|0 |Number of jobs that |Rework: To eliminate all rework jobs. |
| |be redone | |have to be redone | |
|Accurate Estimates |Actual cost of completed |+/- 5% |(Actual – Est) / |Estimates: Job estimates should be |
| |job compared to original | |Estimated Cost |accurate within 5% of the actual job cost.|
| |estimate | | | |
|Eliminate backlog |Number of jobs that are |0 |Number of jobs that are|Scheduling: All jobs should be completed |
|delays |completed after their | |completed after their |by their originally scheduled dates. |
| |originally scheduled date | |originally scheduled | |
| | | |date | |

• What are the top three scope areas that we need to audit considering the SMART Objectives and key risks to the organization?

|Audit Objectives for Areas Under Audit |
|Conditions or Problems from Weaknesses in |Risks to Organization due to Problem |Audit Objective (For Appendix C) |
|SWOT from Appendix A | | |
|Unsatisfactory Quality of Maintenance Work|Wasted resources when jobs have to be |Quality of Work: To determine why maintenance |
| |redone |jobs are not completed correctly the first time.|
| |Employee dissatisfaction | |
| |Further backlogs when jobs have to be | |
| |redone | |
| |Lack of trust in maintenance group | |
|Scheduling Backlogs |Inefficient use of resources |Scheduling: To determine why scheduling |
| |Employee dissatisfaction |backlogs/unexpected schedule changes are |
| |Unexpected downtime |occurring so frequently. |
|Inconsistently high costs |Departments exceed budgets and have to |Costs: To determine why allocated costs are so |
| |make cuts elsewhere |high when compared to estimates and outside |
| |Inefficient use of resources |vendors. |

Attach the following grade sheet to THE TOP of your report.
Grade Sheet

Names alphabetically:

________Katrina Paczosa_________ Group Number__4__

________Clifford Thifault_________

________Betsy Thomas___________

________Andrew Turocy__________

Appendix A. SWOT 1.5 _____

Part I. Introduction 1.5 _____

Appendix B. – Why Targets 1 _____

Part II. Strategic Analysis of Process 2 _____

Appendix C. Audit Process 4 _____

Part III. Analysis of Area under Audit 3 _____

Format/Punctuation etc. 2 _____

Total 15 _____

To: Board of Director’s Audit Committee
From: Director of Internal Audit
RE: Audit of Farma Corporation
Date: July 2nd, 2012

I. Introduction: Many questions have arisen regarding the quality and efficiency of the in-house maintenance group. All four departments have consistently gone over their maintenance budget by an average of $200,000 per year, including a total of $250,000 spent on rework at extra cost. The aim of this audit is to identify any control weaknesses and inefficiencies in the maintenance department and reduce maintenance expenses by $800,000.

A. Scope and Conditions: The following outlines areas under scope included in the audit and the related conditions discovered for each scope area:

1. Quality of Work: The following weaknesses based on the quality of work were found:

a. Unsatisfactory: Complaints have been filed stating that the work done by the maintenance department has been unsatisfactory.

b. Rework: As a result, numerous jobs have to be repeated at additional cost to the company of $250,000 this past year.

2. Control over Charges: The following weaknesses were found based on the control over charges to the client:

a. Inconsistent Pricing: Similar jobs are often billed at different labor rates and material prices.

b. Maintenance Work Order Report: Maintenance Work Order (MWO) Report only indicates total dollar amounts charged, neither labor hours nor materials, so no reasonableness test can be performed without significant additional documentation.

c. Estimate v. Actual: Significant variances occurred between estimates and the actual cost, always to disadvantage of the user.

d. No Explanation: Although a procedure has been established for explaining variances over $500, this has not yet been implemented, leaving $50,000 in variances unexplained.

3. Oversight: A consistent lack of oversight over the following procedures was identified as weaknesses:

a. Timecards: Workers independently fill out time cards manually with no oversight or control as to hours worked and for what job.

b. Approval: User departments failed to approve work orders after performance of repairs, signaling work done to satisfaction, and maintenance foreman would instead sign for user departments.

c. Reasonableness: Little or no hours were reported on 70% of the scheduled “routine” work orders for 1991 and 1992, while another 15% had estimates twice as high as the actual hours. That’s roughly $750,000 of labor hours not recorded already allocated to routine jobs.

4. Work Scheduling: The following weaknesses were identified as weaknesses in the work scheduling process:

a. Backlog: No system recognized for identifying and resolving large backlogs of work, with almost 200 jobs currently in backlog.

b. Priority: Maintenance groups substitute routine jobs in place of nonroutine jobs and vice versa with no explanation.

c. Policy: No policy to dictate how jobs must be classified and scheduled.

II. Strategic Analysis of Process: The following summarizes the corporate objectives and department objectives, risks, and critical success factors for the next year.

A. Corporate SMART Objectives: The following provides a list of corporate objectives:

1. Independence: To be 100% independent of outside help for general maintenance.

2. Maintenance Expenses: To reduce maintenance expenses by $800,000.

B. Department Objectives: To reach the corporate objectives, the Maintenance Department needs to meet the following objectives through the listed critical success factors and consider the risks associated with the objectives.

|Strategic Analysis of Process |
|Department Objectives With Targets |Performance Measure |Critical Success Factors |Risks |
| | | |Impact/likelihood |
| | | |(S) Risks that could stop the |
| | | |objective from being achieved (O) |
| | | |Risks to organization if objective |
| | | |not met |
|Estimates: Job estimates should be |(Actual – Est.) / |Accurate standards |Fluctuating costs of raw materials |
|accurate within 5% of the actual job |Estimated Cost |Established policy stipulating estimating |(S) |
|cost. | |procedure to be followed and implement the |Weaknesses not identified for |
| | |policy |estimating procedures (S) |
| | |Analysis, investigation and explanation of |Based on inaccurate standards (S) |
| | |all significant variances between estimated |Overcharging (S) |
| | |and actual costs |Misestimate cost of jobs (S) |
| | |Stable costs for raw materials |Potential fraud (S\O) |
| | | |Excess costs (O) |
| | | |Decreased profits (O) |
| | | |Distrust of Maintenance Group (O) |
| | | |Departments exceed their budget and |
| | | |have to make cuts elsewhere (O) |

|Strategic Analysis of Process – Continued |
|Department Objectives With Targets |Performance Measure |Critical Success Factors |Risks |
| | | |Impact/likelihood |
| | | |(S) Risks that could stop the |
| | | |objective from being achieved (O) |
| | | |Risks to organization if objective |
| | | |not met |
|Rework: To eliminate all rework jobs. |Number of jobs reworked / Total |Train employees properly |Employees lack necessary skills (S) |
| |number of jobs |Monitoring the work to make sure people are |Lack of understanding of what job |
| | |working efficiently |entails (S) |
| | |Completed work orders must be signed by |Complaints from other departments (S)|
| | |requester |Inferior raw materials (S) |
| | |Work must be reviewed by supervisor |Insufficient time and resources (S) |
| | | |Increasing costs for jobs (O) |
| | | |Wasted resources (O) |
| | | |Malfunctions/ accidents due to poor |
| | | |workmanship (O) |
|Billing: All maintenance charges must |Percentage of maintenance charges |Develop standard costs |Inaccurate standard costs (S) |
|be the same for similar jobs. |using the same rates for similar |Documentation of standard costs |Inaccurate billing to departments (S)|
| |jobs |Manager reviews costing system for accuracy |Database malfunction (S) |
| | |Update standard rates annually |System not updated (S) |
| | |Database maintenance |Under/over stated cost of goods sold |
| | |IT person |(O) |
| | |Database recognizes duplicates |Analysis of differences not performed|
| | |Analysis of differences > $500 |(S) |
| | | |Incorrect decision making (O) |
|Internal Costs: All internal costs |Number of internal costs that are |Accurate and verified external pricing |Inaccurate information (S) |
|should be at least 5% less than |at least 5% cheaper than external |Accurate estimated internal pricing |Failure to compare pricing (S) |
|external costs. |costs | |Overcharging (O) |
| | | |Obsolete Internal Maintenance (O) |
|Job Classification: To eliminate the |Number of jobs that are |Review of classification by supervisors |Schedule wrong person for job (S) |
|misclassification of jobs. |misclassified |Good quality Work Orders |Misclassified work could lead to |
| | |Appropriate training for employees |rework (S) |
| | |Sufficient maintenance employees |Supervisor approving |
| | | |misclassification (S) |
| | | |Backlog of work (O) |

III. Analysis of Area under Audit: The following summarizes the major conditions and recommendations for improvement.

|Analysis of Area under Audit |
|Department: Maintenance - Rework |
|Specific Conditions |Maintenance employees are consistently not producing satisfactory work causing an additional $250,000 of unnecessary |
| |rework. |
|Effect/Risk |Poor use of resources. |
| |Poor controls used to check jobs. |
| |Reduced company profits. |
| |Fraud from maintenance workers. |
| |Fraud from requesting departments. |
| |Unfavorable departmental financial reports. |
|Procedures | Maintenance performs routine and non-routine jobs. |
| |Maintenance charges the requesting department for the cost of the job. |
| |Maintenance work order is requested through the completion of a form. |
| |Maintenance creates an estimate for labor hours and material costs. |
| |Maintenance department schedules work. |
| |Maintenance workers perform work and record time card. |
| |Maintenance manager reports results on work order form (labor hours & cost of materials). |
| |Completed work orders are signed by requestors to verify completion. |
|Practices | Maintenance performs both routine and non-routine jobs. |
| |Maintenance performs re-work on unsatisfactory jobs. |
| |Maintenance charges the requesting department for the cost of the repair work. |
| |The maintenance work order form is filled out and scheduled. |
| |Maintenance workers record their hours worked on the time cards. |
| |Maintenance managers provide a total cost with no breakdown in cost. |
| |Work orders are not always signed by the user to show evidence of approval of the work performed. |
|Root Cause | Significant variances between actual and estimated cost of work orders are not investigated and explained. |
| |False time report by maintenance employees to get overtime. |
| |Poor quality of work by employees. |
| |Lack of communication and understanding of maintenance requests. |
| |Materials are below industry standards. |
|Conclusion | The lack of internal control and communication within the maintenance department is driving the increase in the |
| |amount of rework, which negatively impacts profitability. Maintenance practice for estimating costs is ineffective. |
|Recommendations | All maintenance workers should go through a training session to ensure that they are knowledgeable regarding all work|
| |that would be performed; both routine and non-routine jobs. (Preventative) |
| |Upon completion of a project, maintenance must get approval from their manager and the requesting manager on the MWO |
| |that work is complete. (Detective) |
| |Independent inspections should be done on completed work to ensure it is up to standards. (Detective) |
| |Variances over $500 will not be allowed to go through the system without first getting approved by upper management in|
| |the maintenance department. (Preventative/Detective) |
| |Floor inspectors to monitor employees’ productivity level during working hours. (Preventative) |
| |Code of Ethics training. |
| |Provide maintenance employees with incentives for not creating reworks. |
| |Purchase a time card machine to better control employee hours. (Preventative) |

|Analysis of Area under Audit - Continued |
|Department: Maintenance – Variances |
|Specific Conditions |Cost estimates and charges for maintenance jobs are inconsistent and unreasonable when compared to each other as well|
| |as industry standards. $50,000 in variances remains unexplained, causing distrust and complaints from department |
| |requesters. |
|Effect/Risk |Department budgets cannot be managed correctly given the unreasonable charges and lack of estimates in advance. |
| |The reputation of the Maintenance Group is taking a hit as users become more and more dissatisfied. |
| |Departments are being overcharged for maintenance jobs. |
| |The same tasks are charged at different costs at different times. |
| |Departments may outsource request to outside maintenance companies. |
|Procedures |Job costs should be estimated using standard costing data for routine tasks. |
| |Estimates should be communicated to the requester before starting the job. |
| |Standard costing data should be based on averages of the actual time it takes to complete a given task. |
| |Variations between estimates and actual costs of more than $500 should be investigated and explained thoroughly. |
|Practices |Estimates are not given to the requester before work begins, so the requester does not know how the job will affect |
| |their budget. |
| |Standard costing data is outdated and doesn’t reflect actual hours/costs required. |
| |Large variances between estimated and actual costs are not being investigated. |
| |Charges for jobs are calculated arbitrarily, leading to similar jobs being charged at different amounts. |
|Root Cause |Lack of communication between the Maintenance Group and the requester regarding costs. |
| |Requesters do not receive initial estimates and are not given an opportunity to confirm the scope of the job. |
| |The expense ledger sent to the requester’s department lists only the total cost of each job and not the number of |
| |hours charged; the reasonableness of the labor hours cannot be confirmed by the requester. |
| |Database of standard costs is outdated and unrealistic for current conditions. |
| |Labor hours are not separated by job on employee time cards, and timecards are not approved by a manager. |
|Conclusion |An outdated database of standard costs is leading to unreasonable estimates for maintenance jobs. |
| |Lack of supervision over labor hours is causing incorrect and inconsistent labor charges to the requester. |
|Recommendations |Update the standard costing database using current data as well as industry standards for each task. |
| |The maintenance group should always give the requester an estimate of total costs before starting the job. |
| |(Preventative/Detective) |
| |The Maintenance manager should compare each completed MWO with the employee time cards to verify that the correct |
| |hours have been claimed. (Detective) |
| |Large variances between estimates and actual costs should be investigated promptly to determine the cause. |
| |If variances are determined to stem from unrealistic standard costs, the standard cost database should be updated |
| |accordingly. (Corrective) |

|Analysis of Area under Audit - Continued |
|Department: Maintenance - Backlog |
|Specific Conditions |There is a current backlog of 200 pending work orders. The Maintenance Group has been substituting routine jobs in |
| |the place of nonroutine jobs and vice versa, arbitrarily and without explanation. |
|Effect/Risk |Unexpected downtime could occur if maintenance requests are not handled promptly. |
| |The reputation of the Maintenance Group suffers as users become more and more dissatisfied. |
| |High priority jobs are being displaced by jobs that are less important. |
| |Requesters are unsure of expected completion date. |
|Procedures |Routine jobs are automatically scheduled by the computer. |
| |Nonroutine jobs are scheduled upon request within the time frame available when routine jobs are not undertaken. |
| |There is always time for non-routine jobs, because several workers are solely devoted to nonroutine jobs. |
|Practices |Workers designated solely for nonroutine work regularly perform routine work as well. |
| |Maintenance Group management substitutes routine jobs for nonroutine jobs and vice versa for convenience. |
| |Emergency work orders are often substituted for routine jobs, but they are reported as routine jobs with no |
| |explanation given. |
|Root Cause |Lack of enforced policy dictating how jobs must be classified and scheduled (routine, nonroutine, emergency, etc.). |
|Conclusion |The lack of a clear scheduling policy is creating a chaotic environment in which jobs are haphazardly rearranged |
| |without legitimate reason or notification. |
|Recommendations |Written procedures should be implemented and should detail the exact steps for scheduling both routine and nonroutine|
| |jobs. (Preventative) |
| |Schedule changes should only be made in severe circumstances, and the foremen’s reasons for the substitutions should |
| |be included on the daily work schedules. |
| |Reasons for substitute assignments should also be conveyed to management, who should review them frequently and be |
| |alert for trends. (Detective) |
| |Clear explanations should be given to the requester when a job has to be rescheduled. |
| |The Maintenance Group staffing level should be evaluated quarterly to determine if the department is appropriately |
| |staffed for the number of pending work orders. (Preventative) |

| Analysis of Area Under Audit - Continued |
|Department: Maintenance – Employee Qualification |
|Specific Conditions |HR is not hiring quality employees. Current maintenance employees are not receiving proper training resulting in the |
| |excessive rework costs previously discussed. |
|Effect/Risk |Poor service provided by maintenance employees. |
| |The cost of rework will continue to rise by 10% annually. |
| |Maintenance is operating inefficiently. |
| |Loss of trust in the maintenance department to provide good service. |
| |Inexperienced employees create unsafe working environment. |
| |Inability to effectively promote employees from within. |
|Procedures |HR reviews job applications and select qualified candidates. |
| |All workers must have some form of work experience (not necessarily related). |
| |Management and HR conduct interviews with candidates. |
| |HR performs background checks on candidates. |
| |An offer is made to the potential candidate. |
| |Once hired, employee is expected to complete monthly training and obtain proper certification within a year. |
|Practices |Maintenance managers rely completely on HR to make hiring decisions. |
| |Very few employees attend training. |
| |95% of maintenance employees are not certified. |
| |HR relies on referrals from current employees as background check for related parties. |
|Root Cause |Attendance is never taken during training. |
| |There are no consequences or incentives for employees to obtain their maintenance certificates. |
| |Maintenance managers are over-worked because their current employees are not qualified for supervisor roles. |
| |Maintenance relies completely on HR because of the shortage of time. |
| |High employee turnover due to noncompetitive salaries. |
| |Shortage of qualified job applicants is forcing HR to rely on referrals from current employees to seek out new |
| |talent. |
|Conclusion |HR is unable to attract high quality workers because the wages are not competitive to the industry. |
| |There is a lack of controls over training requirements and certifications because of high employee turnover ratio. |
| |The lack of qualified employees is preventing managers from delegating supervisor duties. |
|Recommendations |Make training attendance mandatory. (Preventative) |
| |Provide incentives to employees for obtaining their certificates. |
| |Offer competitive rates. |
| |Implement a qualification test to assure a minimum level of aptitude. (Preventative) | Appendix A

SWOT Analysis

|Strengths: |Weaknesses: |
|Industry Leader: Industry-leading pharmaceutical company with |Quality of Work: |
|over $2 billion in sales in 1982. |Unsatisfactory: Complaints have been filed stating that the work |
| |done by the maintenance department has been unsatisfactory. |
|Technology: Farma uses extensive computerized technology in an |Rework: As a result, numerous jobs have to be repeated at |
|effort to prevent errors and increase efficiency. |additional cost to company of $250,000 this past year. |
| |Control over Charges: |
|Proactive Management: Management listens to input from staff and |Inconsistent Pricing: Same jobs are occasionally billed at |
|follows up on complaints with an audit of concerned area to |different labor rates and material prices. |
|remedy situation and streamline company to greater efficiency. |Work-Order Report: Work-Order Report only indicates total dollar |
| |amounts charged, neither labor hours nor materials, so no |
|In-house Research: Own large research center devoted to |reasonableness test can be performed without significant |
|innovative work so company can evolve into the future. |additional documentation. |
| |Estimate v. Actual: Significant variances occurred between |
|Independent Maintenance: Having well-staffed in-house maintenance|estimates and the actual cost, always to disadvantage of the |
|staff means significant less waiting for emergency and routine |user. |
|repairs. |No Explanation: Although a procedure has been established for |
| |explaining variances over $500, this has not yet been |
|Availability: Maintenance staff dedicated entirely to non-routine|implemented, leaving $50,000 in variances unexplained. |
|work should likely lead to available repairmen always on call. |Oversight: |
| |Timecards: Workers independently fill out time cards manually |
| |with no oversight or control as to hours worked and for what job.|
| |Reasonableness: Little or no hours were reported on 70% of the |
| |scheduled “routine” work orders for 1991 and 1992, while another |
| |15 % had estimates twice as high as the actual hours. |
| |Approval: User departments failed to approve work orders after |
| |performance of repairs, signaling work done to satisfaction, and |
| |maintenance foreman would instead sign for user departments. |
| |Work Scheduling: |
| |Backlog: No system recognized for identifying and resolving large|
| |backlogs of work. |
| |Priority: Maintenance groups substitute routine jobs in place of |
| |nonroutine jobs and vice versa with no explanation. |
| |Policy: No policy to dictate how jobs must be classified and |
| |scheduled. |
Appendix A - Continued
SWOT Analysis

|Threats: |Opportunities: |
| | |
|Competition: Competitors in the industry could develop better |Independence: Company can be almost entirely independent upon |
|product that will lead to obsolescence of Farma’s products. |outside vendors for maintenance of machinery and facilities. |
| | |
|Loss of Patents: Farma’s sales are reliant upon patents on drugs |Management Support: Active support from management in discovering|
|created/research done, with a finite life on those patents |and carrying out improvements. |
|expiring soon. | |
| |Audit Reputation: Has ability to enhance the reputation of the |
|Wasted Resources: Organization and independent departments could |Internal Audit Department. |
|be overcharged for maintenance and wasting funds over more worthy| |
|endeavors. |Increased Efficiency: Improved scheduling system and additional |
| |oversight to maximize value and prevent backlogs. |
|Complacency: Lack of direct competition to maintenance could lead| |
|to complacency on the job, and deteriorating performance and | |
|questionable actions. | |
| | |
| | |

Appendix B
Analysis of Why Selected the SMART Objective and Targets for the Department

I. Current SMART Objectives and Targets: At this time the Maintenance Department does not have any SMART Objectives or Targets.

II. Suggested SMART Objectives and Targets: The following are suggested SMART Objectives and Targets that should be measured for this Department:

A Estimates: In order to accurately manage the department budgets, maintenance job estimates should be accurate within 5% of the completed job’s actual costs.

B. Rework: It is important that the job is done correctly and with high quality materials the first time, in order to eliminate the costs of rework.

C. Billing: In order for the department to reduce billing discrepancies, they must use the same labor rates and materials charges for each maintenance job.

D. Internal Costs: To justify the internal Maintenance Department as the sole source for maintenance work, internal costs must be less than outside vendors.

E. Job Classification: In order to reduce the backlog of pending work orders, work orders must be correctly classified as “routine” or “non- routine.” The classification may not be changed without written justification.

F. Time Cards: In order to verify the hours worked on each maintenance job, the hours recorded on the MWO must equal the hours recorded on the employee’s time card for that particular time period.

Appendix C
Audit Process

I. Process under Audit: The following is the list of the procedures for rework:

A. Rework: Maintenance workers are required to perform rework when requestors are not satisfied. 1. Rework Request: Upon the dissatisfaction from maintenance performance, Employee files a Maintenance Work Order (MWO) form indicating description of the work, date required, location, and cost centers to be charged. 2. Rework Order Approval: Maintenance management review and approve rework request order. a. Estimates: Maintenance management creates an estimate for rework. 3. Rework Schedule: Maintenance management schedules maintenance worker to perform the work. a. Rework Execution: Maintenance employee completes the rework. 4. Employee Timesheet: Employees records time spend on job on the MWO (no independent verification) a. Data process: Computer applies standard rate to employee reported time and adds material estimates. 5. Department Invoiced: An invoice is printed from the computer that shows the total cost for the job. a. Department Review: Invoice that shows the total cost is signed by department manager who requested the rework. 6. Cost Allocation: Accounting allocates the cost to the department in the ledger.

Summary Workpaper:

|Costs of Rework |
|MRO # |
|Audit Objective |Risks in Area Under Audit |Existing Controls to |Types of Evidence |Audit Steps |
| | |Mitigate Risks | | |
|Rework: To determine reasons|Unskilled employees |None |Documentation: |Interview: Interview the managers of the departments that requested |
|for rework and the costs of |Use of inferior materials | |Original and Rework MWOs for a 6|rework to find out the problems they had with the original repairs. |
|rework to the organization. |Maintenance workers taking | |month period |Interview: Interview the head of maintenance to find out why he thinks |
| |shortcuts and not following | |Listing of projects |so many jobs need to be redone. |
| |maintenance procedures | |Listing of vendors |Interview: Interview maintenance workers to determine if there are |
| |Fraud by workers to get | |Payroll records |issues with quality of materials. |
| |overtime | |Observation |Walkthrough: Perform walkthroughs for several projects that needed to |
| |Receiving kickbacks | |Inquiry |be reworked for original work and rework to see that the correct labor |
| | | |Analysis |and material costs were billed to the department. |
| | | |Confirmation |Analysis: Obtain listing of all rework projects for six months listing |
| | | |Walkthrough |reasons for rework, who performed the original work and the cost of the|
| | | |Examine |rework . |
| | | | | |
Appendix C - Continued
Audit Process

B. Estimating/Billing Jobs: The Maintenance Group charges all users in the four locations for all operating expenses on a job cost basis. 1. Maintenance Work Request: Maintenance Group receives Maintenance Work Order (MWO) from employee requesting work to be performed. 2. Estimate: Maintenance Group generates an estimate for the work using standard quantities and costs in the computer database. a. Communication: Maintenance Group does not communicate the estimate information to the requester. 3. Execution: Maintenance Group schedules and executes requested work. a. Approval Procedure: Maintenance Group gives MWO back to the Department Supervisor for signature and approval of the completed job. b. Approval Practice: Often the maintenance foreman signs for both maintenance and the user department; the requester never approves the completed job. 4. Labor: Employees record time spent on the job as well as estimated costs of materials used on the MWO form. a. Timecards: Employees record their daily hours on a timecards that are not verified by a supervisor. 5. Cost Processing: The computer processes the MWO and timecard information. a. Hours: The computer takes the timecard hours and adds additional standard times for transportation, etc. b. Materials: The computer adds the estimated cost of materials. 6. Cost Allocation: The accounting department enters the data from the computer to charge the requester. a. Expense Ledger: A month-end expense ledger showing only the total cost per job is mailed to the cost center/department.

Summary Workpaper:
|Variance Between Estimate and Actual |
|Type of Job |
|Audit Objective |Risks in Area Under Audit |Existing Controls to |Types of Evidence |Audit Steps |
| | |Mitigate Risks | | |
|Variances: To determine |Overcharging |Variances between estimate |Documentation: |Interview: Interview the foreman as to the process he uses to determine |
|how estimates are |Undercharging |and actuals which are |Standard Cost documents used|estimates. |
|developed for jobs and |Using false estimates |greater than $500 should be |to set prices |Examine: Examine and review documentation showing how estimates are |
|why similar jobs are |Charging different amounts for |investigated and explained. |Documents used to set hourly|calculated through the computer system, including the use of standard |
|billed at different |the same tasks | |rates |costs. |
|prices. |Kickbacks relating to raw |(Not working) |Invoices for similar jobs |Walkthrough: For the estimates, take a sample of estimates for the same |
| |materials purchased | |Original costs for materials|type of jobs sent to departments and walk through how the estimates were |
| |Collusive fraud between | |(Purchasing reports) |made for both parts and labor. |
| |Maintenance Group and certain | |Employee time sheets |Walkthrough: For the billed costs, compare amount billed for material and|
| |departments or requesters | |Inquiry |labor for a sample of similar jobs noting reasons for any differences. |
| |Estimates aren’t given to | |Observation |Recalculate: Recalculate total costs on MWOs to make sure unit costs are |
| |requesters | |Recalculation |being multiplied correctly to get totals for each job. |
| |Standards are outdated and | |Reperformance |Analyze: Analyze the standard costs currently used as the basis for |
| |unrealistic | |Analytical Review |calculating job costs and compare them against actual average material |
| |Timecards not verified by | | |costs, actual average hours per type of task, and industry standards. |
| |supervisors | | |Summary of Work: Take a sample of similar jobs and create a work paper |
| |Timecards don’t reflect actual | | |noting reasons for cost variances between estimates, actual costs for |
| |time spent on each job | | |similar jobs. |

Appendix C - Continued
Audit Process

C. Scheduling Jobs: The Maintenance Group schedules routine and nonroutine jobs through a combination of manual and automatic processes. 1. Maintenance Work Request: Maintenance Group receives Maintenance Work Order (MWO) from requester. 2. Job Scheduled: Maintenance Group schedules the requested work. a. Routine Jobs: Routine jobs are scheduled by the computer system. b. Nonroutine Jobs: Nonroutine jobs are scheduled upon request within the time frame available when routine jobs are not undertaken. i. Availability Procedure: There should always be time for non-routine jobs, because several workers are solely devoted to nonroutine jobs (not working in practice). ii. Availability Practice: Workers designated solely for nonroutine work regularly perform routine work as well. 3. Substitutions: Maintenance Group management can substitute routine jobs for nonroutine jobs and vice versa for convenience. a. Emergencies: Emergency work orders are often substituted for routine jobs, but are reported as routine jobs with no explanation given.

|Backlog of Routine/Nonroutine Jobs |
|MWO# |
|Audit Objective |Risk in Area Under Audit |Existing Controls to Mitigate|Types of Evidence |Audit Steps |
| | |Risks | | |
|Backlog: To determine the |Fraud by maintenance workers and|None |Documentation: |Inquiry: Interview foreman and maintenance workers for their |
|root cause for the |foreman to earn higher wages and| |Work-Order Forms |perceived reasons for the backlog. |
|maintenance backlogs for |OT hours | |Time Cards |Walkthrough: Go through process and procedure for initial |
|routine and non-routine |Lack of communication between | |Payroll Report |scheduling of jobs between routine and non-routine jobs and |
|jobs. |maintenance teams | |Scheduling Documents |substitution between routine and nonroutine work. |
| |Lack of training/expertise | |Pending Work Orders |Review: Review documents (Work-Order Forms and Time Cards) to |
| |Lacking proper procedures | |Bill of Ladings |compare estimated versus actual labor hours for routine and |
| |Poor quality materials | |Vendor List |nonroutine jobs to see if the number of hours needed for each job|
| |Foreman avoiding procedures | |Rework request forms |is under estimated causing there not to be enough labor hours |
| |Possibly understaffed | |Inquiry |left to do other jobs resulting in the backlog. |
| |Excessive and non-budgeted time | |Walkthrough |Test of Reasonableness: Estimate the number of labor hours |
| |required for rework jobs | |Observation |available and the number needed in a period to determine if the |
| | | |Analytical Review |backlog is because of the department being understaffed or doing |
| | | | |too much rework etc. |
| | | | |Analysis: Examine the backlog list, work order documents and work|
| | | | |schedules to create a pending work order aging report, |
| | | | |determining which types of jobs are being delayed. |
| | | | |Summary of Work: Create a summary work paper noting reasons for |
| | | | |baglogs. |
Appendix C - Continued
Audit Process

D. Employee Hiring/Training: HR is responsible for assuring that maintenance managers hire qualified employees and that they are properly trained on the job. 1. Job Application: HR review job application submission to select those that are qualified for the job. a. Work experience: All workers must have some form of work experience. 2. Interview: Management and HR conducts interview with candidates. 3. Background check: HR performs background check on candidates. 4. Job offer: An offer is made to the potential candidate. 5. Employee Development: Hired employees are expected to complete training monthly, and obtain certification within a year.

Summary Workpaper:
|Employee Name |Years of Experience |Number of Rework Jobs |Hours of Training |Cost of Rework |
| | | | | |

Appendix C - Continued
Audit Process

|Audit Process - Continued |
|Audit Objective |Risks in Area Under Audit |Existing Controls to Mitigate|Types of Evidence |Audit Steps |
| | |Risks | | |
|Qualifications: To determine|Unqualified new hires |None |Inquiry |Interview: Interview HR to determine hiring process and training |
|if HR is hiring qualified |Lack of certifications | |Documentation: |programs for maintenance workers. |
|maintenance employees. |No training or personal | |Certifications |Walkthroughs: Perform a new hire background check walkthrough with HR |
| |development programs | |Training attendance logs |personnel to document procedures. |
| |Low employee morale | |New Machinery purchase |Review: Review maintenance employee job descriptions and compare their|
| |Unethical employees | |reports |qualifications to the jobs they are performing. |
| |High Turnover | |Resumes of hired employees |Confirmation: Confirm employees’ external credentials listed on their |
| |Overworked/ Understaffed | |Job descriptions |applications for employment. |
| |Lack of leadership | |Written procedure for |Interview: Interview maintenance managers to obtain understanding of |
| |Lack of incentives | |hiring process |how managers evaluate current employees and potential new hires. |
| |New machinery without training | |Annual performance reviews |Review: Obtain the complaints file for rework and determine which |
| |for it | |Rework request forms |maintenance workers are performing work that needs to redone.. |
| | | |Incidence Reports |Analysis: Analyze maintenance employee turnover ratio and determine |
| | | |Observation |why they have left. |
| | | |Analysis |Examine: Examine annual performance reviews for employees with highest|
| | | |Walkthroughs |rework labor hours. |
| | | | |Summary of Work: Create a summary work paper noting employee, years of|
| | | | |experience, number of rework jobs, hours of training, and cost of |
| | | | |rework. |