Ryan Sandel

Turner Gilreath
Cory Chapman

THE TYRONCO FOUNDATION

COSO

LSU Center for Internal Auditing

Published
By
The Institute of Internal Auditors, Inc.

Developed by:
Glenn E. Sumners
Sumners Audit Services

Not everything that can be counted counts, and not everything that counts can be
counted. Albert Einstein

Case #22
Revised: November 12, 2012

The Tyronco Foundation

The Tyronco Foundation operates worldwide to provide food and medicine to needy
individuals in third world countries. Thirteen countries currently receive assistance through
the program. The number of individuals that have benefited has increased from 407,000 in
1990 to over 721,000 in 2010. Data for current years is still being tabulated for annual
reporting. Contributions are received from foundations, agencies, governments and
individuals. Tyronco outsources the marketing and collection processes. The marketing
agency publicizes the benefits and collects the donations.
The bylaws require that 75% of the funds collected be distributed to directly benefit the
needy (benefit expenses). The administration expenses cannot exceed 25% of
contributions. The CEO has recently determined that distribution costs should be
reclassified from administrative expense to benefit costs since distribution is a benefit to the
needy.
Tyroncos marketing efforts highlight the guaranteed high percent payoff to the needy. The
governing agencies of several countries require that the attest auditors include the 75%
goal in the financial audit.
Background Information
The results of your preliminary work are outlined below:

Board-Audit Committee:
The 13 board members are prominent celebrities, politicians, and business people.
Bernie Lay serves as both the Chairman of the Board and CEO. Bernie was the
CFO for five years before being appointed as the CEO. The board members are
selected by the Chairman of the Board and approved by a majority of the Board.
The five-member audit committee includes the Chairman of the Board and four
members appointed by the Chairman for a three year term. The Board also includes
a nominating committee, a risk committee and a compensation committee.
The Board and the subcommittees meet for one day each quarter. The CFO is
responsible for the agenda and financial reports. THE Chief Audit Executive (CAE)
and the external audit partner share a one-hour slot on the agenda at each meeting.

Chief Executive Officer:

The CEO, Bernie Lay, has a military background and has established an autocratic
management style. He feels that this approach will develop a more efficient and
effective structure for a decentralized organization.
Chief Financial Officer:
Scott Z. Best, the CFO, previously served as the supervisor of accounts payable and
was promoted by the CEO. He was the manager in charge of the Tyronco account
when he worked for the attest auditors. He maintains a good working relationship
with Temple and Duncan, a small regional firm in Geneva.

Operating Management:
Each participating country has an operating manager selected by the CEO. The
managers report directly to the CFO.
Internal Audit:
Martha N. Cider, the Chief Audit Executive, served as the lead auditor on the
Tyronco engagement when she worked for Temple & Duncan. She was hired
because of her knowledge of the financial aspects of Tyronco. As part of a costcutting move she reduced the audit staff from 21 to 13 and cosources the
collections, payables, and purchasing audits to Temple & Duncan.
The reduction in staff was explained by increased usage of the data-mining
technology. Martha was in the MBA program with Bernie and Scott and is
considered a rising star in the organization.
Management requests from the CEO and CFO consume about 90% of available
audit time. The CEO feels that the auditors should be able to complete their audits
from the headquarters location by utilizing technology. He has reduced the travel
budget but significantly increased the budget for systems training and audit software.
The hiring focus is now on systems knowledge.

External Auditors:
Temple and Duncan (T&D) have been the low bidder the last three times the
organization has requested attest proposals. The external auditor proposals are
reviewed by the CFO who recommends a firm to the Audit Committee for approval.
Tyronco represents 60% of T&Ds audit revenues and 80% of their consulting
revenues.
Purchasing:
The purchasing function is decentralized with a purchasing agent located in each of
the 13 countries that qualify for food and non-prescription medicine. The VicePresident of Purchasing at headquarters has requested that the 13 purchasing
agents purchase 50% of all items from vendors located in the same country as the
recipients. The agents operate somewhat autonomously and can sole-source or
utilize competitive bids.
Local purchases are typically 20-30% higher than obtained through a competitive bid
process. The CEO supports this approach since he feels that it establishes good
relations with local government officials and business people.

Warehouse:
The receiving clerks and distribution managers report to the Purchasing Agent.
Inventory status reports are issued quarterly to the V.P. of Purchasing who prepares
a summary report for the CEO & CFO.
The quarterly purchasing reports from the purchasing agents to Headquarters are
provided on the following spreadsheet.
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Total

Vendor

Description

The primary headquarters control and review is a comparison of budget to actual.

Purchasing Agents are provided with a quarterly budget generally based on
demographics of the recipients. Adjustments are made to the budget based on
actual contributions received from countries, organizations, foundations, and
personal sponsors. The overall increase in purchases has been approximately 13%
per year but varied from a low of +7% to a high of +21% between countries.
The summary quarterly reports are approved by the country manager and forwarded
to the CFO with the quarterly financial statements for review and approval.
Requirements:
The audit programs that you will develop should have two sections to facilitate a top-down
audit approach:
1. Organization
COSO Evaluation
2. Purchasing
COSO Evaluation
This approach is suggested since the organizations evaluation of risk, controls, and
corporate governance is the foundation for the audit of the purchasing function.
Requirement #1:
Based on the above background, develop a COSO-based audit program. The audit
program should address the following COSO objectives as applicable:

Operational:
Effectiveness and efficiency of operations.
Financial:
Reliability of information.
Compliance:
Compliance with applicable laws and regulations.

The organization audit program should be classified to align with the five COSO
components:

Control Environment
Risk Assessment
Control Activities
Monitoring
Information and Communication

To provide a consistent framework for comparing solutions; please use the following
component subsections:
1. Control Environment

Integrity and ethical values

How do the employees and volunteers feel about working with
1. _____________________________________________________
Tyronco? Do they feel they "do good work" in the world?
_____________________________________________________
How do employees feel about the management of Tyronco? Do they feel that
2. _____________________________________________________
Bernie Lay, and others have the best interests of the charity in mind?
_____________________________________________________

Commitment to competence
Do the employees feel that the reduced travel time has impacted their ability to
1. _____________________________________________________
perform meaningful audits?
_____________________________________________________
Do the employees feel that the emphasis on systems knowledge as opposed to
2. _____________________________________________________
technical skills and field work has impacted their ability to perform complete audits??
_____________________________________________________

Board and Audit Committee

Bernie Lay is COTB and CEO. Does this affect the audit department's ability to
1. _____________________________________________________
perform complete audits??
_____________________________________________________
Has the CAE confirmed independence to the BOD??
2. _____________________________________________________

_____________________________________________________

Management philosophy and operating style

Does Bernie's authoritarianism get in the way of an independent audit group?
1. _____________________________________________________

_____________________________________________________
Has Martha's relationship with Bernie and Scott impacted her independence and objectivity?
2. _____________________________________________________

_____________________________________________________

Organization Structure
Why are attest auditors the same as the cosourced auditors? Lack of
1. _____________________________________________________
independence!!
_____________________________________________________
Does Bernie's status as Chairman and CEO lead to disincentivizing internal discussion
2. _____________________________________________________
and instead lead to a subordinate culture internally
_____________________________________________________

Assignment of authority and responsibility

The majority of Board members are selected and approved by Bernie Lay. This gives incentive
1. _____________________________________________________
the

to the board members to follow Lay no matter what.

_____________________________________________________
Power has been given to local purchasing agents generating a culuture ripe for
2. _____________________________________________________
corrupt practices
_____________________________________________________

Human resource policies and practices

Internal auditor and attest auditor functions are performed by the same group. This is a
1. _____________________________________________________
violation of independence and objectivity!
_____________________________________________________
Martha Cider has cut 8 souls from the audit staff.. a 38 percent reduction in the audit staff!
2. _____________________________________________________

_____________________________________________________
2. Risk Assessment

Company-wide objectives
How do we know that our marketing oursource is performing at expectations?
1. _____________________________________________________

_____________________________________________________
Why does managment feel the need to reclassify expenses, effectivily leaving
2. _____________________________________________________
them with extra money and poor people with less?
_____________________________________________________

Process-level objectives
Purchasing function ripe for corruption.. especially when there is a focus on "buying locally
1. _____________________________________________________
to establish relationships"
_____________________________________________________
Why is an establisment of relationships worth a 20%+ markup on food/medicine?
2. _____________________________________________________
The

The primary objective is to help as many in need persons as possible..

_____________________________________________________

Risk identification

Purchasing in country with local suppliers is ripe for corruption, especially consider that

1. _____________________________________________________
corruption index identifies poor countries as more likely to engage in such practices
_____________________________________________________
Why do we have people living in the countries?? Thats a HUGE liability given the variable
2. _____________________________________________________

nature
_____________________________________________________

Managing change
Purchaes have been increasing annually. Are the purchasing agents adequately equipped
1. _____________________________________________________
to handle the increased workload.
_____________________________________________________
Have the purchasing agents developed a continuity plan? If we lose one of the purchasing
2. _____________________________________________________
agents, can we ensure continuity of operations??
_____________________________________________________

3. Control Activities

Policies and procedures

Vendor auditing? How do we ensure our vendors are not ripping us off?
1. _____________________________________________________

_____________________________________________________
How do we ensure that aid delivered is going towards humanitarian causes rather than
2. _____________________________________________________
support local governments or terrorists?
_____________________________________________________

Segregation of duties
Why is Bernie chairman and CEO along with nominator of the BOD?
1. _____________________________________________________

_____________________________________________________
Scott Best was hired from Temple, and continues "good relationships". This constitutes a
2. _____________________________________________________
conflict of interest
_____________________________________________________

Periodic reconciliation
Do we reconcile goods purchased to aid delivered?
1. _____________________________________________________

_____________________________________________________
Do we reconcile dollars spend on goods to goods received?
2. _____________________________________________________

_____________________________________________________

Proper authorization
Is the person nominated for the Board by the CEO approved by the majority of the Board?
1. _____________________________________________________

_____________________________________________________
Are the quarterly reports for each country approved by each country manager?
2. _____________________________________________________

_____________________________________________________

Transactions recorded
How are purchases recorded?
1. _____________________________________________________

_____________________________________________________
How is aid deliverance recorded?
2. _____________________________________________________

_____________________________________________________
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Safeguarding assets
Who is authorized to disburse funds and who is responsible for independent review and
1. _____________________________________________________
verification?
_____________________________________________________
Where are goods purchased stored before distribution? Who has access to those facilities?
2. _____________________________________________________

_____________________________________________________
4. Information and Communication

Quality of information
When are contributions reported to administration to ensure accuracy of financial statements?
1. _____________________________________________________

_____________________________________________________
Do the internal auditors feel that they are able to accurately assess the control environment
2. _____________________________________________________
when they are not traveling to the sites?
_____________________________________________________

Effectiveness of communication
How are relationships with the local governments maintained?
1. _____________________________________________________

_____________________________________________________
How can we ensure that the reports given to the V.P. of purchasing accurately reflect the
2. _____________________________________________________
inventory status?
_____________________________________________________

5. Monitoring

On-going monitoring
Do the purchasing agents continually monitor the inventory status of the warehouses
1. _____________________________________________________
to ensure accuracy with regards to purchases
_____________________________________________________
Who ensures that 75% of benefits go to aid?
2. _____________________________________________________

_____________________________________________________

Evaluation process
How does the Board oversee the actions of the CEO?
1. _____________________________________________________

_____________________________________________________
How does the Board oversee the actions of the purchasing agents?
2. _____________________________________________________

_____________________________________________________

Reporting control and process deficiencies

Do reports from countries go through the same process
1. _____________________________________________________

_____________________________________________________
Do reports from other countries go through the same people
2. _____________________________________________________

_____________________________________________________
8

Change management process

Is there a business continuity plan in place?
1. _____________________________________________________

_____________________________________________________
Do we have a plan in place to deal with a revolution/rebellion in country?
2. _____________________________________________________

_____________________________________________________
Requirement #2:
Identify the five major risks in the Purchasing Department. List the controls you would
expect to find to mitigate the risks and the audit steps that would be utilized to ascertain
that the control mitigates the risk.
Purchasing
Risk
At Risk

Control

COSO
Classification

Audit Step

1.

Overpayment for
number of goods

Operational

Control Activites

reconcile goods in
inventory to market price of
goods

2.

Security in
warehouse

Operational

Control Activities

Is there biometric
identification?

3.

Misrepresentaton of
budget

Financial

Monitoring

ensure dollars spent in

country reconciles with
financial statements

Increases in
purchases do not
match increases in
aid needed

Operational

Control Environment

Overpayment for
quality of goods

Operational

Control Environment

Look at GDP of
countries economy.
There should be an
inverse relationship b/t
spending and GDP
Go to the warehouse
and make sure the food
is of high quality

4.

5.

Requirement #3:
List one or two audit steps that you would perform in each of the six listed sections:
Procurement Audit
1.

General:
Segregation of duties: Approver of PO cannot be recipient of goods
1. _____________________________________________________

_____________________________________________________
Three way match PO, Invoice, and MSA
2. _____________________________________________________

_____________________________________________________
2.

Requisitioning:
Ensure supplier has MSA in place
1. _____________________________________________________

_____________________________________________________
Ensure requisitions have appropriate approval
2. _____________________________________________________

_____________________________________________________
3.

Purchasing:
Check to make sure buyer has authorization for spending limit
1. _____________________________________________________

_____________________________________________________
Make sure seller is authorized.
2. _____________________________________________________

_____________________________________________________
4.

Receiving:
Match deliveries with Invoice
1. _____________________________________________________

_____________________________________________________
Ensure Invoice has authorization
2. _____________________________________________________

_____________________________________________________
5.

Invoice Processing:
Ensure invoice rates equal to rates in Master Service Agreements
1. _____________________________________________________

_____________________________________________________
2. _____________________________________________________
_____________________________________________________
6.

Accounts Payable, Encumbrances, or Obligations:

Ensure AP is cleared in a timely manner.
1. _____________________________________________________

_____________________________________________________
2. _____________________________________________________
_____________________________________________________
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Requirement #4:
List five major risks specifically related to Tyronco. What would be your five major areas of
concern as an internal auditor?
Corrupt Practices
1. ___________________________________________________________________

___________________________________________________________________
Independence of audit group
2. ___________________________________________________________________

___________________________________________________________________
Tone at the top
3. ___________________________________________________________________

___________________________________________________________________
Segregation of duties
4. ___________________________________________________________________

___________________________________________________________________
Safety of purchasing agents in foreign countries.
5. ___________________________________________________________________

___________________________________________________________________

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