Internal and Governmental Financial Auditing and Operational Auditing
Transcript of Internal and Governmental Financial Auditing and Operational Auditing
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5
Internal and Governmental Financial Auditing
and Operational Auditing
Chapter 26
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 2
Learning Objective 1
Explain the role of internal auditors in financial auditing.
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Internal Auditing
Internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization’s operations. Risk Management Controls Governance Processes
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Internal Auditing
Provide value through improved operational effectiveness while performing traditional
responsibilities.
Reviewing management information
Ensuring compliance
Safeguarding assets
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Institute of Internal Auditors Ethical Principles
Integrity
Confidentiality Competence
Objectivity
Ethical
Principles
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Institute of Internal Auditors Rules of Conduct
Integrity
Confidentiality Competency
Objectivity
Rules
of
Conduct
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Relationship of Internal and External Auditors
The external auditor is responsible to financial statement users
The internal auditor is responsible to management
Both must be competent, objective, use a similar methodology, and consider risk and materiality
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Learning Objective 2
Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act
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Governmental Financial Auditing
The primary source of authoritative literature for performance of government audits is Government Auditing Standards, which is issued by the GAO.
Because of the color of the cover, it is usually referred to as the “Yellow Book.”
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Governmental Financial Auditing
The Yellow Book standards are often called generally accepted government auditing standards (GAGAS).
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Financial Audit and Reporting Requirements – Yellow Book
Compliance auditing
Financial Auditing Standards of the Yellow Book
Reporting
Materiality and
significance
Consistent with GAAS/ Provide additional guidance…
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Audit and Reporting – Single Audit Act and OMB Circular A-133
The threshold for requiring a single audit is $500,000.
The Single Audit Act and OMB Circular A-133 contain requirements for the scope of the audit.
Legal
Compliance
Internal Control Risk
Compliance with GAGAS
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An opinion on …
Legal
Compliance
Internal controls
Statements in accordance
with GAAP
Reporting Requirements
Schedule of federal awards
A report on …
Findings and Questioned
costs
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Learning Objective 3
Distinguish operational auditing from financial auditing.
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Operational Auditing
The purpose of operational auditing is to determine the effectiveness or efficiency
of any part of an organization
Financial Auditing emphasizes whether historical information was correctly recorded while operational auditing
emphasizes effectiveness and efficiency
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Learning Objective 4
Provide an overview of operational audits.
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Effectiveness refers to accomplishing objectives
Efficiency is defined as reducing cost without reducing effectiveness
Effectiveness Versus Efficiency
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Inefficiency Example
Acquisition of goods and services is too costly
Bids for purchases of materials are not required
Raw materials are not available when needed
An assembly line was shut down for lack of materials
A duplication of effort by employees exists
Production and accounting keep identical records
Effectiveness Versus Efficiency
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Work is done that serves no purpose
Vendors’ invoices and receiving reports are filed without being used
There are too many employees
Office work could be done with one less assistant
Effectiveness Versus Efficiency
Inefficiency Example
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Relationship Between Operational Auditing and Internal Controls
Reliability of financial reporting Efficiency and effectiveness of operations
Compliance with applicable laws and regulations
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Types of Operational Audits
Special assignments
Functional
Organizational
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Who Performs Operational Audits
CPA firms
Internal auditors
Government auditors
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The two most important qualities for an operational auditor
Independence and Competence of Operational Auditors
Independence Competence
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Learning Objective 5
Plan and perform an operational audit.
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Specific Criteria
Sources of criteria include: Historical performance Benchmarking Engineered standards Discussion and agreement
More specific criteria are usually desirable before starting an operational audit
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Phases in Operational Auditing
Evidence gathering and
evaluation
Planning Reporting
and follow-up
Staffing Scope Controls
Eight types Documentation
Scope Findings Recommendations
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End of Chapter 26