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Internal and Governmental

Financial Auditing
and Operational Auditing
Chapter 26

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

5-5

Learning Objective 1
Explain the role of internal auditors in
financial auditing.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Auditing 14/e.Internal Auditing Internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization’s operations. Arens/Elder/Beasley 26 .3 . Risk Management Controls Governance Processes ©2012 Prentice Hall Business Publishing.

4 . Auditing 14/e. Reviewing management information Safeguarding assets Ensuring compliance ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 .Internal Auditing Provide value through improved operational effectiveness while performing traditional responsibilities.

Arens/Elder/Beasley 26 . Auditing 14/e.5 .Institute of Internal Auditors Ethical Principles Integrity Confidentiality Ethical Principles Competence Objectivity ©2012 Prentice Hall Business Publishing.

6 .Institute of Internal Auditors Rules of Conduct Integrity Confidentiality Rules of Conduct Competency Objectivity ©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 26 .

use a similar methodology. Arens/Elder/Beasley 26 . and consider risk and materiality ©2012 Prentice Hall Business Publishing. objective.Relationship of Internal and External Auditors The internal auditor is responsible to management The external auditor is responsible to financial statement users Both must be competent. Auditing 14/e.7 .

Arens/Elder/Beasley 26 . Auditing 14/e.8 .Learning Objective 2 Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act ©2012 Prentice Hall Business Publishing.

which is issued by the GAO. it is usually referred to as the “Yellow Book.” ©2012 Prentice Hall Business Publishing.Governmental Financial Auditing The primary source of authoritative literature for performance of government audits is Government Auditing Standards.9 . Because of the color of the cover. Auditing 14/e. Arens/Elder/Beasley 26 .

Arens/Elder/Beasley 26 . Auditing 14/e.10 .Governmental Financial Auditing The Yellow Book standards are often called generally accepted government auditing standards (GAGAS). ©2012 Prentice Hall Business Publishing.

Arens/Elder/Beasley 26 . Auditing 14/e.Financial Audit and Reporting Requirements – Yellow Book Financial Auditing Standards of the Yellow Book Consistent with GAAS/ Provide additional guidance… Materiality and significance Compliance auditing Reporting ©2012 Prentice Hall Business Publishing.11 .

12 . The Single Audit Act and OMB Circular A-133 contain requirements for the scope of the audi Legal Compliance Internal Control Risk Compliance with GAGAS ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 .Audit and Reporting – Single Audit Act and OMB Circular A-133 The threshold for requiring a single audit is $500. Auditing 14/e.

13 . Arens/Elder/Beasley Findings and Questioned costs 26 . Auditing 14/e.Reporting Requirements An opinion on … Statements in accordance with GAAP Schedule of federal awards A report on … Internal controls Legal Compliance ©2012 Prentice Hall Business Publishing.

14 . Auditing 14/e.Learning Objective 3 Distinguish operational auditing from financial auditing. ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 .

Auditing 14/e. Arens/Elder/Beasley 26 .15 .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 ©2012 Prentice Hall Business Publishing.

Arens/Elder/Beasley 26 . Auditing 14/e.16 .Learning Objective 4 Provide an overview of operational audits. ©2012 Prentice Hall Business Publishing.

Effectiveness Versus Efficiency Effectiveness refers to accomplishing objectives Efficiency is defined as reducing cost without reducing effectiveness ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 .17 . Auditing 14/e.

18 .Effectiveness Versus Efficiency Inefficiency Example Acquisition of goods andBids for purchases of services is too costly materials are not required Raw materials are not An assembly line was shu available when needed down for lack of materials A duplication of effort by employees exists Production and accountin keep identical records ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 . Auditing 14/e.

19 . Arens/Elder/Beasley 26 .Effectiveness Versus Efficiency Inefficiency Example Work is done that servesVendors’ invoices and no purpose receiving reports are filed without being used There are too many employees Office work could be done with one less assistant ©2012 Prentice Hall Business Publishing. Auditing 14/e.

Relationship Between Operational Auditing and Internal Controls Reliability of financial reporting Efficiency and effectiveness of operations Compliance with applicable laws and regulation ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 . Auditing 14/e.20 .

Types of Operational Audits Functional Organizational Special assignments ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 . Auditing 14/e.21 .

Auditing 14/e.22 . Arens/Elder/Beasley 26 .Who Performs Operational Audits Internal auditors Government auditors CPA firms ©2012 Prentice Hall Business Publishing.

23 .Independence and Competence of Operational Auditors The two most important qualities for an operational auditor Competence Independence ©2012 Prentice Hall Business Publishing. Arens/Elder/Beasley 26 . Auditing 14/e.

Arens/Elder/Beasley 26 .Learning Objective 5 Plan and perform an operational audit. Auditing 14/e. ©2012 Prentice Hall Business Publishing.24 .

25 .Specific Criteria More specific criteria are usually desirable before starting an operational audit Sources of criteria include: Historical performance Benchmarking Engineered standards Discussion and agreement ©2012 Prentice Hall Business Publishing. Auditing 14/e. Arens/Elder/Beasley 26 .

Arens/Elder/Beasley Reporting and follow-up Scope Findings Recommendations 26 . Auditing 14/e.Phases in Operational Auditing Planning Staffing Scope Controls Evidence gathering and evaluation Eight types Documentation ©2012 Prentice Hall Business Publishing.26 .

Arens/Elder/Beasley 5-5 . Auditing 14/e.End of Chapter 26 ©2012 Prentice Hall Business Publishing.