Internal and

Governmental
Financial Auditing and
Operational Auditing
Chapter 25

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 Learning Objective 1

Explain the role of internal

auditors in financial auditing.

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 Internal Auditing

It is an independent, objective assurance and

consulting activity designed to add value
and improve an organization’s operations.
It helps an organization accomplish its objectives
by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk
management, control, and governance processes.

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 Institute of Internal Auditors
Ethical Principles

Integrity Confidentiality

Objectivity Competency

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 Relationship of Internal
and External Auditors

The
The external
external auditor
auditor isis responsible
responsible
to
to financial
financial statement
statement users.
users.

The
The internal
internal auditor
auditor isis responsible
responsible
to
to management.
management.
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 Relationship of Internal
and External Auditors

Competency
Competency Methodology
Methodology

Objectivity
Objectivity Audit
Audit risk
risk model
model

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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
The primary
primary source
source of of authoritative
authoritative literature
literature
for
for performance
performance of of government
government audits
audits isis
Government
Government Auditing
Auditing Standards,
Standards,
which
which isis issued
issued by
by the
the GAO.
GAO.

Because
Because ofof the
the color
color of
of the
the cover,
cover, itit isis
usually
usually referred
referred to
to as
as the
the “Yellow
“Yellow Book.”
Book.”

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 Governmental Financial Auditing

The
TheYellow
Yellow Book
Book standards
standards are
are often
often called
called
generally
generally accepted
accepted government
government auditing
auditing
standards
standards (GAGAS
(GAGAS or or GAS).
GAS).

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 Financial Audit and Reporting
Requirements – Yellow Book


 Materiality
Materiality and
and significance
significance

 Quality
Quality control
control

 Compliance
Compliance auditing
auditing

 Reporting
Reporting

 Working
Working papers
papers

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 Audit and Reporting – Single Audit
Act and OMB Circular A-133

The threshold for requiring

a single audit was raised
from $100,000 to $300,000
to exempt many smaller
entities from single
audit requirements.

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 Audit and Reporting – Single Audit
Act and OMB Circular A-133

Statutory coverage of the single audit was

extended to not-for-profit organizations
as well as to state and local governments.
A risk-based approach is to be used in
selecting programs for testing.

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 Audit Requirements

The audit should be in accordance with generally

accepted government auditing standards (GAGAS).
The auditor must obtain an understanding of internal
control over federal programs sufficient to support a
low assessed level of control risk for major programs.

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 Audit Requirements

The auditor should determine whether the client

had complied with laws, regulations, and the
provisions of contracts or grant agreements
that may have a direct and material effect
on each of its major programs.

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 Reporting Requirements

 an opinion on whether the financial statements

are in accordance with GAAP, and an opinion
as to whether the schedule of federal awards
is presented fairly in all material respects in
relation to the financial statements as a whole

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 Reporting Requirements

 a report on internal control related to the

financial statements and major programs
 a report on compliance with laws,
regulations, and the provisions of
contracts or grant agreements
 a schedule of findings and questioned costs

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 Operational Auditing

The purpose of operational auditing is to

determine the efficiency and effectiveness
of any part of an organization.

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 Learning Objective 3

Distinguish operational auditing

from financial auditing.

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 Differences between
Operational
and Financial Auditing

Purpose of
the audit

Distribution of
the reports

Inclusion of
nonfinancial areas
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 Learning Objective 4

Provide an overview of
operational audits.

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 Effectiveness Versus Efficiency

Effectiveness refers to the

accomplishment of objectives.

Efficiency refers to the resources used

to accomplish those objectives.

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 Effectiveness Versus Efficiency

Types of
Example
Inefficiency
Acquisition of goods and Bids for purchases of
services is excessively costly. materials are not required.
Raw materials are not An assembly line was shut
available when needed. down for lack of materials.
A duplication of effort by Production and accounting
employees exists. keep identical records.

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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

Functional

Organizational

Special assignments

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 Who Performs
Operational Audits

Internal
auditors
Government
auditors
CPA firms

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 Independence and Competence
of Operational Auditors

The two most important qualities for

an operational auditor are:

Independence Competence

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 Learning Objective 5

Plan and perform an

operational audit.

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 Criteria for Evaluating
Efficiency and Effectiveness

Were all plant layouts approved by home office

engineering at the time of original design?
Has home office engineering done a reevaluation
study of plant layout in the past five years?

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 Criteria for Evaluating
Efficiency and Effectiveness

Is each piece of equipment operating

at 60% of capacity or more for
at least three months each year?
Does layout facilitate the movement of
new materials to the production floor?
Does layout facilitate the production
of finished goods?

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 Criteria for Evaluating
Efficiency and Effectiveness

Does layout facilitate the movement of

finished goods to distribution centers?
Does the plant layout effectively use
existing equipment?
Is the safety of employees endangered
by the plant layout?

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 Sources of Criteria

Historical performance
Benchmarking
Engineers standards
Discussion and agreement

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 Phases in Operational Auditing

Planning

Evidence accumulation and evaluation

Reporting and follow-up

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 Planning

• Scope of engagement
• Staffing
• Background information
• Understand internal control
• Decide on appropriate evidence

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 Evidence Accumulation
and Evaluation

• Documentation
• Client
• Observation

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 Reporting Follow-up

• Report usually sent to management

• Tailored reports
• Follow-up on recommendations
with management

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 Examples of Operational
Audit Findings

• Outside janitorial firm saves $160,000

• More timely credit memo processing
• Legislative auditors detect $1 million per year
insurance overcharge
• Use the right tool
• Computer programs save manual labor
• Timely depositing

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 End of Chapter 25

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