OPERATIONAL

OVERVIEW
LEARNING OBJECTIVES:
 Explain clearly the definition, role,
and practices of modern internal
auditing in general and the evolving
world of operational auditing in
particular.
 Develop the value of the conduct of
operations audit and internal audition
standards as a means of giving
answers to problems.
RESPONSIBILITY OF INTERNAL AND EXTERNAL AUDITOR

INTERNAL AUDITOR EXTERNAL AUDITOR

 Possess work competence

- responsible and objectivity - responsible
to the  Follow similar audit to the users of
management methodology financial
and the  Consider risk and statements
board materiality in the extent
of test and evaluating
result decisions.
 HOW ARE EXTERNAL AUDITORS RELATED TO INTERNAL
AUDITORS?

 External auditors rely on internal auditors when using the audit risk model to
assess control.

Internal Auditors are considered effective if:

a. Independent of the operating units being evaluated
b. Competent and well-trained
c. Have performed relevant audit tests of the internal control and financial
statements.

 Auditing standard permit the external auditor to use the internal auditor for
direct assistance on the audit.
 INTERNAL AUDITING

DEFINITION:
An independent, objective assurance and consulting activity designed to
add value and improve an organization’s operations.

PURPOSE:
To help an organization accomplish its objectives by bringing systematic,
disciplined approach, to evaluate and improve the effectiveness of risk
management, control, and governance processes.
 DEFINITION OF TERMS
TERM DEFINITION
Independence • the position of internal audit within the
organization's hierarchy.
• internal audit should not be under the control of
those they audit.
Objectivity • the auditors’ frame of mind and their ability to do
their tasks without bias, agenda, and no other
motive that to find the truth and communicate it
accurately and on time.
• ability to maintain healthy professional and social
relationship with others in the organization.
Assurance • the auditor’s ability to give confidence and make
statements regarding the condition of matters
within the organization.
• synonymous to “compliance”
 TERM DEFINITION
Consulting • giving advice to management and the board, and
engaging in activities that the organization resolve
distressing business issues.
• relates to special project that auditors do their work
on.
• relates to the way auditors do their work.
Help an organization • Control-based auditing.
accomplish its • Internal auditors must first identify the relevant
objectives business objectives then do their work in ways that
help the organization achieve its objectives by
properly responding to the risk that threaten these
objectives.
By bringing • The approach followed when performing the work
systematic, enclosed in the standards, the Practice Guides and
discipline approach Practice Advisory.
 TERM DEFINITION
To evaluate and • Auditors not only evaluate but also help improve the
improve effectiveness organization’s ability to achieve the goals and
objective related to:
a. Risk Management- identification, measurement,
assessment and response to risk.
b. Control- activities that mitigate relevant risks and
helps the organization avoid surprises.
c. Governance processes- relates to ethical behavior
by directors and others charged with the creation
and preservation of wealth for all stakeholders.

“…improve an • Checking processes to ensure control risk are

organization’s performed according to procedure documentation
operations” and looking over the other types of possible risks.
 OPERATIONS AUDITING
DEFINITION:
A future-oriented, independent, systematic, and business focused
evaluation of management, and the organization’s activities controlled by the
management and third parties.

PURPOSE:
To improve organizational profitability and the attainment of
organizational objectives.

ACTIVITIES INVOLVED:
 Evaluation of management’s performance.
 Verify a variety of qualitative aspects of the organization &
activities.
 Concerned with the structure of the organization.
 Deal with efficiency and effectiveness of organization.
 OPERATIONAL AUDITING AND FINANCIAL AUDITING
OPERATIONAL FINANCIAL
Purpose of Audit
-emphasize effectiveness and efficiency -emphasizes correct recording of
of internal control. historical information.
- future-oriented - past-oriented
Distribution of Report
- intended for the management. - distributed to external users of FS.
- report vary depending from audit to - report requires well-defined structure
audit due to limited distribution and and wording due to widespread
diversified nature of audit for E&E. distribution.
Inclusion of Non-Financial Areas
-covers any aspect of efficiency and -limited to matters directly affecting
effectiveness in the organization. fairness of FS presentation.
 EFFECTIVENESS VS EFFICIENCY

Effectiveness Efficiency
-refers to the accomplishment of -refers to determining the
objectives resources used to achieve these
objectives.
- Reducing costs without
reducing effectiveness
 CRITERIA FOR EVALUATING
EFFICIENCY AND EFFECTIVENESS

I. Adequate Approach Applicable for Experienced and Well-Trained auditors

Auditors could define the objectives as determining whether some aspects

of the entity could be made more effective and efficient, and recommending
improvements.

II. SPECIFIC CRITERIA:

Varies and identified before starting an operational audit.

 SOURCES OF CRITERIA
to develop specific evaluation criteria:
A. Historical • Criteria is based on actual result from prior periods.
Performance • Easy to derive but does not provide much insight into how
well/poor the results are compared to what they could be.
B. • Using operating results of entities within or outside the
Benchmarking client’s organization as criteria.
• Benchmarking data are often available through industry
groups and governmental regulatory agencies.
C. Engineered • Criteria is based on engineered standard.
Standards • Often time consuming and costly to develop requiring
considerable expertise but it may worth the cost

D. Discussion • Discussion and Agreement involving the client’s

and Agreement management, operational auditor, and the entity or person
to whom the findings will be reported.