Internal and Governmental Financial Auditing and ... Internal and Governmental Financial Auditing and

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  • ©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.

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 3

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 4

    Internal Auditing

    Provide value through improved operational effectiveness while performing traditional

    responsibilities.

    Reviewing management information

    Ensuring compliance

    Safeguarding assets

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 5

    Institute of Internal Auditors Ethical Principles

    Integrity

    Confidentiality Competence

    Objectivity

    Ethical

    Principles

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 6

    Institute of Internal Auditors Rules of Conduct

    Integrity

    Confidentiality Competency

    Objectivity

    Rules

    of

    Conduct

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 7

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 8

    Learning Objective 2

    Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 9

    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.”

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 10

    Governmental Financial Auditing

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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 11

    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…

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 12

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 13

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 14

    Learning Objective 3

    Distinguish operational auditing from financial auditing.

  • ©2012 Prentice Hall Business Publishing, 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, Auditing 14/e, Arens/Elder/Beasley 26 - 16

    Learning Objective 4

    Provide an overview of operational audits.

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 17

    Effectiveness refers to accomplishing objectives

    Efficiency is defined as reducing cost without reducing effectiveness

    Effectiveness Versus Efficiency

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 18

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 19

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 20

    Relationship Between Operational Auditing and Internal Controls

    Reliability of financial reporting Efficiency and effectiveness of operations

    Compliance with applicable laws and regulations

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 21

    Types of Operational Audits

    Special assignments

    Functional

    Organizational

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 22

    Who Performs Operational Audits

    CPA firms

    Internal auditors

    Government auditors

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 23

    The two most important qualities for an operational auditor

    Independence and Competence of Operational Auditors

    Independence Competence

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 24

    Learning Objective 5

    Plan and perform an operational audit.

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 25

    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

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 26

    Phases in Operational Auditing

    Evidence gathering and

    evaluation

    Planning Reporting

    and follow-up

    Staffing Scope Controls

    Eight types Documentation

    Scope Findings Recommendations

  • ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5 - 5

    End of Chapter 26