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Internal and Governmental Financial Auditing

and Operational Auditing

Chapter 26

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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