Addthis Arens Chapter26

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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

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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.

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Institute of Internal Auditors

Ethical Principles

_{Confidentiality} _Objectivity

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Institute of Internal Auditors

Rules of Conduct

_Integrity

_{Confidentiality} _Objectivity

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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

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Relationship of Internal and

External Auditors

_Competency

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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.

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Governmental Financial

Auditing

The Yellow Book standards are often called generally accepted government auditing

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Financial Audit and Reporting

Requirements – Yellow Book

_{Compliance auditing}

_{Materiality and significance}

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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 office of Management and Budget issued a revised Circular A-133, Audits of States,

Local Governments, and Non-Profit

Organizations, to provide administrative guidance for implementing the

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Audit Requirements

The audit should be in accordance with generally accepted government auditing standards (GAGAS).

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Audit Requirements

The auditor should determine whether the client had complied with the laws, regulations, and the provisions of contracts or grant agreements

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Reporting Requirements

_{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

_{An opinion on whether the financial}

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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

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Operational Auditing

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Learning Objective 3

Distinguish operational auditing

from financial auditing.

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Differences Between Operational

and Financial Auditing

_{Distribution of the reports}

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Learning Objective 4

Provide an overview of

operational audits.

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 _{Effectiveness}_{refers to the accomplishment} of objectives

 _Efficiency _{is defined as reducing costs} without reducing effectiveness

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Types of 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

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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

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Relationship Between Operational

Auditing and Internal Controls

_{Reliability of financial reporting}

_{Efficiency and effectiveness of operations}

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Types of Operational Audits

_Functional

_{Organizational}

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_{CPA firms}

_{Government auditors} _{Internal auditors}

Who Performs Operational

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The two most important qualities for an operational auditor are:

Independence and Competence

of Operational Auditors

_Independence

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Learning Objective 5

Plan and perform an

operational audit.

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Specific Criteria

_{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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Specific Criteria

_{Is each piece of equipment operating} at least 60 percent of capacity for

three months or more each year?

_{Does layout facilitate the movement of} new materials to the production floor?

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Specific Criteria

_{Does layout facilitate the movement of} finished goods to distribution centers?

_{Does the plant layout effectively use} existing equipment?

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Sources of Criteria

_{Historical performance}

_Benchmarking

_{Engineered standards}

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Phases in Operational Auditing

_Planning

_{Evidence accumulation and evaluation}

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Planning

_Staffing

_{Understand internal control} _{Background information}

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Evidence Accumulation

and Evaluation

_{Documentation}

_{Client inquiry}

_{Analytical procedures}

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Reporting and Follow Up

1. In operational audits, the report is usually sent only to management Two major differences in operational and financial auditing reports:

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Examples of Operational

Audit Findings

_{Outside janitorial firm saves $160,000}

_{Use the right tool}

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