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Internal and Governmental Financial Auditing and Operational Auditing

Internal and Governmental Financial Auditing and Operational Auditing. Chapter 25. Learning Objective 1. Explain the role of internal auditors in financial auditing. Internal Auditing. It is an independent, objective assurance and consulting activity designed to add value

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Internal and Governmental Financial Auditing and Operational Auditing

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  1. Internal and GovernmentalFinancial Auditing andOperational Auditing Chapter 25

  2. Learning Objective 1 Explain the role of internal auditors in financial auditing.

  3. 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.

  4. Institute of Internal Auditors Ethical Principles Integrity Confidentiality Objectivity Competency

  5. Relationship of Internaland External Auditors Differences The external auditor is responsible to financial statement users. The internal auditor is responsible to management.

  6. Relationship of Internaland External Auditors Similarities Competency Methodology Objectivity Audit risk model

  7. Learning Objective 2 Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act.

  8. 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.”

  9. Governmental Financial Auditing The Yellow Book standards are often called generally accepted government auditing standards (GAGAS or GAS).

  10. Financial Audit and Reporting Requirements – Yellow Book • Materiality and significance • Quality control • Compliance auditing • Reporting • Working papers

  11. Audit and Reporting – Single AuditAct 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.

  12. Audit and Reporting – Single AuditAct 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.

  13. 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.

  14. 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.

  15. 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

  16. 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

  17. Operational Auditing The purpose of operational auditing is to determine the efficiency and effectiveness of any part of an organization.

  18. Learning Objective 3 Distinguish operational auditing from financial auditing.

  19. Differences between Operationaland Financial Auditing Purpose of the audit Distribution of the reports Inclusion of nonfinancial areas

  20. Learning Objective 4 Provide an overview of operational audits.

  21. Effectiveness Versus Efficiency Effectiveness refers to the accomplishment of objectives. Efficiency refers to the resources used to accomplish those objectives.

  22. Effectiveness Versus Efficiency Types of Inefficiency Example Acquisition of goods and services is excessively 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.

  23. Relationship between OperationalAuditing and Internal Controls Reliability of financial reporting Efficiency and effectiveness of operations Compliance with applicable laws and regulations

  24. Types of Operational Audits Functional Organizational Special assignments

  25. Who PerformsOperational Audits Internal auditors Government auditors CPA firms

  26. Independence and Competence of Operational Auditors The two most important qualities for an operational auditor are: Independence Competence

  27. Learning Objective 5 Plan and perform an operational audit.

  28. Criteria for Evaluating Efficiency and Effectiveness Were all plant layoutsapproved 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?

  29. 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 newmaterials to the production floor? Does layout facilitate the production of finished goods?

  30. 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?

  31. Sources of Criteria Historical performance Benchmarking Engineers standards Discussion and agreement

  32. Phases in Operational Auditing Planning Evidence accumulation and evaluation Reporting and follow-up

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

  34. Evidence Accumulationand Evaluation • Documentation • Client • Observation

  35. Reporting Follow-up • Report usually sent to management • Tailored reports • Follow-up on recommendations • with management

  36. Examples of OperationalAudit 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

  37. End of Chapter 25

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