Internal and Governmental Financial Auditing and Operational Auditing

1. Internal and GovernmentalFinancial Auditingand Operational Auditing Chapter 26 محمد أبو طواحينة شاكر الغلاييني أحمد إسليم

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

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

4. Internal Auditing Provide value through improved operational effectiveness while performing traditional responsibilities. Reviewing management information Safeguarding assets Ensuring compliance

5. Institute of Internal Auditors Ethical Principles Integrity Ethical Principles Competence Confidentiality Objectivity

6. Institute of Internal Auditors Rules of Conduct Integrity Rules of Conduct Competency Confidentiality Objectivity

7. Relationship of Internal and External Auditors The internal auditor is responsible to management The external auditor is responsible to financial statement users Both must be competent, objective, use a similar methodology, and consider risk and materiality

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

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.”

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

11. Financial Audit and Reporting Requirements – Yellow Book Financial Auditing Standards of the Yellow Book Consistent with GAAS/ Provide additional guidance… Compliance auditing Materiality and significance Reporting

12. Audit and Reporting – Single AuditAct 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. Internal Control Risk Legal Compliance Compliance with GAGAS

13. Reporting Requirements An opinion on … Schedule of federal awards Statements in accordance with GAAP A report on … Findings and Questioned costs Legal Compliance Internal controls

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

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

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

17. Effectiveness Versus Efficiency Effectiveness refers to accomplishing objectives Efficiencyis defined as reducing cost without reducing effectiveness

18. Effectiveness Versus Efficiency 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

19. Effectiveness Versus Efficiency Inefficiency Example 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

20. Relationship Between OperationalAuditing and Internal Controls • Reliability of financial reporting • Efficiency and effectiveness of operations • Compliance with applicable laws and regulations

21. Types of Operational Audits Functional Organizational Special assignments

22. Who Performs Operational Audits Internal auditors Government auditors CPA firms

23. Independence and Competenceof Operational Auditors The two most important qualities for an operational auditor Independence Competence

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

25. Specific Criteria More specific criteria are usually desirable before starting an operational audit • Sources of criteria include: • Historical performance • Benchmarking • Engineered standards • Discussion and agreement

26. Phases in Operational Auditing Planning Evidence gathering and evaluation Reporting and follow-up • Eight types • Documentation • Staffing • Scope • Controls • Scope • Findings • Recommendations

27. End of Chapter 26