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AUDITING CHAPTER 19

AUDITING CHAPTER 19. Compliance & Internal Auditing By David N. Ricchiute. TOPICS. Compliance auditing Internal auditing. TYPES OF AUDITING. Objective Audit Type Standards. COMPLIANCE AUDITS: Government Entities. Also recipients of governmental financial assistance (SAS 74)

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AUDITING CHAPTER 19

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  1. AUDITINGCHAPTER 19 Compliance & Internal Auditing By David N. Ricchiute

  2. TOPICS • Compliance auditing • Internal auditing GBW 8th ed., Ch. 19

  3. TYPES OF AUDITING Objective Audit Type Standards GBW 8th ed., Ch. 19

  4. COMPLIANCE AUDITS: Government Entities Also recipients of governmental financial assistance (SAS 74) • Audit must conform to • GAAS • GAO standards • Single Audit Act GBW 8th ed., Ch. 19

  5. COMPLIANCE AUDITS: Other Examples Compliance with: • Minimum wage laws • Employee benefits programs • Commercial bank lending agreements • Special engagements • Hazardous waste trust fund • State-sponsored health insurance program GBW 8th ed., Ch. 19

  6. RESPONSIBILITIES UNDER GAAS • Responsibility for detecting violations of laws, regulations identical to responsibility for client error, fraud • Assess risk of violations creating material misstatements • Design procedures to detect anticipated violations GBW 8th ed., Ch. 19

  7. EFFECTS OF LAWS, REGULATIONS • Management responsible for identifying laws, regulations having direct, material effect on financial statement • Auditor designs procedures to detect violations GBW 8th ed., Ch. 19

  8. COMPLIANCE & INTERNAL CONTROL • Compliance audit requires auditor to • Understand internal controls • Assess control risk • Obtain knowledge about design, performance of internal control policies, procedures GBW 8th ed., Ch. 19

  9. GOVERNMENT AUDITING STANDARDS • Written by GAO • GAGAS • AICPA 10 GAAS • Standards related to • Independence & Quality control • Audit documentation • Legal, regulatory requirements GBW 8th ed., Ch. 19

  10. GOVERNMENT FINANCIAL AUDITS: Financial Statement Audits • Financial statement audits determine whether • Financial statements fairly presented • Entity complied with laws, regulations GBW 8th ed., Ch. 19

  11. GOVERNMENT FINANCIAL AUDITS: Financial-Related Audits • Financial-related audits determine whether • Financial reports, related items fairly presented • Financial information in accord with established, stated criteria • Entity adhered to financial compliance requirements GBW 8th ed., Ch. 19

  12. GOVERNMENT PERFORMANCE AUDITS • Economy & efficiency audits determine whether • Entity acquires, protects, uses resources economically & efficiently • Causes of diseconomies, inefficiencies • Compliance with laws, regulations related to efficiency GBW 8th ed., Ch. 19

  13. GOVERNMENT PROGRAM AUDITS • Program audits determine • Extent to which program achieves results, benefits • Effectiveness of organization, program, activity, function • Compliance with laws, regulations GBW 8th ed., Ch. 19

  14. REPORTING ON COMPLIANCE • Positive assurance on tests for noncompliance • Description of material instances of noncompliance, if any GBW 8th ed., Ch. 19

  15. REPORTING ON INTERNAL CONTROL • Government auditing standards require report on internal control in all governmental financial audits to • Describe costs, benefits, objectives, limitations of internal control • State that auditor assessed control risk • Describe deficiencies in internal control not considered reportable conditions GBW 8th ed., Ch. 19

  16. SINGLE AUDIT ACT • Audit coverage • All governmental units that receive any federal assistance • Reporting requirements for governments receiving over $300,000 GBW 8th ed., Ch. 19

  17. SINGLE AUDIT ACT: Reports 5 additional reports required on • Compliance with General Requirements • Major Program compliance with specific requirements • Nonmajor Program compliance with specific requirements • Schedule of Federal Financial Assistance • Internal controls over Federal Financial Assistance GBW 8th ed., Ch. 19

  18. SINGLE AUDIT ACT: General Requirements 1 9 general requirements • Involve significant national policy • Could materially effect entity’s financial statements GBW 8th ed., Ch. 19

  19. SINGLE AUDIT ACT: General Requirements 2 • Political activity • Davis-Bacon Act: labor rates • Civil Rights • Cash Management • Relocation assistance, real property acquisition • Federal Financial Reports • Allowable cost/cost principle • Drug-free workplace • Administrative requirements GBW 8th ed., Ch. 19

  20. SINGLE AUDIT ACT: Specific Requirements 1 • Major programs • Types services allowed, not allowed • Eligibility • Matching, level of effort, earmarking • Reporting • Special tests & provisions GBW 8th ed., Ch. 19

  21. SINGLE AUDIT ACT: Specific Requirements 2 • When transactions from nonmajor programs are tested • Compliance with applicable laws, regulations • Allowability program expenditures • Eligibility GBW 8th ed., Ch. 19

  22. INTERNAL AUDITING Internal auditing is an independent, objective assurance, consulting activity designed to add value, improve organizations operations. It helps organization accomplish objectives by bringing systematic, disciplined approach to evaluate, improve effectiveness of risk management, control, governance Institute of Internal Auditors GBW 8th ed., Ch. 19

  23. INTERNAL AUDITING: Independence, Objectivity • Independence achieved by reporting to board of directors • Objectivity achieved by appraising controls, not designing or implementing them GBW 8th ed., Ch. 19

  24. OPERATIONAL AUDITING • Verification of data • Appraisal of controls • Compliance with policies, plans, procedures • Protection of assets • Appraisal of performance • Recommendations for operating improvements GBW 8th ed., Ch. 19

  25. SCIENTIFIC METHOD & OPERATIONAL AUDITS Scientific Method Operational Audit Function GBW 8th ed., Ch. 19

  26. AUDITOR’S CONSIDERATION INTERNAL AUDIT FUNCTION • SAS 65 • Guidance on • Considering work of internal auditors • Using internal auditors to provide direct assistance GBW 8th ed., Ch. 19

  27. UNDERSTANDING CONTROLS: Internal Auditor • Auditor should obtain understanding of internal audit function as part of assessment of control risk • Organizational status • Adherence to professional standards • Internal auditor’s audit plan • Access to records; limitations on scope of activities • Charter or mission statement GBW 8th ed., Ch. 19

  28. ASSESSING COMPETENCE, OBJECTIVITY: Internal Auditor • SAS 65 requires independent auditor to review competence, integrity of internal auditor • Education, experience, certification, continuing education • Audit policies, programs, procedures • Practices for assigning internal auditors • Quality work paper documentation GBW 8th ed., Ch. 19

  29. RELIANCE ON INTERNAL AUDITORS • Independent auditor can rely on internal auditor after evaluating his/her work for • Understanding internal control • Assessing risk • Performing substantive procedures GBW 8th ed., Ch. 19

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