Operational Auditing

1. Operational Auditing 2012 Professor Bill O’Brien Operational Auditing--2012

2. Definition of Internal/Operational Auditing • Formal: “Internal auditing is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s operations.” • Informal: “Internal auditing is an independent activity designed to help an organization stay under control and achieve its objectives.” Operational Auditing--2012

3. An Organization Achieves Its Objectives by: • Staying under control as evidenced by • Safeguarding of assets • Compliance with laws and regulations • Organizational goal & obj. achievement • Reliability & quality of information • Effectiveness & efficiency of business operations Operational Auditing--2012

4. Roles of I/A in Relation to the Formal Definition • Helping the organization achieve objectives • Evaluating risk, control and governance • Adding value and improving operations • Remaining independent and objective • Utilizing a systematic approach Operational Auditing--2012

5. COSO • Committee of Sponsoring Organizations • FEI, AICPA, IMA, IIA and AAA • Sponsored the Treadway Commission in 1987 • Issued guidelines for Internal Control in 1992: COSO Cube • Issued guidelines for Enterprise Risk Management in 2004: COSO 2 Operational Auditing--2012

6. Relating COSO (2004) to SCORE • Strategic objectives • Organizational goal & obj. achievement • Operations objectives • Effectiveness & efficiency of business operations • Safeguarding of assets • Reporting objectives • Reliability & quality of information • Compliance objectives • Compliance with laws and regulations Operational Auditing--2012

7. Independence: Organizational Relationship • Reporting responsibility • As high as possible…the Audit Committee • Administrative responsibility • To a key interested party Operational Auditing--2012

8. Systematic Approach • Planning: • Selecting the BPO • Pre-site planning • Evaluating: • Conducting the preliminary survey • Review internal controls • Expanding tests as necessary • Generating findings • Communicating: • Reporting the results • Conducting follow-up • Assessing the process • Note Exh. 2-6 and Exh. 13-4 Operational Auditing--2012

9. SAS 65-now part of AICPA Auditing Standards Codification • Defines roles • Defines function • Discusses competency & objectivity • Considers nature of the work • Discusses coordination • Guidelines for evaluation • Role of direct assistance Operational Auditing--2012

10. Typical Int. Audit Assistance with External Auditors • Design of control systems • Reduction of risk assessment • Reduction of substantive testing Operational Auditing--2012

11. SAS 99-now part of AICPA Auditing Standards Codification • Auditor’s responsibility to detect fraud Operational Auditing--2012

12. Create a Cooperative Bridge with Management • Coordination • Risk assessment alert • Control system disclosure • Common sampling tools • Pooled IT knowledge • Different perspective • Constant general communication Operational Auditing--2012

13. Roles of Internal Auditing • Auditing or assurance • System design & implementation • Performance appraisals • Consultations • Strategic planning • Merger & acquisition analysis • Market appraisals • Investment analysis Operational Auditing--2012

14. The Institute of Internal Auditors • The professional organization of internal auditors • Established in 1941 • Provides the following: • Professional guidance • Professional certifications • Research • Educational products and services Operational Auditing--2012

15. Competencies of Internal Auditors • Inherent qualities • Integrity • Passion • Work ethic • Curiosity • Creativity • Initiative • Flexibility • Skills and credentials • Technical expertise • Software expertise • Communication skills • Analytical skills…connecting the dots • The “What” and the “How” Operational Auditing--2012

16. General Business Skills: the “What” • Business perspective • Organizational focus • Bias for action • Communication excellence • People proficiency Operational Auditing--2012

17. Implementation Styles: the “How” • Cc: communication versus control • KTT: knowing the territory • MBWA: managing by wandering around • R ƒ R3”: respect is a function of • Responsiveness • Reliability, and • Relevancy Operational Auditing--2012

18. Ops. Audit as a Profession • Transition from public accounting • Career internal auditor • Operational finance professional • Operations professional • Pathway to senior management Operational Auditing--2012

19. Hints for Starting or Taking Over a Dept. • Report to the Audit Committee or the highest level possible • Avoids conflict of interest • Have an administrative manager as well • Establish an agreed upon review approach • For example, operations v. compliance • Prepare a set of achievable objectives • Commit to IIA standards • Establish a team approach with BPOs • Invest in continuing education Operational Auditing--2012