AUDITING
CHAPTER 19
Compliance & Internal Auditing
By
David N. Ricchiute
TOPICS
Compliance auditing
Internal auditing
2
GBW 8th ed., Ch. 19
TYPES OF AUDITING
Objective
Audit Type Standards
Financial
statement
Financial
statement
audit
AICPA: GAAS
Compliance
Financial
Performance
GAO: GASB
Internal
Operational
IIA: Internal Auditing
Standards
3
GBW 8th ed., Ch. 19
COMPLIANCE AUDITS:
Government Entities
Also recipients of governmental financial
assistance (SAS 74)
Audit must conform to



4
GAAS
GAO standards
Single Audit Act
GBW 8th ed., Ch. 19
COMPLIANCE AUDITS:
Other Examples
Compliance with:
Minimum wage laws
Employee benefits programs
Commercial bank lending agreements
Special engagements


5
Hazardous waste trust fund
State-sponsored health insurance program
GBW 8th ed., Ch. 19
RESPONSIBILITIES
UNDER GAAS
Responsibility for detecting violations of
laws, regulations identical to
responsibility for client error, fraud


6
Assess risk of violations creating material
misstatements
Design procedures to detect anticipated
violations
GBW 8th ed., Ch. 19
EFFECTS OF LAWS,
REGULATIONS
Management responsible for identifying
laws, regulations having direct, material
effect on financial statement
Auditor designs procedures to detect
violations
7
GBW 8th ed., Ch. 19
COMPLIANCE & INTERNAL
CONTROL
Compliance audit requires auditor to



8
Understand internal controls
Assess control risk
Obtain knowledge about design,
performance of internal control policies,
procedures
GBW 8th ed., Ch. 19
GOVERNMENT AUDITING
STANDARDS
Written by GAO
GAGAS


AICPA 10 GAAS
Standards related to
 Independence & Quality control
 Audit documentation
 Legal, regulatory requirements
9
GBW 8th ed., Ch. 19
GOVERNMENT FINANCIAL
AUDITS: Financial Statement Audits
Financial statement audits determine
whether


10
Financial statements fairly presented
Entity complied with laws, regulations
GBW 8th ed., Ch. 19
GOVERNMENT FINANCIAL
AUDITS: Financial-Related Audits
Financial-related audits determine
whether



11
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
GOVERNMENT
PERFORMANCE AUDITS
Economy & efficiency audits determine
whether



12
Entity acquires, protects, uses resources
economically & efficiently
Causes of diseconomies, inefficiencies
Compliance with laws, regulations related
to efficiency
GBW 8th ed., Ch. 19
GOVERNMENT PROGRAM
AUDITS
Program audits determine



13
Extent to which program achieves
results, benefits
Effectiveness of organization,
program, activity, function
Compliance with laws, regulations
GBW 8th ed., Ch. 19
REPORTING ON
COMPLIANCE
Positive assurance on tests for
noncompliance
Description of material instances of
noncompliance, if any
14
GBW 8th ed., Ch. 19
REPORTING ON INTERNAL
CONTROL
Government auditing standards require
report on internal control in all
governmental financial audits to



15
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
SINGLE AUDIT ACT
Audit coverage


16
All governmental units that
receive any federal assistance
Reporting requirements for
governments receiving over
$300,000
GBW 8th ed., Ch. 19
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
17
GBW 8th ed., Ch. 19
SINGLE AUDIT ACT:
General Requirements 1
9 general requirements


18
Involve significant national policy
Could materially effect entity’s financial
statements
GBW 8th ed., Ch. 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
19
GBW 8th ed., Ch. 19
SINGLE AUDIT ACT:
Specific Requirements 1
Major programs





20
Types services allowed, not allowed
Eligibility
Matching, level of effort, earmarking
Reporting
Special tests & provisions
GBW 8th ed., Ch. 19
SINGLE AUDIT ACT:
Specific Requirements 2
When transactions from nonmajor
programs are tested



21
Compliance with applicable laws,
regulations
Allowability program expenditures
Eligibility
GBW 8th ed., Ch. 19
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
22
GBW 8th ed., Ch. 19
INTERNAL AUDITING:
Independence, Objectivity
Independence achieved by reporting to
board of directors
Objectivity achieved by appraising
controls, not designing or implementing
them
23
GBW 8th ed., Ch. 19
OPERATIONAL AUDITING
Verification of data
Appraisal of controls
Compliance with policies, plans,
procedures
Protection of assets
Appraisal of performance
Recommendations for operating
improvements
24
GBW 8th ed., Ch. 19
SCIENTIFIC METHOD &
OPERATIONAL AUDITS
Scientific Method Operational Audit Function
Recognize problem
Formulate hypothesis
Become familiar with activity to be
reviewed
Hypothesis: control operating
properly relevant to objective
Gather evidence to test Select procedures; gather evidence
hypothesis
Evaluate evidence
Develop conclusions
25
Evaluate evidence
Report
GBW 8th ed., Ch. 19
AUDITOR’S CONSIDERATION
INTERNAL AUDIT FUNCTION
SAS 65

Guidance on
 Considering work of internal auditors
 Using internal auditors to provide direct
assistance
26
GBW 8th ed., Ch. 19
UNDERSTANDING
CONTROLS: Internal Auditor
Auditor should obtain understanding of internal
audit function as part of assessment of control
risk





27
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
ASSESSING COMPETENCE,
OBJECTIVITY: Internal Auditor
SAS 65 requires independent auditor to
review competence, integrity of internal
auditor




28
Education, experience, certification,
continuing education
Audit policies, programs, procedures
Practices for assigning internal auditors
Quality work paper documentation
GBW 8th ed., Ch. 19
RELIANCE ON INTERNAL
AUDITORS
Independent auditor can rely on
internal auditor after evaluating his/her
work for



29
Understanding internal control
Assessing risk
Performing substantive procedures
GBW 8th ed., Ch. 19