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in Microsoft®
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Prepared by
Brad MacDonald
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© 2003 McGraw-Hill
Ryerson Limited
Chapte
r
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Comprehensive Auditing:
Public Sector and Internal
Audits
Copyright © 2003 McGraw-Hill Ryerson Limited
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Learning Objective 1
Describe the public sector and internal audit
institutions (II) and tell how public sector
and internal audit work interacts with
independent audits.
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“External,” Public Sector, and
Internal Audits
Internal Auditing
– Institute of Internal Auditors (IIA)
• The international organization that governs
the standards, continuing education, and
general rules of conduct for internal
auditors as a profession.
Public Sector Auditing
– Auditors employed by federal, provincial, and
municipal levels of government.
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Interaction with External
Auditors
External auditors consider the internal audit
function in two contexts:
– Internal audit is part of the company’s control
environment.
• Can be studied, tested, and relied on in
determining nature, timing, and extent of
substantive procedures.
– Internal auditors help gather evidence about
internal controls and account balances.
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Interaction with External
Auditors
Compliance auditing applicable to
governmental entities:
– Engagements governed by the Office of the
Auditor General (OAG) audit standards are to
be conducted in accordance with public
sector auditing standards.
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Learning Objective 2
Define public sector auditing and internal
auditing.
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Definitions and Objectives
Internal auditing:
– is an independent, objective assurance and
consulting activity designed to add value and
improve and organization’s operations. It
helps an organization accomplish its
objectives by bringing a systematic,
disciplined approach to evaluating and
improving the effectiveness of risk
management, control and governance
processes.
-IIA
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Definitions and Objectives
Operational auditing:
– Auditors’ study of business operations for the
purpose of making recommendations about
economic and efficient use of resources,
effective achievement of business objectives,
and compliance with company policy.
• The goal of operational auditing is to help
managers discharge their responsibilities.
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Learning Objective 3
Compare aspects of public sector, internal,
and external auditors’ independence
problems.
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Independence
Internal auditors hold independence as a
goal.
– Seek to ensure both operational and
reporting independence.
• Enables internal auditors to be objective in
reporting findings without having to fear for
their jobs.
• Independence is enhanced when internal
auditors report to a high executive level.
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Independence
Public sector auditors hold independence as a
goal. Government auditors are considered
independent when they are:
–
–
–
–
–
free from sources of personal impairment
free from sources of external impairment
organizationally independent
independent under rules of conduct
elected or appointed and reporting to a legislative
body
– auditing in a branch of government other than the
one to which they are normally assigned
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Learning Objective 4
Specify the elements of expanded scope
auditing in both public sector and internal
audit practice.
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Scope of Service – Internal Audit
The services provided by internal auditors include:
– audits of financial reports and accounting control
systems
– reviews of control systems that ensure compliance
with policies, procedures, laws and regulations
– appraisals of the economy and efficiency of
operations and
– reviews of the effectiveness in achieving program
results
Internal auditors often make recommendations
that result in additional profits or economies.
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Scope of Service – Public Sector
The OAG of Canada defines and describes
expanded scope governmental auditing in
terms of the types of audits that can be
performed.
– Financial statement audits, to determine:
• whether statements of an entity present
the financial position and results of an
entity in accordance with GAAP, and
• whether the entity has complied with laws
and regulations
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Scope of Service – Public Sector
– Compliance audits, in which the mandate is
to do one or more of:
• express an opinion on whether an entity
complied with specified authorities
• express an opinion on whether
transactions that have come to their notice
were carried out in compliance with
specified authorities, or
• report instances of noncompliance with
authorities
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Scope of Service – Public Sector
– Value-for-money (VFM) audits:
• Economy and efficiency audits include
determining:
• whether the entity is acquiring, protecting, and
using resources economically and efficiently
• the causes of inefficiencies or uneconomical
practices, and
• whether the entity has complied with laws and
regulations concerning matters of economy
and efficiency
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Scope of Service – Public Sector
– VFM audits:
• Effectiveness or program audits include
determining:
• the extent to which the desired results or
benefits established by the authorizing body
are being achieved
• the effectiveness of organizations, programs,
activities or functions, and
• whether the agency has complied with laws
and regulations applicable to the program
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Learning Objective 5
Describe the coverage of public sector and
internal audit standards.
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Internal Auditing Standards
Standards for the Professional Practice of Internal Auditing
are issued by the IIA.
– The 1999 standards are classified into three major
categories:
• Attribute standards:
• These relate to the characteristics of individuals or
internal auditing departments.
• Performance standards
• These describe internal audit activities and criteria for
their quality.
• Implementation standards
• These apply to specific types of engagements, such as
performance or compliance audits.
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Internal Auditing Standards
Internal audit standards that are significantly
different from GAAS:
– Implementation standards call for:
• review of compliance with policies
• review of economy and efficiency in the use of
resources, and
• review of the results of programs for
effectiveness
– These requirements go beyond the
requirements of GAAS.
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Internal Auditing Standards
Internal audit standards that are significantly
different from GAAS:
– Performance standards include a
requirement for monitoring progress to
determine that action is taken on reported
audit findings.
• GAAS has no follow-up requirements.
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Internal Auditing Standards
Internal audit standards that are significantly
different from GAAS:
– There are six IIA standards that deal with the
quality assurance and improvement program
of the internal audit department.
• External auditors have the same
requirements, but this guidance is not in
GAAS.
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Internal Auditing Standards
Internal audit standards that are significantly
different from GAAS:
– GAAS includes four comprehensive reporting
standards.
• The related IIA standard merely says,
“Internal auditors should communicate the
engagement results promptly.”
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Public Sector Standards
Public Sector Assurance Sections (PSs)
incorporate GAAS and include terminology
and concepts unique to the public sector.
– PAs accepting engagements to audit
government grants and programs must follow
the public sector sections.
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Public Sector Assurance
Sections
PS 5000 Assurance in the Public Sector:
– This section provides background information
useful in interpreting the subsequent
sections.
PS 5200 Audit of Financial Statements in
the Public Sector:
– This section deals with the application of
GAAS to audits of statements of governments
and other public sector entities.
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Public Sector Assurance
Sections
PS 5300 Auditing for Compliance with
Legislative and Related Authorities:
– This section provides guidance for
compliance audit mandates.
PS 5400 Value-for-Money Auditing
Standards:
– This section provides guidance for value-formoney audit mandates.
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Public Sector Assurance
Sections
PS 6410: Planning VFM Audits:
– This section discusses planning
considerations of the audit mandate, audit
objectives and scope, criteria, audit evidence
and the audit plan.
PS 6420: Knowledge of the Entity in VFM
Audits:
– This section includes factors considered by
the auditor when establishing or assessing
the objectives and scope of a VFM audit.
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Public Sector Assurance
Sections
PS 6430: Engaging and Using Specialists
in VFM Audits
– This section covers considerations required
in the use of specialists in VFM auditing.
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Differences Between Traditional
Auditing and VFM Auditing
1. In traditional audits, the objective is to render
an opinion on the financial statements.
•
In VFM audits, the mandate may provide the
auditor with discretion to establish the audit
objectives and scope.
2. In VFM audits, the objectives and scope vary
from one audit to another.
3. In VFM audits, much of the audit focuses on
matters that are not necessarily financial.
4. There is no body of standards like GAAP to
refer to in VFM auditing.
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Differences Between Traditional
Auditing and VFM Auditing
5. The nature and sources of evidence may differ
between VFM auditing and traditional auditing.
6. VFM auditing will tend to make greater use of
a multidisciplinary team.
7. VFM audits may not relate to a standard time
period, such as year end.
8. There are no standard audit reports for VFM
auditing.
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Differences Between Traditional
Auditing and VFM Auditing
9. VFM audits use the concept of “significance”
rather than materiality.
•
Significance is based on consideration of
• financial magnitude
• importance
• economic, social and environmental impact
and
• previous VFM recommendations
10. The concepts of audit risk, inherent risk, and
control risk take on unique meanings in a VFM
audit.
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Economy, Efficiency and
Effectiveness Audits
Economy and efficiency measures are fairly
straightforward.
– Economy is related to price variances and
efficiency is related to the efficiency variances
of standard variance analysis.
Effectiveness is more difficult to define and
evaluate.
– The Canadian Comprehensive Auditing
Foundation (CCAF) enumerated 12 attributes
of effectiveness to be examined.
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Attributes of Effectiveness
Management direction:
– How well integrated are the organization’s objectives
with management’s decision making?
Relevance:
– Does the program serve the intended purpose?
Appropriateness:
– Is the program’s structure appropriate?
Achievement of results:
– Has the program realized its goals and objectives?
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Attributes of Effectiveness
Acceptance:
– How well have customers received the services of
the program?
Secondary impacts:
– Has the organization caused any other results?
Costs and productivity:
– How efficient has the organization been?
Responsiveness:
– Has the organization adapted well to changes?
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Attributes of Effectiveness
Financial results:
– Has the organization accounted properly for
revenues, expenses, assets and liabilities?
Working environment:
– Is the work environment appropriate?
Protection of asses:
– Does the organization safeguard valuable assets?
Monitoring and reporting:
– Does the organization know where it stands?
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Audit Assignments
Government auditors are assigned as a result of:
– specific statutory or policy requirements for audits
– legislative, audit committee, or executive department
requests
– auditors’ own initiative resulting from recognition of
the importance of a program, activity, or organization
because of the size of its revenues, expenditures or
investment in assets
– auditors’ own initiative resulting from recognition of
the potential importance of a new program or activity
– auditors’ response to a request for proposal to audit a
specific organization, program, activity, or function
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Learning Objective 6
Describe a sequence of work in
governmental and internal audits in terms of
preliminary survey, evaluation of
administrative control, evidence-gathering
field work, and report preparation.
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Preliminary Survey
Most government and many internal audits
begin with a preliminary survey.
– Auditor becomes familiar with the
organization, program, or activity being
audited.
– Auditor must determine the specific standards
relevant for the circumstances.
– The preliminary survey should be an
organized activity.
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Emphasis on Administrative
Controls
Controls are classified into two broad categories.
– Administrative controls: Plans of organization and
procedures that are concerned with operational
efficiency and adherence to policies.
• Internal and governmental auditors are interested
in administrative controls because they affect
economy, efficiency, and effectiveness.
– Internal accounting controls: Plan of organization and
procedures designed to prevent, detect , and correct
accounting errors.
• External auditors are interested in accounting
controls.
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Evidence Gathering
Evidence-gathering field work can be described as
an application of a practical audit method for
problem solving.
– Problem recognition: Ascertain the pertinent facts
and circumstances, specify objectives in detail.
– Evidence collection: Select and perform procedures
to produce information.
– Evidence evaluation: Evaluate activities in terms of
economy, efficiency, and goal achievement.
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Learning Objective 7
Explain the function of standards and
measurements in economy, efficiency, and
program results audits.
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Audit Procedures
The general evidence-gathering procedures in
governmental and internal audits are about the
same as those used by external auditors.
– Objectivity is important in developing conclusions
about economy, efficiency, and effectiveness. This is
achieved by
• finding standards for evaluation
• using measurements of actual results
• determining that standards and measurements
may take some imagination
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Learning Objective 8
List and explain several requirements for
public sector and internal audit reports.
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Reporting
Public sector and internal audit reports are
not standardized.
– Each report is different because of the variety
of assignments and audit objectives.
– The key criterion for a report is its ability to
communicate clearly and concisely.
– Examples of a public sector audit report, an
internal audit report, and a consulting
engagement report are included in the text.
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