Internal and Governmental
Financial Auditing
and Operational Auditing
Chapter 26
‫محمد أبو طواحينة‬
‫شاكر الغالييني‬
‫أحمد إسليم‬
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Learning Objective 1
Explain the role of internal auditors in
financial auditing.
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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
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Internal Auditing
Provide value through improved operational
effectiveness while performing traditional
responsibilities.
Reviewing
management
information
Safeguarding
assets
Ensuring
compliance
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Institute of Internal Auditors
Ethical Principles
Integrity
Confidentiality
Ethical
Principles
Competence
Objectivity
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Institute of Internal Auditors
Rules of Conduct
Integrity
Confidentiality
Rules
of
Conduct
Competency
Objectivity
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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
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Learning Objective 2
Describe the auditing and reporting
requirements under Government Auditing
Standards and the Single Audit Act
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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.”
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Governmental Financial Auditing
The Yellow Book standards are often called
generally accepted government auditing
standards (GAGAS).
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Financial Audit and Reporting
Requirements – Yellow Book
Financial Auditing Standards of the Yellow Book
Consistent with GAAS/
Provide additional guidance…
Materiality
and
significance
Reporting
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Compliance
auditing
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Audit and Reporting – Single Audit
Act 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.
Compliance
with GAGAS
Internal Control
Risk
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Legal
Compliance
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Reporting Requirements
An opinion on …
Statements
in accordance
with GAAP
Schedule of
federal awards
A report on …
Internal
controls
Legal
Compliance
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Findings and
Questioned
costs
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Learning Objective 3
Distinguish operational auditing from
financial auditing.
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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
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Learning Objective 4
Provide an overview of operational audits.
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Effectiveness Versus Efficiency
Effectiveness refers to accomplishing
objectives
Efficiency is defined as reducing cost
without reducing effectiveness
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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
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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
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Relationship Between Operational
Auditing and Internal Controls
Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance with applicable laws and regulations
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Types of Operational Audits
Functional
Organizational
Special
assignments
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Who Performs Operational
Audits
Internal
auditors
Government
auditors
CPA firms
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Independence and Competence
of Operational Auditors
The two most important qualities
for an operational auditor
Competence
Independence
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Learning Objective 5
Plan and perform an operational audit.
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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
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Phases in Operational Auditing
Planning
Staffing
Scope
Controls
Evidence
gathering and
evaluation
Eight types
Documentation
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Reporting
and
follow-up
Scope
Findings
Recommendations
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End of Chapter 26
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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