Auditing and Assurance Services Seventeenth Edition, Global Edition Chapter 4 Internal and Governmental Financial Auditing and Operational Auditing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objectives 4.1 Explain the role of internal auditors in financial auditing 4.2 Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act 4.3 Distinguish operational auditing from financial auditing 4.4 Provide an overview of operational audits 4.5 Plan and perform an operational audit Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objective 4.1 Explain the role of internal auditors in financial auditing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Internal Financial Auditing (1 of 4) • Internal auditing is an independent, objective assurance, and consulting activity designed to add value and improve an organization’s operations • It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Internal Financial Auditing (2 of 4) • Internal auditors are expected to provide value to the organization through improved operational effectiveness, while also performing traditional responsibilities, such as: – Reviewing the reliability and integrity of information – Ensuring compliance with policies and regulations – Safeguarding assets Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Internal Financial Auditing (3 of 4) • The objectives of internal auditors are considerably broader than the objectives of external auditors • Internal auditors are responsible to management and the board • External auditors are responsible to financial statement users, who rely on the auditor to add credibility to financial statements Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Internal Financial Auditing (4 of 4) • External auditors rely on internal auditors when using the audit risk model to assess control risk • External auditors typically consider internal auditors effective if they: – Are independent of the operating units being evaluated – Are competent and well trained – Apply a systematic and disciplined approach, including quality control Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (1 of 6) • What is the nature of the two categories of standards in the IIA International Standards for the Professional Practice of Internal Auditing? • Explain the difference between the independence of internal auditors and external auditors in the audit of historical financial statements. – How can internal auditors best achieve independence? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objective 4.2 Describe the auditing and reporting requirements under Government Auditing Standards and the Single Audit Act Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Governmental Financial Auditing (1 of 4) • Federal and state governments employ their own auditing staffs to perform audits in much the same way as internal auditors • The primary source of authoritative literature for doing government audits is Government Auditing Standards (usually referred to as the Yellow Book) • These standards are often called generally accepted government auditing standards (GAGAS) Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Governmental Financial Auditing (2 of 4) • The financial auditing standards of the Yellow Book are consistent with the principles of the AICPA auditing standards, and also contain extensive additional guidance, including the following: – Materiality and significance – Quality control – Compliance auditing – Reporting Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Governmental Financial Auditing (3 of 4) • The Single Audit Act of 1984 provides for a single coordinated audit to meet the audit requirements of all federal agencies • The Single Audit Act was extended in 1990 to highereducation institutions and other not-for-profit organizations by the Office of Management and Budget (OMB) through the issuance of OMB Circular A-133 Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Governmental Financial Auditing (4 of 4) • The Single Audit Act as amended and OMB Uniform Guidance contain requirements for the scope of the audit • The OMB Uniform Guidance also contains reporting requirements Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (2 of 6) • Explain the role of internal auditors for financial auditing. How is it similar to and different from the role of external auditors? • Explain how governmental financial auditing is similar to and different from audits of commercial companies. – Who does governmental auditing? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (3 of 6) • Explain what is meant by the Single Audit Act. – What is its purpose? • In what ways is the Yellow Book consistent with the principles in AICPA auditing standards, and what are some additions and modifications? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objective 4.3 Distinguish operational auditing from financial auditing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operational Auditing (1 of 2) • The purpose of operational auditing deals with the efficiency and effectiveness of any part of an organization • Beyond financial auditing activities, internal auditors, government auditors, and CPAs also do operational auditing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Operational Auditing (2 of 2) • There are three major differences between operational and financial auditing: – Purpose of the audit: operational auditing emphasizes effectiveness and efficiency – Distribution of the reports: operational audit reports are intended primarily for management – Inclusion of nonfinancial areas: operational audits cover any aspect of efficiency and effectiveness in an organization Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objective 4.4 Provide an overview of operational audits Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Effectiveness Versus Efficiency (1 of 4) • Auditors must define specific criteria for measuring effectiveness and efficiency before an operational audit can be performed: – Effectiveness refers to meeting objectives – Efficiency refers to determining the resources used to achieve those objectives Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Effectiveness Versus Efficiency (2 of 4) • Management establishes internal controls to help meet its goals • Effective internal controls are designed and implemented to help organizations achieve these objectives: – Reliability of reporting – Efficiency and effectiveness of operations – Compliance with applicable laws and regulations Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Effectiveness Versus Efficiency (3 of 4) • Operational auditors can benefit greatly from the use of data analytic tools to identify opportunities to improve the efficiency and effectiveness of key operations • Auditors can use software to: – Scan through large populations of operational data – Search for unusual trends and outliers that may shed insights that lead to helpful improvements in the functioning of a core activity Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Effectiveness Versus Efficiency (4 of 4) • Operational audits fall into three broad categories: – Functional – Organizational – Special assignments • Operational audits are usually performed by one of three groups: – Internal auditors – Government auditors – CPA firms Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (4 of 6) • Describe what is meant by an operational audit. • Distinguish among the following types of operational audits: functional, organizational, and special assignment. – State an example of each for a not-for-profit hospital. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Learning Objective 4.5 Plan and perform an operational audit Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Criteria for Evaluating Efficiency and Effectiveness (1 of 2) • Specific criteria are desirable before starting an operational audit • Sources of criteria: – Historical performance – Benchmarking – Engineered standards – Discussion and agreement Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Criteria for Evaluating Efficiency and Effectiveness (2 of 2) • The three phases in an operational audit are: – Planning – Evidence accumulation and evaluation – Reporting and follow-up Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (5 of 6) • Explain what is meant by the criteria for evaluating efficiency and effectiveness. – Provide five possible specific criteria for evaluating effectiveness of an IT system for payroll. Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Let’s Discuss (6 of 6) • Identify the three phases of an operational audit. • Explain how planning for operational auditing is similar to and different from financial auditing. • What are the major differences between reporting for operational and financial auditing? Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
