Internal and Governmental

Financial Auditing
and Operational Auditing
Chapter 26
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5

 Learning Objective 1

Explain the role of internal auditors in

financial auditing.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 2

 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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 3

 Internal Auditing

Provide value through improved operational

effectiveness while performing traditional
responsibilities.

Reviewing
management Safeguarding
information assets
Ensuring
compliance
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 4
 Institute of Internal Auditors
Ethical Principles
Integrity

Ethical
Confidentiality Competence
Principles

Objectivity

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 5

 Institute of Internal Auditors
Rules of Conduct
Integrity

Rules
Confidentiality of Competency
Conduct

Objectivity

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 6

 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
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 7
 Learning Objective 2

Describe the auditing and reporting

requirements under Government Auditing
Standards and the Single Audit Act

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 8

 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.”

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 9

 Governmental Financial Auditing

The Yellow Book standards are often called

generally accepted government auditing
standards (GAGAS).

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 10

 Financial Audit and Reporting
Requirements – Yellow Book
Financial Auditing Standards of the Yellow Book

Consistent with GAAS/

Provide additional guidance…

Materiality
Compliance
and
auditing
significance
Reporting
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 11
 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 Internal Control Legal

with GAGAS Risk Compliance

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 12

 Reporting Requirements
An opinion on …
Statements Schedule of
in accordance federal awards
with GAAP

A report on …

Findings and
Internal Legal
Questioned
controls Compliance
costs
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 13
 Learning Objective 3

Distinguish operational auditing from

financial auditing.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 14

 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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 15

 Learning Objective 4

Provide an overview of operational audits.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 16

 Effectiveness Versus Efficiency

Effectiveness refers to accomplishing

objectives

Efficiency is defined as reducing cost

without reducing effectiveness

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 17

 Effectiveness Versus Efficiency

Inefficiency Example
Acquisition of goods and Bids for purchases of
services is too costly materials are not required

Raw materials are not An assembly line was shut

available when needed down for lack of materials

A duplication of effort Production and accounting

by employees exists keep identical records

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 18

 Effectiveness Versus Efficiency
Inefficiency Example
Work is done that serves Vendors’ invoices and
no purpose receiving reports are filed
without being used

There are too many Office work could be done

employees with one less assistant

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 19

 Relationship Between Operational
Auditing and Internal Controls

Reliability of financial reporting

Efficiency and effectiveness of operations

Compliance with applicable laws and regulations

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 20

 Types of Operational Audits

Functional

Organizational

Special
assignments
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 21
 Who Performs Operational
Audits
Internal
auditors

Government
auditors

CPA firms

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 22

 Independence and Competence
of Operational Auditors
The two most important qualities
for an operational auditor

Competence Independence

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 23

 Learning Objective 5

Plan and perform an operational audit.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 24

 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

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 25

 Phases in Operational Auditing

Evidence Reporting
Planning gathering and and
evaluation follow-up
Staffing Eight types Scope
Scope Documentation Findings
Controls Recommendations

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 26 - 26

 End of Chapter 26

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5