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Chapter 26 – Internal and Governmental Financial Auditing and

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Chapter 26 – Internal and Governmental Financial Auditing and Powered By Docstoc
					                              Internal and
                              Governmental
                              Financial Auditing
                              and Operational Auditing
                              Chapter 26



©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder   26 - 1
                      Learning Objective 1

                      Explain the role of internal
                      auditors in financial auditing.




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                      Internal Auditing

           The New York Stock Exchange requires its
            registrants to have an internal audit function




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                      Internal Auditing

       It 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.

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                      Institute of Internal Auditors
                      Ethical Principles
                       Objectivity

                       Confidentiality

                       Competency




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                      Institute of Internal Auditors
                      Rules of Conduct
                       Integrity

                       Objectivity

                       Confidentiality

                       Competency



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                      Relationship of Internal and
                      External Auditors
                      Differences:

                       The internal auditor is responsible
                        to management

                       The external auditor is responsible
                        to financial statement users




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                      Relationship of Internal and
                      External Auditors
                      Similarities:

                       Competency

                       Objectivity

                       Methodology

                       Audit risk model



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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.”



©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder   26 - 10
                      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

                       Materiality and significance

                       Compliance auditing

                       Reporting




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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 office of Management and Budget issued
            a revised Circular A-133, Audits of States,
            Local Governments, and Non-Profit
            Organizations, to provide administrative
            guidance for implementing the
            single audit requirements.


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                      Audit Requirements

          The audit should be in accordance with
          generally accepted government auditing
          standards (GAGAS).


          The auditor must obtain an understanding
          of internal control over federal programs
          sufficient to support a low assessed
          level of control risk for major programs.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder   26 - 14
                      Audit Requirements

          The auditor should determine whether the client
          had complied with the laws, regulations, and the
          provisions of contracts or grant agreements
          that may have a direct and material effect
          on each of its major programs.




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                      Reporting Requirements

            An opinion on whether the financial
             statements are in accordance with GAAP

            An opinion as to whether the schedule of
             federal awards is presented fairly in all
             material respects in relation to the
             financial statements as a whole




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                      Reporting Requirements

            A report on internal control related to the
             financial statements and major programs

            A report on compliance with laws,
             regulations, and the provisions of
             contracts or grant agreements

            A schedule of findings and questioned costs



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                      Operational Auditing

                The purpose of operational auditing is to
                 determine the effectiveness or efficiency
                 of any part of an organization




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                      Learning Objective 3

                      Distinguish operational auditing
                      from financial auditing.




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                      Differences Between Operational
                      and Financial Auditing
                       Purpose of the audit

                       Distribution of the reports

                       Inclusion of nonfinancial areas




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                      Learning Objective 4

                      Provide an overview of
                      operational audits.




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                      Effectiveness Versus
                      Efficiency
            Effectiveness refers to the accomplishment
             of objectives

            Efficiency is defined as reducing costs
             without reducing effectiveness




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                      Effectiveness Versus
                      Efficiency
     Types of 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



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                      Effectiveness Versus
                      Efficiency
     Types of 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




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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 are:

                       Independence

                       Competence




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                      Learning Objective 5

                      Plan and perform an
                      operational audit.




©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder   26 - 29
                      Specific Criteria

             Questions that might be used to evaluate
             plant layouts:

       Were all plant layouts approved by home office
        engineering at the time of original design?

       Has home office engineering done a reevaluation
        study of plant layout in the past five years?



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                      Specific Criteria

       Is each piece of equipment operating
        at least 60 percent of capacity for
        three months or more each year?
       Does layout facilitate the movement of
        new materials to the production floor?

       Does layout facilitate the production
        of finished goods?


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                      Specific Criteria

       Does layout facilitate the movement of
        finished goods to distribution centers?

       Does the plant layout effectively use
        existing equipment?

       Is the safety of employees endangered
        by the plant layout?



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                      Sources of Criteria

                       Historical performance

                       Benchmarking

                       Engineers standards

                       Discussion and agreement



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                      Phases in Operational
                      Auditing
                       Planning

                       Evidence accumulation and evaluation

                       Reporting and follow up




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                      Planning

                       Scope of engagement

                       Staffing

                       Background information

                       Understand internal control

                       Decide on appropriate evidence



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                      Evidence Accumulation
                      and Evaluation
                       Documentation

                       Client inquiry

                       Analytical procedures

                       Observation



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                      Reporting and Follow Up

                      Two major differences in operational
                      and financial auditing reports:

                      1. In operational audits, the report is
                         usually sent only to management

                      2. Tailoring of each report is required
                         in operational audits



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                      Examples of Operational
                      Audit Findings
                       Outside janitorial firm saves $160,000

                       Use the right tool

                       Computer programs save manual labor




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                              End of Chapter 26




©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder   26 - 39

				
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