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Internal and Governmental

Financial Auditing
and Operational Auditing
Chapter 26

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.

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

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Internal Auditing
Internal auditing is an independent objective
assurance and consulting activity designed
to add value and improve an organizations
operations.
Risk Management
Controls
Governance Processes

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

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Internal Auditing
Provide value through improved operational
effectiveness while performing traditional
responsibilities.
Reviewing
management
information

Safeguarding
assets
Ensuring
compliance

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

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Institute of Internal Auditors


Ethical Principles
Integrity

Confidentiality

Ethical
Principles

Competence

Objectivity

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

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Institute of Internal Auditors


Rules of Conduct
Integrity

Confidentiality

Rules
of
Conduct

Competency

Objectivity

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

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

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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

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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.

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

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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

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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

Compliance
auditing
Reporting

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

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Audit and Reporting Single


Audit
Act and OMB Circular A-133

The threshold for requiring a single audit is $500,

The Single Audit Act and OMB Circular A-133


contain requirements for the scope of the audi
Legal
Compliance Internal Control
Risk
Compliance
with GAGAS

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

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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

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

Findings and
Questioned
costs
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Learning Objective 3
Distinguish operational auditing from
financial auditing.

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

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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

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

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Learning Objective 4
Provide an overview of operational
audits.

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

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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

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Effectiveness Versus
Efficiency
Inefficiency

Example

Acquisition of goods andBids for purchases of


services is too costly
materials are not required

Raw materials are not An assembly line was shu


available when needed down for lack of materials
A duplication of effort
by employees exists

Production and accountin


keep identical records

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

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Effectiveness Versus
Efficiency
Inefficiency

Example

Work is done that servesVendors invoices and


no purpose
receiving reports are filed
without being used
There are too many
employees

Office work could be done


with one less assistant

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

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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 regulation

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

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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

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Learning Objective 5
Plan and perform an operational audit.

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

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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

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

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Phases in Operational
Auditing

Planning
Staffing
Scope
Controls

Evidence
gathering and
evaluation
Eight types
Documentation

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

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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