Auditing and assurance services 14e by arens chapter 26

Internal and Governmental
Financial Auditing
and Operational Auditing
Chapter 26


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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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