copyright © 2007 pearson education canada 1 chapter 24: assurance services: internal auditing and...

Copyright © 2007 Pearson Education Canada

1

Chapter 24: Assurance Services: Internal Auditing and Government

Auditing


24-2

Chapter 24 objectives

Explain the role of internal auditing List differences between operational

auditing and financial auditing Define and provide examples of

effectiveness, efficiency and economy Identify the functions of an Auditor

General office Describe the phases in operational auditing


24-3

Internal auditors

Employed by entities to help improve the organization’s operations

Typically use a risk-based approach in consultation with the audit committee to determine work to be completed

Includes: operational auditing, systems development auditing, fraud auditing, providing assistance with the external audit, and management consulting


24-4

Practice question 24-2 (p. 672)

Explain the difference in the independence of internal auditors and external auditors in the audit of historical financial statements


24-5

Professional standards for internal auditors

Internal auditors who are members of other professional organizations (e.g. accounting, information systems audit) would adhere to the standards of those organizations

In addition, the Institute of Internal Auditors (IIA) provides professional practice attribute and performance standards (Figure 24-1)


24-6

Relationship of internal and external auditors

External auditors rely on internal auditors using the risk model

Fee reduction of the external auditor may be substantial when there is a highly regarded internal audit function

Before relying upon internal auditors, the external auditor must be confident of their competence, independence and objectivity


24-7

Operational auditing

This term is used to describe the review of an organization or its processes with respect to efficiency and effectiveness

Used synonymously with: management auditing, performance auditing, value-for-money auditing


24-8

Differences between operational and financial auditing: purpose of

the audit

Financial Operational

Emphasizes whether historical information was correctly recorded: oriented towards the past

Emphasizes effectiveness and efficiency: concerns operating performance for the future


24-9

Differences between operational and financial auditing: distribution

of the reportsFinancial Operational

Audit report typically goes to many users, e.g. shareholders and bankers. (Report requires well defined wording.)

Intended primarily for management. Will be go to operational and executive management and the audit committee. (Wording of report varies considerably from audit to audit.)


24-10

Differences between operational and financial auditing: inclusion of

nonfinancial areasFinancial Operational

Limited to matters that directly affect the financial statements: nonfinancial areas would be addressed only to address issues such as going concern.

Cover any aspect of efficiency and effectiveness; involve a wide variety of activities.


24-11

The three E’s

Effectiveness: the degree to which the organization’s (or the system’s) objectives are achieved

Efficiency: the extent to which costs are reduced without reducing effectiveness

Economy: the degree to which goods and services of suitable quality are acquired at the lowest price


24-12

Examples of effectiveness and efficiency

Effectiveness and efficiency are considered in the context of a goal or objective, using specific criteria. Let’s say that your goal is to “do well” in this course.

Effectiveness criteria: At least a B. Efficiency criteria: Still able to meet with

friends twice a week and get seven hours of sleep.


24-13

Was this goal achieved?

Effectiveness Economy

Mary: Obtained a B plus.

Had one long and one short visit with friends every week. Slept eight hours every night.

Mark: Obtained an A plus.

Did not visit with friends, only once or twice per term. Slept six or seven hours every night.


24-14

Importance of criteria

The above example shows the relationship between objectives (goals) and criteria

The objectives need to be what the person, department, or organization needs to accomplish

Criteria need to be relevant to the goals, and may be difficult to develop


24-15

Relationship between operational auditing and internal controls

Recall that the goals of good internal controls include:– Maintaining reliable systems– Safeguarding assets, records– Optimizing the use of resources– Preventing and detecting error and fraud

Operational audits can help evaluate these controls using the three E’s


24-16

Purpose of internal control evaluation

Financial audit Operational audit

To determine the extend of substantive testing.

To evaluate the efficiency and effectiveness of internal controls and make recommendations for improvement.


24-17

Scope of internal control evaluation


Restricted to matters affecting the financial statements.

Concerns any control that management would like to evaluate, or that could result in risks to the organization.


24-18

Practice problem 24-17 (p. 674)

Identify internal control weaknesses and recommendations for improvement for capital assets


24-19

Who performs operational audits?

Such audits may be performed by internal auditors, government auditors, or external public accountants/consulting firms

The audit team should be competent in the area being audited, and maintain their independence as best as possible


24-20

Auditor General offices

The role of these offices is mandated by provincial and federal legislation

May include: financial statement audits, program (operational) audits, compliance audits


24-21


Value-for-money audit of expenditures for the homeless

What criteria would be used?

What recommendations for improvement would you provide?


24-22

Operational audit phases

Planning Evidence

accumulation and evaluation

Reporting and follow-up


24-23

Operational audit planning steps

Determine the scope of the engagement Assess risks Communicate with the organizational unit Staff the engagement properly Obtain background information about the

organizational unit Understand internal controls Decide on the appropriate evidence to

accumulate


24-24

Differences in components of planning


Criteria used for planning are generally accepted auditing standards (GAAS).

Because of diversity:

- Difficult to determine specific objectives

- Criteria will be linked to objectives

-Staffing may require unique specialists

-Consensus with management needs to be reached with respect to the criteria


24-25

Operational audit evidence accumulation and evaluation

Seven types of evidence used in a financial audit are also used in an operational audit (Chapter 6):– Physical examination– Confirmation– Documentation– Observation– Inquiries of the client– Reperformance– Analytical procedures


24-26


Operational audit of a hospital research department

Evaluate objectives Outline basic

procedures and documents


24-27

Operational audit reporting

As explained previously, financial audit reports may be circulated widely and have standard wording

As operational audit reports are tailored to the situation, report writing may take a significant amount of time to communicate findings and recommendations clearly


24-28

Operational audit follow-up

The purpose of follow-up is to determine whether the recommended changes were made and if not, why not

Follow-up may be after a specified time period, the following year, or even two or three years later


24-29

Sources of operational audit findings

The best place to find detailed audit reports that go through the whole operational audit process is the reports of the various Auditor General offices (see text, p. 671 for links)


24-30

Practice problem 24-18 (pp. 674-75)

Large manufacturing company with multiple locations

Discuss issues for the internal audit department in the audit of capital expenditures

copyright © 2007 pearson education canada 1 chapter 24: assurance services: internal auditing and...

Documents