Operational Auditing--Spring 2010 1

Operational Auditing

Spring 2010

Professor Bill O’Brien

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Frameworks

Internal control IC-Integrated Framework (COSO) Guidance on Controls (CoCo) Internal Control Guidance (Turnbull)

Enterprise risk management Australian/New Zealand Std. Risk Mgt. ERM-Integrated Framework (COSO)

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COSO

Committee of Sponsoring Organizations AICPA, IIA, IMA, FEI, AAA Treadway Commission 1992 I/C; 2004 ERM

Control Objectives Compliance with laws and regulations Reliability of financial reporting Effectiveness & efficiency of operations

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Components of I/C

Control environment Risk assessment Control activities Information and communication Monitoring

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Threats to Control

Management override Open access to assets Form over substance approach Conflict of interest

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Balancing Risk and Control

Too much risk Loss of assets Poor decision making Potential non-compliance Potential for fraud

Too much control Increased bureaucracy Excess costs Excess cycle-time Increase in non-value added effort

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Control Activities Segregation of duties Performance reviews Approvals IT access Documentation Physical access IT applications Independent verifications & reconciliations

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IIA and Control

IIA control objectives: S-C-O-R-E Safeguarding of assets Compliance with laws and regulations Objective and goal achievement Reliability & integrity of information Economical & efficient use of assets

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Control Self Assessment (CSA)

Methodology Review and Identification

Key business objectives Related risks Mitigating controls

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CSA-History

Introduced by Gulf Canada in 1987 Gulf used facilitated meetings

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Facilitated Meetings

Management and staff participate through interviews and polling

Objectives Risks Processes Soft and/or informal controls

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General Methodology

Shared process Assessment of internal controls Evaluation of risks Development of action plans Assess the likelihood of achieving objectives SJSU simulation

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General Approaches

Facilitated meetings--group workshops Questionnaires--yes/no answers Management analysis--self studies

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Uses

Self analysis for risk* Selection of audit areas* Internal control review* Special projects Soft control analysis

* alternatives to the traditional approach to the I/A process

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Benefits

Increases I/A scope Target review of high risk areas Increases the effectiveness of corrective action Builds team-oriented relationships

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Engagement Process Planning:

Selecting the BPO Pre-site planning

Performing: Conducting the preliminary survey Review internal controls Expanding tests as necessary Generating findings

Communicating: Reporting the results Conducting follow-up Assessing the process

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Audit Evidence

Healthy skepticism Attributes

Relevant: consistent with objectives Reliable: credible Sufficient: convincing

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Generalized Audit Software (GAS)

Two most popular applications ACL (ACL) IDEA (CaseWare)

Typical uses File examination Recalculations Sample selection File comparison Reformatting Pivot tables Benford’s Law analysis Reporting Data analysis log

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GAS, continued Benefits

Minimizes customization Independent of company IT Efficient Facilitates 100% testing Frees BPP for analytical work

Obstacles Data access Physical access Format knowledge Downloading issues to BPP’s computer Importing data in usable format

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Workpaper Usage

Planning and execution Supervision and review Objective tracking Conclusion support Supports quality assurance Professional development IIA standards’ compliance

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Workpaper Guidelines Cross-referencing system Consistent layouts Standardized symbols or “tick marks” Standardization for permanent files Unique indexing Description of purpose Initialed by preparer and reviewer Source of information indicated Clear explanations of symbols Legibly written and easy to understand Must stand alone Must relate to the engagement objectives

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Sample Work Paper

Heading Ref.

Review

T/M Legend:

Source

Purpose:

Conclusions