Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
25Internal and Governmental
Financial Auditing
and Operational
Auditing
Good Auditing Often Results
in Improved Cash Flows
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Internal Financial Auditing
Institute of Internal
Auditors
Relationship of Internal
and External Auditors
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Governmental Financial Auditing
The primary source of authoritative literature for
performance of government audits is
Government Auditing Standards,which is
issued by the GAO.
The Yellow Book standards are often called general
accepted government auditing standards (GAGAS or GAS).
Because of the color of the cover,it is
usually referred to as the,Yellow Book”
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Financial Audit
and Reporting
Requirements-
Yellow Book? Materiality and significance
Quality control
Compliance auditing
Reporting.
Working papers
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit and Reporting
Requirements-Single Audit Act and
OMB Circular A-133
The threshold for requiring a single audit was raised from
$100,000 to $300,000 to exempt many smaller entities
from single audit requirements.
Statutory coverage of the single audit was extended to
not-for-profit organizations,as well as to state
and local governments.
A risk-based approach is to be used in selecting programs
for testing.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Audit Requirements
The audit should be in accordance with generally
accepted government auditing standards (GAGAS or GAS).
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.
The auditor should determine whether the client had compiled
with laws,regulations,and the provisions of contracts or grant
agreements that may have a direct and material effect on each
of its major programs.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Reporting Requirements
An opinion on whether the financial statements are in
accordance with GAAP,and 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.
A report on internal control related to the financial
statements and major program.
A report on compliance with laws,regulations,and the
provisions of contracts or grant agreements.
A schedule of findings and questioned costs.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Operational
Auditing
We prefer to use operational auditing broadly,
as long as the purpose of the test is to determine
the effectiveness or efficiency of any
part of an organization.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Difference between
Operational and Financial
Auditing
Purpose of
the Audit
Distribution of
the Reports
Inclusion of
Nonfinancial Areas
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Effectiveness versus
Efficiency
Types of Inefficiency
Acquisition of goods and services
is excessively costly.
Example
Bids for purchases of material are
not required.
Types of Inefficiency
Raw materials are not available for
production when needed.
Example
An entire assembly line must be shut
down because necessary materials
were not ordered.
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Relationship between
Operational Auditing
and Internal Controls
Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance with applicable laws and regulations
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Types of
Operational Audits
Functional
Organizational
Special Assignments
Who Performs
Operational Audits
Internal Auditors
Government Auditors
CPA Firms
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Criteria for Evaluating Efficiency and
Effectiveness
Specific Criteria
Were all plant layouts approved by home office engineering at
time of original design?
Has home office engineering done a reevaluation study of plant
layout in the past 5 years?
Is each piece of equipment operating at 60 percent of capacity or
more for a t least 3 months each year?
Does layout facilitate the movement of new materials to the
production floor?
Does layout facilitate the production of finished goods?
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?
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Sources of Criteria
Historical performance
Benchmarking
Engineered standards
Discussion and agreement
Phases in Operational Auditing
Planning
Evidence Accumulation and Evaluation
Reporting and Follow-Up
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Examples of
Operational Audit Findings
Outside Janitorial Firm Saves $160,000
More Timely Credit Memo Processing
Legislative Auditors Detect $1 Million per Year
Insurance Overcharge
Use the Right Tool
computer Programs Save manual labor
Timely Depositing
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
PHASES IN OPERATIONAL AUDITING
PLANNING
Scope of engagement
Staffing
Background information
Understand internal control
Decide on appropriate evidence
EVIDENCE ACCUMULATION
AND EVALUATION
Documentation
Client
Observation
REPORTING AND
FOLLOW-UP
Report usually sent to
management
Tailored reports
Follow-up on
recommendations with
management
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
Economy and efficiency audit
Effectiveness
Efficiency
functional audit
Government Auditing Standards (GAGAS or GAS)
Government audits
IIA Practice Standards
Institute of Internal Auditors (IIA)
Operational auditing
Organizational audit
Program audit
Single Audit Act
Special assignments
Statements on Internal Auditing Standards (SIASs)
Yellow Book
Arens,Loebbecke; Auditing,8/E
2000 by Prentice Hall,Inc.
An Integrated Approach
Eighth Edition
Final Chapter
Good Luck