Chapter 26

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Explain the role of internal auditors in

financial auditing.
Describe the auditing and reporting
requirements under Government Auditing
Standards and the Single Audit Act.
Distinguish operational auditing from
financial auditing.

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Provide an overview of operational audits.

Plan and perform an operational audit.

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1
Explain the role of internal auditors in
financial auditing.

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Internal auditing is an independent objective

assurance and consulting activity designed
to add value and improve an organizations
operations.
Risk Management
Controls
Governance Processes

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Provide value through improved operational

effectiveness while performing traditional
responsibilities.
Reviewing
management
information

Safeguarding
assets
Ensuring
compliance

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Integrity

Confidentiality

Ethical
Principles

Competency

Objectivity

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Integrity

Confidentiality

Rules
of
Conduct

Competency

Objectivity

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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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2
Describe the auditing and reporting
requirements under Government Auditing
Standards and the Single Audit Act

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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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The Yellow Book standards are often called

generally accepted government auditing
standards (GAGAS).

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Financial Auditing Standards of the Yellow Book

Consistent with GAAS/
Provide additional guidance

Materiality
and
significance
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Quality
Control

Compliance
auditing
Reporting

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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 audi
Compliance Internal Control
with GAGAS
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
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Legal
Compliance

Findings and
Questioned
costs

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3
Distinguish operational auditing from financial
auditing.

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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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4
Provide an overview of operational audits.

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Effectiveness refers to accomplishing

objectives
Efficiency is defined as reducing cost
without reducing effectiveness

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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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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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Reliability of financial reporting

Efficiency and effectiveness of operations
Compliance with applicable laws and regulations

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Functional

Organizational

Special
assignments
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Internal
auditors
Government
auditors

CPA firms
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The two most important qualities

for an operational auditor

Competence

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Independence

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5
Plan and perform an operational audit.

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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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Planning
Staffing
Scope
Controls

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Evidence
gathering and
evaluation
Eight types
Documentation

Reporting
and
follow-up
Scope
Findings
Recommendations

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Copyright

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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