Internal and Governmental

Financial Auditing
and Operational Auditing
Chapter 26

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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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 organizations
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

Compliance
auditing
Reporting

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Audit and Reporting Single

Audit
Act and OMB Circular A-133

The threshold for requiring a single audit is $500,

The Single Audit Act and OMB Circular A-133

contain requirements for the scope of the audi
Legal
Compliance Internal Control
Risk
Compliance
with GAGAS

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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 andBids for purchases of

services is too costly
materials are not required

Raw materials are not An assembly line was shu

available when needed down for lack of materials
A duplication of effort
by employees exists

Production and accountin

keep identical records

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Effectiveness Versus
Efficiency
Inefficiency

Example

Work is done that servesVendors invoices and

no purpose
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 regulation

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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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Phases in Operational
Auditing

Planning
Staffing
Scope
Controls

Evidence
gathering and
evaluation
Eight types
Documentation

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Reporting
and
follow-up

Scope
Findings
Recommendations

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End of Chapter 26

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