Otto Chang1 Chapter 5: Internal Audit Process ACCT620 Internal Auditing Otto Chang Professor of Accounting

Otto Chang2 Internal Auditing Process Selection of auditee (select riskiest area) Audit planning Preliminary survey of operations Internal control description and analysis Expanded tests of control system Develop findings and recommendations Reporting Follow-up Evaluation

Otto Chang3 Step 1: Selection Of The Auditee (Chapter 6)  Audit Plan Based On Risk Assessment (Systematic)  Ad Hoc Audits  Auditee Requests

Otto Chang4 Step 2:Audit Preparation (Chapter 7)  Tentative Overall Purpose and Scope Of Audit  Review of Previous Audit Files  Selection of Audit Team  Preliminary Communication with Auditee  Preparation of Preliminary Audit Program  Planning the Audit Report  Obtaining Approval of The Audit Approach

Otto Chang5 Step 3: Preliminary Survey (Chapter 8)  Opening Conference  Tour  Document Study  Written Description  Analytical Review, If Appropriate

Otto Chang6 Step 4:Initial Study of Internal Control (Chapter 8)  Controls Description  Walk-Through of Transactions or Decision Process  Limited Testing  Evaluation of Internal Controls  Risk Assessment

Otto Chang7 Step 5:Expanded Testing (Chapter 9)  Detailed Review of Operations and Controls  Tests of Auditor’s Compliance with Control Systems  Evaluate Design of Control System  Evaluate the Effectiveness of Control System

Otto Chang8 Step 6Findings And Recommendations (Chapter 9)  Findings  Conditions actually observed  Criteria used to evaluate the conditions  Effects (Risk) of the observed problems  Cause of the problems  Recommendations  No Changes  Improve Current Controls  Adding Insurance to Ensure against Risks  Required Rate of Return to Reflect Risks

Otto Chang9 Step 7Reporting (Chapter 10)  Written  Audit Objectives  Audit Scope  General Procedures  “Findings”  Recommendations  Personal (Oral) Presentation

Otto Chang10 Step 8 & 9:Follow-Up and Evaluation (Chapter 11)  Follow-Up  Auditee Response  Management’s Follow-Up  Auditor’s Review  Evaluation  Evaluation of Audit Approach, Techniques, Etc.  Auditor Performance Reviews

Otto Chang11 An Outline of Audit Working Paper 1. Table of contents 2. Planning checklist 3. Authorization form 4. Preliminary memo to the auditee 5. A cross-referenced audit report, imterrim memoranda, and follow-up report 6. Auditee’s written response to audit findings and recommendations

Otto Chang12 Audit Working Paper-continued 7. Review notes on the working papers 8. Audit program 9. Summary finding sheets (Chapter 9) 10. Preliminary survey A. Minutes of opening conference B. Summary of observations made during the on-site tour C. Notes from study of background materials D. Written descriptions of the auditee’s operation E. Analytical review worksheet

Otto Chang13 Audit Working Paper--continued 11. Review of Internal Control: A. Completed internal control questionnaires B. Flowcharts and descriptions of internal control C. Work sheets on limited tests D. Internal control matrix 12. Worksheet from expanded tests 13. Miscellaneous papers 14. Follow-up working papers

Otto Chang14 Format of Working Paper Title Preparer and reviewer’s date and initials Complete cross-indexing Use of tick marks Explanation of legends Auditor’s conclusion and recommendation