1. What is the role of internal auditors in financial auditing?

2. Internal Auditing The New York Stock Exchange
requires its registrants to have
an internal audit function.

3. Internal Auditing It is an independent, objective assurance and
consulting activity designed to add value
and improve an organization’s operations.
It helps an organization accomplish its objectives
by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk
management, control, and governance processes.

4. What about Sarbox?
Does Sarbanes-Oxley add “legitimacy” to the IA function?
Where were the internal auditors at Enron?
WorldCom … Waste Management … etc…

5. Institute of Internal Auditors Ethical Principles
Integrity
Objectivity
Confidentiality
Competency

6. Integrity Internal auditors:
1.1. Shall perform their work with honesty, diligence, and responsibility.
1.2. Shall observe the law and make disclosures expected by the law and the profession.
1.3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization.
1.4. Shall respect and contribute to the legitimate and ethical objectives of the organization.

7. Objectivity Internal auditors:
2.1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.
2.2 Shall not accept anything that may impair or be presumed to impair their professional judgment.
2.3 Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.

8. Confidentiality Internal auditors:
3.1 Shall be prudent in the use and protection of information acquired in the course of their duties.
3.2 Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization.

9. Competency Internal auditors:
4.1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience.
4.2 Shall perform internal auditing services in accordance with the International Standards for the Professional Practice of Internal Auditing.
4.3 Shall continually improve their proficiency and the effectiveness and quality of their services.

10. Relationship of Internal and External Auditors
Differences
The external auditor is responsible
to financial statement users.
The internal auditor is responsible
to management.

11. Relationship of Internal and External Auditors
Similarities
Competency
Objectivity
Methodology
Audit risk model

12. 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.”

13. Governmental Financial Auditing
The Yellow Book standards are often called
generally accepted government auditing
standards (GAGAS or GAS).

14. Financial Audit and Reporting Requirements – Yellow Book
Materiality and significance
Quality control
Compliance auditing
Reporting
Audit files

15. Audit and Reporting – 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.
The OMB increased the single audit
threshold to $500,000 beginning in 2004.

16. Audit and Reporting – Single Audit Act and OMB Circular A-133
The office of Management and Budget issued
a revised Circular A-133, Audits of States,
Local Governments, and Non-Profit
Organizations, to provide administrative
guidance for implementing the
single audit requirements.

17. Audit Requirements The audit should be in accordance
with generally accepted government
auditing standards (GAGAS).
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.

18. Audit Requirements The auditor should determine whether the client
had complied 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.

19. 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

20. Reporting Requirements
a report on internal control related to the
financial statements and major programs
a report on compliance with laws,
regulations, and the provisions of
contracts or grant agreements
a schedule of findings and questioned costs

21. Reporting Requirements
reasonable (positive) assurance related
to items tested
limited (negative) assurance related to
items not tested (usually includes
“nonmajor” programs)

22. Operational Auditing The purpose of operational auditing is to
determine the efficiency and effectiveness
of any part of an organization.

23. Differences between Operational and Financial Auditing
Purpose of
the audit
Distribution of
the reports
Inclusion of
nonfinancial areas

24. Effectiveness Versus Efficiency
Effectiveness refers to the
accomplishment of objectives.
Efficiency refers to the resources used
to accomplish those objectives.

25. Effectiveness Versus Efficiency
Types of
inefficiency
Example
Acquisition of goods and
services is excessively 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.

26. Effectiveness
Can a process be “effective” if it is inefficient?

27. Relationship between Operational Auditing and Internal Controls
Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance with applicable laws and regulations

28. Types of Operational Audits
Functional
Organizational
Special assignments

29. Who Performs Operational Audits
Internal
auditors
Government
auditors
CPA firms

30. Independence and Competence of Operational Auditors
The two most important qualities for
an operational auditor are:
Independence
Competence

31. Independence How can an operational auditor be independent?
Is this the same kind of “independence” that financial auditors have?

32. Specific Criteria for Evaluating Efficiency and Effectiveness
Example:
Were all plant layouts approved by home office
engineering at the time of original design?
Has home office engineering done a reevaluation
study of plant layout in the past five years?

33. Specific Criteria for Evaluating Efficiency and Effectiveness
Is each piece of equipment operating
at 60% of capacity or more for
at least three months each year?
Does layout facilitate the movement of
new materials to the production floor?
Does layout facilitate the production
of finished goods?

34. Specific Criteria for Evaluating Efficiency and Effectiveness
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?

35. Sources of Criteria Historical performance Benchmarking
Engineers standards
Discussion and agreement

36. Phases in Operational Auditing
Planning
Evidence accumulation and evaluation
Reporting and follow-up

37. Planning Scope of engagement Staffing Background information
Understand internal control
Decide on appropriate evidence

38. Evidence Accumulation and Evaluation
Documentation
Client
Observation

39. Reporting Follow-up Report usually sent to management Tailored reports
Follow-up on recommendations
with management

40. Examples of Operational Audit Findings (from text)
Outside janitorial firm saves $160,000
More timely credit memo processing
Use the right tool
Computer programs save manual labor