1. Operational Auditing--Fall 2009 1 Operational Auditing Fall 2009 Professor Bill O’Brien

2. Operational Auditing--Fall 2009 1-2 Definition of Internal/Operational Auditing n Formal: “Internal auditing is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s operations.” n Informal: “Internal auditing is an independent activity designed to help an organization stay under control and achieve its objectives.”

3. Operational Auditing--Fall 2009 1-3 An Organization Achieves Its Objectives by: n Staying under control as evidenced by n Safeguarding of assets n Compliance with laws and regulations n Organizational goal & obj. achievement n Reliability & quality of information n Effectiveness & efficiency of business operations

4. Operational Auditing--Fall 2009 1-4 Roles of I/A in Relation to the Formal Definition n Helping the organization achieve objectives n Evaluating risk, control and governance n Adding value and improving operations n Remaining independent and objective n Utilizing a systematic approach

5. Operational Auditing--Fall 2009 1-5 COSO n Committee of Sponsoring Organizations n FEI, AICPA, IMA, IIA and AAA n Sponsored the Treadway Commission in 1987 n Issued guidelines for Internal Control in 1992: COSO Cube n Issued guidelines for Enterprise Risk Management in 2004: COSO 2

6. Operational Auditing--Fall 2009 1-6 Relating COSO (2004) to SCORE n Strategic objectives n Organizational goal & obj. achievement n Operations objectives n Effectiveness & efficiency of business operations n Safeguarding of assets n Reporting objectives n Reliability & quality of information n Compliance objectives n Compliance with laws and regulations

7. Operational Auditing--Fall 2009 1-7 Independence: Organizational Relationship n Reporting responsibility n As high as possible…the Audit Committee n Administrative responsibility n To a key interested party

8. Operational Auditing--Fall 2009 1-8 Systematic Approach n Planning: n Selecting the BPO n Pre-site planning n Evaluating: n Conducting the preliminary survey n Review internal controls n Expanding tests as necessary n Generating findings n Communicating: n Reporting the results n Conducting follow-up n Assessing the process

9. Operational Auditing--Fall 2009 1-9 Dealing with the External Auditors n Different objectives n Different accountability n Different qualifications n Different activities

10. Operational Auditing--Fall 2009 1-10 Cooperation n Economy n Efficiency n Effectiveness n Advantages for the external auditor n Increases external auditor client insight n Improves client relations n Rotates emphasis n Advantages for the internal auditor n Improves training n Source of additional work n Increases professional knowledge n Independent appraisal source n Compliance with SAS 65 and SAS 99

11. Operational Auditing--Fall 2009 1-11 SAS 65 n Defines roles n Defines function n Discusses competency & objectivity n Considers nature of the work n Discusses coordination n Guidelines for evaluation n Role of direct assistance

12. Operational Auditing--Fall 2009 1-12 SAS 99 n Auditor’s responsibility to detect fraud

13. Operational Auditing--Fall 2009 1-13 Typical Int. Audit Assistance n Design of control systems n Reduction of risk assessment n Reduction of substantive testing

14. Operational Auditing--Fall 2009 1-14 Create a Cooperative Bridge n Coordination n Risk assessment alert n Control system disclosure n Common sampling tools n Pooled IT knowledge n Different perspective n Constant general communication

15. Operational Auditing--Fall 2009 1-15 Roles of Internal Auditing n Auditing or assurance n System design & implementation n Performance appraisals n Consultations n Strategic planning n Merger & acquisition analysis n Market appraisals n Investment analysis

16. Operational Auditing--Fall 2009 1-16 The Institute of Internal Auditors n The professional organization of internal auditors n Established in 1941 n Provides the following: n Professional guidance n Professional certifications n Research n Educational products and services

17. Operational Auditing--Fall 2009 1-17 Competencies of Internal Auditors n Inherent qualities n Integrity n Passion n Work ethic n Curiosity n Creativity n Initiative n Flexibility n Skills and credentials n Technical expertise n Software expertise n Communication skills n Analytical skills…connecting the dots n The “What” and the “How”

18. Operational Auditing--Fall 2009 1-18 General Business Skills: the “What” n Business perspective n Organizational focus n Bias for action n Communication excellence n People proficiency

19. Operational Auditing--Fall 2009 1-19 Implementation Styles: the “How” n Cc: communication versus control n KTT: knowing the territory n MBWA: managing by wandering around n R ƒ R 3” : respect is a function of n Responsiveness n Reliability, and n Relevancy

20. Operational Auditing--Fall 2009 1-20 Ops. Audit as a Profession n Transition from public accounting n Career internal auditor n Operational finance professional n Operations professional n Pathway to senior management

21. Operational Auditing--Fall 2009 1-21 Managing the Internal Audit Activity n Effective management n Establish a risk-based plan n Communicate the plan n Ensure adequate resources n Coordinate services n Report on a regular basis n Monitor implementation of recommendations