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Compliance & Internal Auditing By David N. Ricchiute

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1 Compliance & Internal Auditing By David N. Ricchiute
AUDITING CHAPTER 19 Compliance & Internal Auditing By David N. Ricchiute

2 TOPICS Compliance auditing Internal auditing GBW 8th ed., Ch. 19

3 TYPES OF AUDITING Objective Audit Type Standards Financial statement
Financial statement audit AICPA: GAAS Compliance Financial Performance GAO: GASB Internal Operational IIA: Internal Auditing Standards GBW 8th ed., Ch. 19

4 COMPLIANCE AUDITS: Government Entities
Also recipients of governmental financial assistance (SAS 74) Audit must conform to GAAS GAO standards Single Audit Act GBW 8th ed., Ch. 19

5 COMPLIANCE AUDITS: Other Examples
Compliance with: Minimum wage laws Employee benefits programs Commercial bank lending agreements Special engagements Hazardous waste trust fund State-sponsored health insurance program GBW 8th ed., Ch. 19

6 RESPONSIBILITIES UNDER GAAS
Responsibility for detecting violations of laws, regulations identical to responsibility for client error, fraud Assess risk of violations creating material misstatements Design procedures to detect anticipated violations GBW 8th ed., Ch. 19

7 EFFECTS OF LAWS, REGULATIONS
Management responsible for identifying laws, regulations having direct, material effect on financial statement Auditor designs procedures to detect violations GBW 8th ed., Ch. 19

8 COMPLIANCE & INTERNAL CONTROL
Compliance audit requires auditor to Understand internal controls Assess control risk Obtain knowledge about design, performance of internal control policies, procedures GBW 8th ed., Ch. 19

9 GOVERNMENT AUDITING STANDARDS
Written by GAO GAGAS AICPA 10 GAAS Standards related to Independence & Quality control Audit documentation Legal, regulatory requirements GBW 8th ed., Ch. 19

10 GOVERNMENT FINANCIAL AUDITS: Financial Statement Audits
Financial statement audits determine whether Financial statements fairly presented Entity complied with laws, regulations GBW 8th ed., Ch. 19

11 GOVERNMENT FINANCIAL AUDITS: Financial-Related Audits
Financial-related audits determine whether Financial reports, related items fairly presented Financial information in accord with established, stated criteria Entity adhered to financial compliance requirements GBW 8th ed., Ch. 19

12 GOVERNMENT PERFORMANCE AUDITS
Economy & efficiency audits determine whether Entity acquires, protects, uses resources economically & efficiently Causes of diseconomies, inefficiencies Compliance with laws, regulations related to efficiency GBW 8th ed., Ch. 19

13 GOVERNMENT PROGRAM AUDITS
Program audits determine Extent to which program achieves results, benefits Effectiveness of organization, program, activity, function Compliance with laws, regulations GBW 8th ed., Ch. 19

14 REPORTING ON COMPLIANCE
Positive assurance on tests for noncompliance Description of material instances of noncompliance, if any GBW 8th ed., Ch. 19

15 REPORTING ON INTERNAL CONTROL
Government auditing standards require report on internal control in all governmental financial audits to Describe costs, benefits, objectives, limitations of internal control State that auditor assessed control risk Describe deficiencies in internal control not considered reportable conditions GBW 8th ed., Ch. 19

16 SINGLE AUDIT ACT Audit coverage
All governmental units that receive any federal assistance Reporting requirements for governments receiving over $300,000 GBW 8th ed., Ch. 19

17 SINGLE AUDIT ACT: Reports
5 additional reports required on Compliance with General Requirements Major Program compliance with specific requirements Nonmajor Program compliance with specific requirements Schedule of Federal Financial Assistance Internal controls over Federal Financial Assistance GBW 8th ed., Ch. 19

18 SINGLE AUDIT ACT: General Requirements 1
Involve significant national policy Could materially effect entity’s financial statements GBW 8th ed., Ch. 19

19 SINGLE AUDIT ACT: General Requirements 2
Political activity Davis-Bacon Act: labor rates Civil Rights Cash Management Relocation assistance, real property acquisition Federal Financial Reports Allowable cost/cost principle Drug-free workplace Administrative requirements GBW 8th ed., Ch. 19

20 SINGLE AUDIT ACT: Specific Requirements 1
Major programs Types services allowed, not allowed Eligibility Matching, level of effort, earmarking Reporting Special tests & provisions GBW 8th ed., Ch. 19

21 SINGLE AUDIT ACT: Specific Requirements 2
When transactions from nonmajor programs are tested Compliance with applicable laws, regulations Allowability program expenditures Eligibility GBW 8th ed., Ch. 19

22 INTERNAL AUDITING Internal auditing is an independent, objective assurance, consulting activity designed to add value, improve organizations operations. It helps organization accomplish objectives by bringing systematic, disciplined approach to evaluate, improve effectiveness of risk management, control, governance Institute of Internal Auditors GBW 8th ed., Ch. 19

23 INTERNAL AUDITING: Independence, Objectivity
Independence achieved by reporting to board of directors Objectivity achieved by appraising controls, not designing or implementing them GBW 8th ed., Ch. 19

24 OPERATIONAL AUDITING Verification of data Appraisal of controls
Compliance with policies, plans, procedures Protection of assets Appraisal of performance Recommendations for operating improvements GBW 8th ed., Ch. 19

25 SCIENTIFIC METHOD & OPERATIONAL AUDITS
Scientific Method Operational Audit Function Recognize problem Become familiar with activity to be reviewed Formulate hypothesis Hypothesis: control operating properly relevant to objective Gather evidence to test hypothesis Select procedures; gather evidence Evaluate evidence Develop conclusions Report GBW 8th ed., Ch. 19

26 AUDITOR’S CONSIDERATION INTERNAL AUDIT FUNCTION
SAS 65 Guidance on Considering work of internal auditors Using internal auditors to provide direct assistance GBW 8th ed., Ch. 19

27 UNDERSTANDING CONTROLS: Internal Auditor
Auditor should obtain understanding of internal audit function as part of assessment of control risk Organizational status Adherence to professional standards Internal auditor’s audit plan Access to records; limitations on scope of activities Charter or mission statement GBW 8th ed., Ch. 19

28 ASSESSING COMPETENCE, OBJECTIVITY: Internal Auditor
SAS 65 requires independent auditor to review competence, integrity of internal auditor Education, experience, certification, continuing education Audit policies, programs, procedures Practices for assigning internal auditors Quality work paper documentation GBW 8th ed., Ch. 19

29 RELIANCE ON INTERNAL AUDITORS
Independent auditor can rely on internal auditor after evaluating his/her work for Understanding internal control Assessing risk Performing substantive procedures GBW 8th ed., Ch. 19

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