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26-1
Chapter 26
Internal and Governmental Financial Auditing
and Operational Auditing
Concept Checks
P. 832
1. Internal auditors who perform financial auditing are responsible for
evaluating whether their company’s internal controls are designed and
objective in performing their work and reporting their results. Despite these
similarities, the role of the internal auditor in financial auditing differs from that
Guidelines for performing internal audits are not as well defined as
the guidelines for external auditors.
statement users.
Because internal auditors are responsible to management, their
decisions about materiality and risks may differ from the decisions
of external auditors.
2. Governmental financial audits are similar to audits of commercial
companies in that both types of audits require the auditor to be independent,
to accumulate and evaluate evidence, and to apply AICPA auditing
standards (GAAS). The two types of audits are different because
26-2
P. 839
1. The three major differences between financial and operational auditing are:
Purpose of the audit. Financial auditing emphasizes whether
historical information was correctly recorded. Operational auditing
operating performance for the future.
Distribution of the reports. For financial auditing, the report is
typically distributed to many users of financial statements, such as
primarily for management.
Inclusion of nonfinancial areas. Operational audits cover any
aspect of efficiency and effectiveness in an organization and can
statement presentations.
2. Criteria for evaluating efficiency and effectiveness in operational auditing
means deciding the specific objectives that should have been achieved in
the operation being audited. Usually, it is insufficient to state that the
Was payroll completed and computer generated payroll checks
prepared at least 12 hours before the payroll distribution deadline in
each of the past 26 weeks?
Were there two or less complaints by employees each week in the
past 26 weeks concerning incorrect paychecks that are attributable
Review Questions
26-1 The two categories of standards in the IIA International Standards for the
26-3
26-1 (continued)
The Attribute Standards are:
Purpose, authority, and responsibility
Independence and objectivity
The Performance Standards are:
Managing the internal audit activity
Nature of work
Engagement planning
independence. The internal auditor should not be responsible for performing
operating functions in a company or for correcting deficiencies when ineffective
or inefficient operations are found.
the issuance of OMB Circular A-133.
26-4 The auditing standards of the Yellow Book are consistent with the
principles in AICPA auditing standards.
participate in an external quality control review program.
26-4
26-4 (continued)
on the financial statements.
Reporting. The audit report must state that the audit was made in
accordance with generally accepted government auditing standards
(GAGAS). In addition, the report on financial statements must
describe the scope of the auditors’ testing of compliance with laws
judgments.
26-5 The primary specific objectives that must be incorporated into the design
of audit tests under the Single Audit Act are as follows:
eligible to receive them.
Matching requirements, levels of effort, and earmarking limitations
were met.
26-6 The revised OMB Circular A-133 greatly simplified reporting under the
with GAAP.
2. An opinion as to whether the schedule of federal awards is
statements as a whole.
major programs.
4. A report on compliance with laws, regulations, and the provisions
5. A schedule of findings and questioned costs.
26-7 An operational audit is the review of any part of an organization ’s
26-8 Effectiveness refers to the accomplishment of objectives, whereas
efficiency refers to the resources used to achieve those objectives. An example
of an operational audit for effectiveness would be to assess whether a
26-9 The following are the distinctions between the three kinds of operational
audits and an example of each for a not-for-profit hospital:
TYPES OF OPERATIONAL AUDIT
EXAMPLE FOR A HOSPITAL
Functional Functions are a means of
categorizing the activities of a business,
such as the billing function or
production function. A functional
operational audit deals with any of
these functions.
Review of the payroll
department to determine if the
operations are effectively and
efficiently performed.
Organizational An operational audit of
an organization deals with an entire
organizational unit, such as a
department, branch, or subsidiary.
Review of the entire hospital
for inefficiencies found in any
department in the hospital.
Special assignment Special operational
auditing assignments arise at the
request of management for anything of
concern to management.
Review of the IT system for
failure to bill insurance
companies for reimbursable
charges.
26-11 Different federal and state government auditors perform operational
auditing, often as a part of doing financial audits. The most widely recognized
government auditors group is the United States Government Accountability
Office (GAO). In addition, each state has an Auditor General’s office that has similar
26-6
26-11 (continued)
26-12 It is common, as a part of doing an audit of historical financial statements,
for CPA firms to also identify operational problems and make recommendations
that may benefit the audit client. The recommendations can be made orally, but
they are typically communicated through a management letter.
CPA firm to evaluate the efficiency and effectiveness of its computer systems.
Auditors of public companies have to be especially cautious due to the
prohibition of many non-audit services for public company audit clients.
audit of historical financial statements.
26-14 Planning in an operational audit is similar to the audit of historical
financial statements. Like audits of financial statements, the operational auditor
must determine the scope of the engagement and communicate that to the
audit. Another difference is that staffing is often more complicated in an
operational audit than in a financial audit. This is because the areas covered by
operational audits are diverse and often require special technical skills.
recommendations.
26-7
Multiple Choice Questions from CPA Examinations
26-16 a. (3) b. (3) c. (2)
26-17 a. (1) b. (2) c. (3)
26-18 a. (4) b. (4) c. (4)
26-19 a. (1) b. (3) c. (4)
Discussion Questions and Problems
internal auditor.
b. 1. Objectivity is not impaired. Assistance with the development
of written policies and procedures to guide Lajod’s staff
verification of proper internal controls.
2. Objectivity is impaired. The preparation of bank reconciliations
is an internal check over cash. In order to maintain
3. Objectivity is not impaired in the review of the budget for
reasonableness if the internal auditor has no responsibility
for establishing or implementing the budget. Objectivity is
4. Objectivity is impaired in that the internal auditor will be
called upon to evaluate the design and implementation of the
26-8
26-20 (continued)
5. Objectivity is impaired. The internal auditors should not be
c. 1. Yes, the reporting relationship results in an objectivity problem.
related transactions.
The internal audit staff is responsible for independent
reports.
2. No, the responses for requirement b. would not be affected
by the internal audit staff reporting to an audit committee
rather than the controller. In order to maintain objectivity, the
internal audit staff should refrain from performing non-audit
functions such as management decision-making, design
26-21 a. To help organizations accomplish their objectives, management is
responsible for establishing and maintaining a system of internal
controls on behalf of the organization’s stakeholders and is held
accountable for this responsibility. A dedicated, independent, and
b. The following are the six steps to certification:
1. Decide which certification is right for you.
2. Determine your eligibility and skill level.
