Presentation on theme: "What is the role of internal auditors in financial auditing?"— Presentation transcript:
1 What is the role of internal auditors in financial auditing?
2 Internal Auditing The New York Stock Exchange requires its registrants to havean internal audit function.
3 Internal Auditing It is an independent, objective assurance and consulting activity designed to add valueand improve an organization’s operations.It helps an organization accomplish its objectivesby bringing a systematic, disciplined approach toevaluate and improve the effectiveness of riskmanagement, 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 IntegrityObjectivityConfidentialityCompetency
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 DifferencesThe external auditor is responsibleto financial statement users.The internal auditor is responsibleto management.
11 Relationship of Internal and External Auditors SimilaritiesCompetencyObjectivityMethodologyAudit risk model
12 Governmental Financial Auditing The primary source of authoritative literaturefor performance of government audits isGovernment Auditing Standards,which is issued by the GAO.Because of the color of the cover, it isusually referred to as the “Yellow Book.”
13 Governmental Financial Auditing The Yellow Book standards are often calledgenerally accepted government auditingstandards (GAGAS or GAS).
14 Financial Audit and Reporting Requirements – Yellow Book Materiality and significanceQuality controlCompliance auditingReportingAudit files
15 Audit and Reporting – Single Audit Act and OMB Circular A-133 The threshold for requiring a single auditwas raised from $100,000 to $300,000to exempt many smaller entitiesfrom single audit requirements.The OMB increased the single auditthreshold to $500,000 beginning in 2004.
16 Audit and Reporting – Single Audit Act and OMB Circular A-133 The office of Management and Budget issueda revised Circular A-133, Audits of States,Local Governments, and Non-ProfitOrganizations, to provide administrativeguidance for implementing thesingle audit requirements.
17 Audit Requirements The audit should be in accordance with generally accepted governmentauditing standards (GAGAS).The auditor must obtain an understandingof internal control over federal programssufficient to support a low assessedlevel of control risk for major programs.
18 Audit Requirements The auditor should determine whether the client had complied with laws, regulations, and theprovisions of contracts or grant agreementsthat may have a direct and material effecton each of its major programs.
19 Reporting Requirements an opinion on whether the financial statementsare in accordance with GAAP, and an opinionas to whether the schedule of federal awardsis presented fairly in all material respects inrelation to the financial statements as a whole
20 Reporting Requirements a report on internal control related to thefinancial statements and major programsa report on compliance with laws,regulations, and the provisions ofcontracts or grant agreementsa schedule of findings and questioned costs
21 Reporting Requirements reasonable (positive) assurance relatedto items testedlimited (negative) assurance related toitems not tested (usually includes“nonmajor” programs)
22 Operational Auditing The purpose of operational auditing is to determine the efficiency and effectivenessof any part of an organization.
23 Differences between Operational and Financial Auditing Purpose ofthe auditDistribution ofthe reportsInclusion ofnonfinancial areas
24 Effectiveness Versus Efficiency Effectiveness refers to theaccomplishment of objectives.Efficiency refers to the resources usedto accomplish those objectives.
25 Effectiveness Versus Efficiency Types ofinefficiencyExampleAcquisition of goods andservices is excessively costly.Bids for purchases ofmaterials are not required.Raw materials are notavailable when needed.An assembly line was shutdown for lack of materials.A duplication of effort byemployees exists.Production and accountingkeep identical records.
26 EffectivenessCan a process be “effective” if it is inefficient?
27 Relationship between Operational Auditing and Internal Controls Reliability of financial reportingEfficiency and effectiveness of operationsCompliance with applicable laws and regulations
28 Types of Operational Audits FunctionalOrganizationalSpecial assignments
29 Who Performs Operational Audits InternalauditorsGovernmentauditorsCPA firms
30 Independence and Competence of Operational Auditors The two most important qualities foran operational auditor are:IndependenceCompetence
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 officeengineering at the time of original design?Has home office engineering done a reevaluationstudy of plant layout in the past five years?
33 Specific Criteria for Evaluating Efficiency and Effectiveness Is each piece of equipment operatingat 60% of capacity or more forat least three months each year?Does layout facilitate the movement ofnew materials to the production floor?Does layout facilitate the productionof finished goods?
34 Specific Criteria for Evaluating Efficiency and Effectiveness Does layout facilitate the movement offinished goods to distribution centers?Does the plant layout effectively useexisting equipment?Is the safety of employees endangeredby the plant layout?
35 Sources of Criteria Historical performance Benchmarking Engineers standardsDiscussion and agreement
36 Phases in Operational Auditing PlanningEvidence accumulation and evaluationReporting and follow-up
37 Planning Scope of engagement Staffing Background information Understand internal controlDecide on appropriate evidence
38 Evidence Accumulation and Evaluation DocumentationClientObservation
39 Reporting Follow-up Report usually sent to management Tailored reports Follow-up on recommendationswith management
40 Examples of Operational Audit Findings (from text) Outside janitorial firm saves $160,000More timely credit memo processingUse the right toolComputer programs save manual labor