Audit Practice and Procedures II - Week 11
48 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary difference in focus between operational audits and financial audits?

Operational audits focus on efficiency and effectiveness across various aspects of an organization, while financial audits are limited to financial statement fairness.

How do criteria for effectiveness differ from those for efficiency in operational auditing?

Effectiveness criteria measure whether objectives are met, while efficiency criteria evaluate the resources used to achieve those objectives.

What might an auditor assess to determine the effectiveness of a governmental agency in elevator safety?

An auditor might assess whether the agency's objective of inspecting all elevators annually is met and whether any fatalities occurred due to elevator breakdowns.

In the context of operational auditing, what does it mean to conduct an efficiency analysis?

<p>Conducting an efficiency analysis involves evaluating the cost-effectiveness of processes while ensuring that quality remains unchanged.</p> Signup and view all the answers

List one objective of effective internal controls that relates directly to operational auditing.

<p>One objective is the efficiency and effectiveness of operations.</p> Signup and view all the answers

Why is it generally easier to set criteria for efficiency than for effectiveness?

<p>Efficiency criteria often focus on reducing costs without affecting quality, while effectiveness requires measuring the extent to which broader objectives are achieved.</p> Signup and view all the answers

What types of inefficiencies might operational auditing commonly uncover?

<p>Operational auditing may uncover typical inefficiencies such as excessive costs or ineffective processes.</p> Signup and view all the answers

How do the objectives of reliability of financial reporting relate to operational auditing?

<p>While primarily associated with financial audits, reliability of financial reporting can also affect the efficiency and effectiveness assessed in operational audits.</p> Signup and view all the answers

What is the primary focus of a functional audit compared to an organizational audit?

<p>A functional audit focuses on one or more specific functions, while an organizational audit examines the efficiency and effectiveness of an entire organizational unit.</p> Signup and view all the answers

What is one significant advantage of conducting a functional audit?

<p>One significant advantage is that it allows auditors to develop specialized expertise in a specific area.</p> Signup and view all the answers

Identify a disadvantage of functional auditing.

<p>A disadvantage is the failure to evaluate interrelated functions, which may lead to incomplete assessments.</p> Signup and view all the answers

How do special assignments in operational auditing arise?

<p>Special assignments arise at the request of management to address specific issues or areas of concern.</p> Signup and view all the answers

Who typically performs operational audits?

<p>Operational audits are performed by internal auditors, government auditors, or CPA firms.</p> Signup and view all the answers

What distinguishes internal auditors from other groups conducting operational audits?

<p>Internal auditors are positioned uniquely within an organization, often performing both operational and financial audits simultaneously.</p> Signup and view all the answers

What role does the Government Accountability Office (GAO) play in operational auditing?

<p>The GAO performs operational audits as part of their financial audits and sets standards for performance auditing.</p> Signup and view all the answers

What are economy and efficiency audits classified as?

<p>Economy and efficiency audits are classified as performance audits, which are synonymous with operational audits.</p> Signup and view all the answers

What are the primary purposes of operational auditing compared to financial auditing?

<p>Operational auditing focuses on evaluating efficiency and effectiveness, while financial auditing aims to determine the extent of substantive audit testing and report on the effectiveness of internal control over financial reporting.</p> Signup and view all the answers

How does the scope of operational auditing differ from financial auditing?

<p>The scope of operational auditing encompasses any control affecting efficiency or effectiveness, while financial auditing is restricted to internal control over financial reporting and its impact on fair presentation of financial statements.</p> Signup and view all the answers

Give two examples of what an operational auditor and a financial auditor might evaluate in the same internal control test.

<p>Both might evaluate internal verification procedures for duplicate sales invoices; however, the operational auditor focuses on customer satisfaction, while the financial auditor aims to reduce substantive testing on accounts receivable.</p> Signup and view all the answers

What are the three broad categories of operational audits?

<p>The three categories are functional audits, organizational audits, and special assignments.</p> Signup and view all the answers

What role does internal control evaluation play in the purpose of financial auditing?

<p>Internal control evaluation in financial auditing serves to determine the extent of substantive audit testing required and, when applicable, to report on the effectiveness of internal control over financial reporting.</p> Signup and view all the answers

How might the scope of an operational audit affect the marketing department?

<p>An operational audit could focus on evaluating the effectiveness of marketing strategies, such as the impact of catalogs on product sales.</p> Signup and view all the answers

What is a potential secondary purpose of financial audits besides reporting on internal control effectiveness?

<p>A secondary purpose of financial audits is to provide operational recommendations to management.</p> Signup and view all the answers

In what way can functions be categorized within functional audits?

<p>Functions can be categorized and subdivided in various ways, such as the accounting function being split into cash disbursement, cash receipt, and payroll disbursement functions.</p> Signup and view all the answers

What are the three main purposes of an economy and efficiency audit?

<p>To determine resource acquisition and usage efficiency, identify causes of inefficiencies, and ensure compliance with relevant laws and regulations.</p> Signup and view all the answers

How does the purpose of a program audit differ from that of an economy and efficiency audit?

<p>A program audit focuses on achieving desired results and evaluating effectiveness, whereas an economy and efficiency audit assesses resource usage and compliance.</p> Signup and view all the answers

Why is independence crucial for operational auditors?

<p>Independence ensures that auditors can make unbiased investigations and recommendations without being influenced by the entity they audit.</p> Signup and view all the answers

What management structure enhances the independence of internal auditors?

<p>Having the internal audit department report directly to the board of directors or the president enhances their independence.</p> Signup and view all the answers

What is a significant challenge regarding the competence of operational auditors?

<p>Finding qualified internal auditors who can evaluate diverse operational problems such as marketing effectiveness and production efficiency.</p> Signup and view all the answers

Explain why an operational auditor should not be responsible for correcting deficiencies found during an audit.

<p>If auditors are responsible for correcting deficiencies, it compromises their independence and objectivity.</p> Signup and view all the answers

What role do specific criteria play before an operational audit begins?

<p>Specific criteria provide a clear framework for evaluating efficiency and effectiveness during the audit.</p> Signup and view all the answers

What are the three main objectives that a program audit aims to achieve?

<p>To assess the achievement of desired results, evaluate the effectiveness of programs, and ensure compliance with applicable laws and regulations.</p> Signup and view all the answers

What is the significance of having all plant layouts approved by home office engineering?

<p>It ensures that the layouts meet engineering standards and safety regulations, which can enhance operational efficiency.</p> Signup and view all the answers

Why is it important for home office engineering to conduct a reevaluation study of plant layout every five years?

<p>It allows the identification of potential improvements and adaptations to changes in production processes and technology.</p> Signup and view all the answers

What does operating each piece of equipment at 60 percent capacity for at least three months indicate?

<p>It suggests that the equipment is being utilized effectively and not underperforming, which can lead to better productivity.</p> Signup and view all the answers

How does a well-designed layout facilitate the movement of materials to the production floor?

<p>It minimizes transportation time and reduces handling costs, increasing overall efficiency in the manufacturing process.</p> Signup and view all the answers

What role does benchmarking play in evaluating operational layouts?

<p>Benchmarking provides a comparison against similar organizations, which helps identify performance gaps and areas for improvement.</p> Signup and view all the answers

Why is developing criteria based on engineered standards considered time-consuming and costly?

<p>It requires detailed analysis and expertise, particularly when conducting time and motion studies to establish efficient output rates.</p> Signup and view all the answers

How can historical performance serve as a source of criteria in operational audits?

<p>Historical performance allows auditors to assess trends and improvements by comparing current results with prior periods.</p> Signup and view all the answers

What potential risks might arise if the plant layout endangers employee safety?

<p>It can lead to increased accidents, regulatory penalties, and decreased employee morale, ultimately affecting productivity.</p> Signup and view all the answers

What is the primary benefit of developing standards by industry groups?

<p>They help spread the cost among all members.</p> Signup and view all the answers

Who should be included in discussions when setting objective criteria for operational audits?

<p>Management of the entity, the operational auditor, and the reporting entity or persons.</p> Signup and view all the answers

List the three phases of an operational audit.

<p>Planning, evidence accumulation and evaluation, reporting and follow-up.</p> Signup and view all the answers

Why is it important for operational auditors to understand internal control?

<p>It helps in determining the scope of the engagement and the efficiency of the audit process.</p> Signup and view all the answers

What types of evidence are commonly used in operational auditing?

<p>Inspection, client inquiry, analytical procedures, and observation.</p> Signup and view all the answers

How might an auditor address inherent risks when sampling elevators?

<p>By increasing the sampling of older elevators or those with previous safety defects.</p> Signup and view all the answers

What is one way an auditor can verify the competence of elevator inspectors?

<p>By reviewing their resumes, training programs, and performance reports.</p> Signup and view all the answers

Why might reperformance be less common in operational audits compared to financial audits?

<p>Because existence and accuracy objectives are less relevant for operational audits.</p> Signup and view all the answers

Study Notes

Audit Practice and Procedures II

  • Course: Audit Practice and Procedures II
  • Institution: University of the Commonwealth Caribbean (UCC)
  • Week: Eleven
  • Topics: Internal and Government Financial Auditing, Operational Audit

Recap of Last Class

  • No specific details provided

Internal Financial Auditing

  • Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.
  • Internal auditing helps an organization accomplish its objectives by evaluating and improving risk management, control, and governance processes.
  • Internal auditors are expected to provide value through improved operational effectiveness, and perform traditional responsibilities including reviewing the reliability and integrity of information, ensuring compliance with policies and regulations, and safeguarding assets.
  • Objectives of internal auditors are broader than external auditors', and flexibility allows for company-specific needs. The extent of internal auditing varies between companies. Internal audit reports are not standardized, and not relied on by external users..

Ethical Principles and Rules of Conduct

  • Integrity: Internal auditors exhibit the highest level of professional objectivity and provide a basis for reliance, evaluating, and communicating information without undue influence from personal or external interests.
  • Objectivity: Internal auditors are impartial and balanced in their assessments, evaluating relevant circumstances without bias.
  • Confidentiality: Internal auditors respect information ownership and confidentiality, releasing information only as legally/professionally required.
  • Competency: Internal auditors apply necessary knowledge, skills, and experience for internal auditing services.

Rules of Conduct

  • Integrity: Auditors should perform with honesty, diligence, and responsibility; observe the law, avoid discreditable actions, and respect organizational objectives.
  • Objectivity: Auditors should avoid any activity potentially impairing unbiased assessment, not accept anything compromising judgment, and disclose facts that could distort reporting.
  • Confidentiality: Auditors should properly use and protect acquired information and should not use it for personal gain or detrimental to organizational objectives.
  • Competency: Auditors should perform services using necessary knowledge, skills, and experience, following the International Standards for the Professional Practice of Internal Auditing and continually improve proficiency.

International Standards for the Professional Practice of Internal Auditing

  • Attribute Standards: Cover purpose, authority, and responsibility of the internal audit activity. The chief audit executive must review and present the internal audit charter to senior management and the board for approval, ensuring independence and objectivity.
  • Performance Standards: Detail managing the internal audit activity through appropriate evaluation of governance, risk management, and control processes; developing and documenting engagement plans; performing engagements to achieve objectives; communicating engagement results; and monitoring progress.

Relationship of Internal and External Auditors

  • Internal auditors are responsible to management and the board, while external auditors are responsible to financial statement users.
  • Both must be competent as auditors and remain objective in performing their work
  • Both follow a similar methodology, planning and conducting tests.
  • Decisions on materiality and risks may differ due to differing needs of users.

External Auditors' Use of Internal Auditors

  • External auditors rely on internal auditors to assess control risk and reduce substantive testing.
  • Effective internal audit functions reduce external auditor fees.

Governmental Financial Auditing

  • No specific details presented

Operational Auditing

  • Operational auditing deals with the efficiency and effectiveness of an organization's operations, extending beyond financial auditing to encompass areas like resource acquisition, protection, and usage.
  • Operational auditing uses the terms management auditing or performance auditing interchangeably.

Differences Between Operational and Financial Auditing

  • Purpose: Financial auditing focuses on past recording accuracy, while operational auditing focuses on improving future performance and efficiency.
  • Distribution of Reports: Financial audit reports usually go to external users (stockholders, bankers), while operational reports are primarily for management.
  • Inclusion of Nonfinancial Areas: Financial audits are limited to financial aspects, while operational audits consider all operational aspects, like programs, activities, or functions (e.g., factory employees, advertising programs).

Effectiveness vs. Efficiency

  • Auditors must define criteria to measure effectiveness (meeting objectives, producing parts without defects) and efficiency (resources used to achieve objectives, minimum cost)
  • Operational audit assesses if an organization has achieved assigned objectives, such as elevator safety in a city.

Types of Inefficiencies

  • Excessive cost of acquisition of goods and services
  • Unavailability of raw materials
  • Duplication of effort by employees
  • Work done without purpose
  • Excessive number of employees.

Relationship Between Operational Auditing and Internal Controls

  • Management implements internal controls to meet goals:
    • Reliability of financial reporting
    • Efficiency and effectiveness of operations
    • Compliance with applicable laws and regulations.

Two Things Distinguishing Internal Control Evaluation and Testing

  • Purpose: Operational auditing evaluates efficiency and effectiveness; financial auditing determines audit testing extent and reports on control effectiveness.
  • Scope: Operational auditing's scope is broader, encompassing any control that affects efficiency or effectiveness; financial audits focus on control's effect on financial reporting fairness.

Types of Operational Audits

  • Functional Audits: Focus on individual functions (e.g., billing, production, payroll).
  • Organizational Audits: Look at entire organizational units (e.g., departments, branches).
  • Special Assignments: Address specific problems/issues e.g., IT system issues, fraud investigation).

Who Performs Operational Audits

  • Internal Auditors
  • Government Auditors
  • CPA firms.

Government Audit Types

  • Economy and Efficiency Audits: Evaluate resource acquisition, protection, and use; causes of inefficiencies/uneconomical practices; compliance with laws.
  • Program Audits: Determine if desired results/benefits, effectiveness of organizations and programs are being achieved and compliant with laws/regulations.

Independence and Competence of Operational Auditors

  • Operational auditors need independence to report impartially to management.
  • Auditors should not operate functions needing improvement/correction.
  • Competence needed to understand cause of operational problems.

Criteria for Evaluating Efficiency and Effectiveness

  • Specific criteria, e.g., evaluation of equipment layout for a company.
  • Criteria may be sourced from past performance, benchmarking (entities similar to the client) or engineered standards.

Phases in Operational Auditing

  • Planning: Scoping, proper staffing; background information/internal control understanding.
  • Evidence accumulation and Evaluation: Using inspection, client inquiry, analytical procedures and observation.
  • Reporting and Follow Up: Tailoring reports to management, with copy to the unit, following up on recommendations.

Examples of Operational Audit Findings

  • Outside Janitorial Firm: Savings of $160,000 and better quality achieved from changing to an external vendor.
  • Use of the Right Tool: A company saved $25,000 by replacing heavy-duty trucks with light vans, as the previous trucks were predominantly used for service calls.
  • Computer Programs: Identifying and fixing errors in profit-sharing plans to improve accuracy.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Week 11 - Applying the Principles of Internal Auditing - Lecture Notes PDF

Description

Test your knowledge on Internal and Government Financial Auditing as covered in Audit Practice and Procedures II at UCC. This quiz focuses on key concepts of operational auditing and the role of internal auditors in improving organizational effectiveness. Enhance your understanding of risk management and governance processes.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser