Podcast
Questions and Answers
What is the first phase in an operational audit?
What is the first phase in an operational audit?
Which of the following is NOT typically considered during the planning phase of an operational audit?
Which of the following is NOT typically considered during the planning phase of an operational audit?
What type of evidence is used less extensively in operational audits compared to financial audits?
What type of evidence is used less extensively in operational audits compared to financial audits?
Which of the following is essential for the operational auditor to consider during the evidence accumulation phase?
Which of the following is essential for the operational auditor to consider during the evidence accumulation phase?
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Who are the parties typically involved in the discussion and agreement phase for operational auditing?
Who are the parties typically involved in the discussion and agreement phase for operational auditing?
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What is a key reason external auditors may lower their fees for a client?
What is a key reason external auditors may lower their fees for a client?
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Which of the following is NOT a characteristic of effective internal auditors?
Which of the following is NOT a characteristic of effective internal auditors?
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Operational auditing primarily evaluates what aspect of an organization?
Operational auditing primarily evaluates what aspect of an organization?
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Which term may be used interchangeably with operational auditing?
Which term may be used interchangeably with operational auditing?
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What is a primary difference between operational and financial auditing?
What is a primary difference between operational and financial auditing?
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To whom are financial audit reports primarily distributed?
To whom are financial audit reports primarily distributed?
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Operational auditing differs from financial auditing in which of the following areas?
Operational auditing differs from financial auditing in which of the following areas?
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What is a primary disadvantage of functional auditing?
What is a primary disadvantage of functional auditing?
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Which type of audit emphasizes the interaction between functions within an organization?
Which type of audit emphasizes the interaction between functions within an organization?
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Which group is NOT typically associated with performing operational audits?
Which group is NOT typically associated with performing operational audits?
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What is a benefit of having internal auditors conduct operational audits?
What is a benefit of having internal auditors conduct operational audits?
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What is the focus of special assignments in operational auditing?
What is the focus of special assignments in operational auditing?
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What is one of the categories defined by the Yellow Book in relation to operational audits?
What is one of the categories defined by the Yellow Book in relation to operational audits?
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Which statement about internal auditing is correct?
Which statement about internal auditing is correct?
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Which of the following is a characteristic of organizational audits?
Which of the following is a characteristic of organizational audits?
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What role do government auditors play in operational audits?
What role do government auditors play in operational audits?
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What is primarily assessed in an economy and efficiency audit?
What is primarily assessed in an economy and efficiency audit?
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Which of the following is NOT a purpose of a program audit?
Which of the following is NOT a purpose of a program audit?
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What is one major risk to an auditor's independence?
What is one major risk to an auditor's independence?
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What distinguishes competence as a significant challenge for operational auditors?
What distinguishes competence as a significant challenge for operational auditors?
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Which of the following statements is true regarding the reporting structure of internal auditors?
Which of the following statements is true regarding the reporting structure of internal auditors?
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Which criterion is essential for evaluating both efficiency and effectiveness in operational audits?
Which criterion is essential for evaluating both efficiency and effectiveness in operational audits?
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What is a common reason for inefficiencies identified during an economy and efficiency audit?
What is a common reason for inefficiencies identified during an economy and efficiency audit?
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Which characteristic is essential for an operational auditor to maintain objectivity?
Which characteristic is essential for an operational auditor to maintain objectivity?
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Why is it problematic for internal auditors to report their findings to operational managers?
Why is it problematic for internal auditors to report their findings to operational managers?
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In the context of operational auditing, which of the following is a crucial factor for ensuring the auditor's recommendations are implemented?
In the context of operational auditing, which of the following is a crucial factor for ensuring the auditor's recommendations are implemented?
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What is one criterion used to evaluate plant layouts regarding equipment performance?
What is one criterion used to evaluate plant layouts regarding equipment performance?
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Which of the following best describes the evaluation of historical performance as a source of criteria?
Which of the following best describes the evaluation of historical performance as a source of criteria?
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What aspect of plant layout is not directly evaluated by the criteria mentioned?
What aspect of plant layout is not directly evaluated by the criteria mentioned?
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Why is benchmarking important in operational audits?
Why is benchmarking important in operational audits?
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What is a potential downside of using engineered standards as a source of evaluation criteria?
What is a potential downside of using engineered standards as a source of evaluation criteria?
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Which question addresses the safety consideration in plant layout evaluation?
Which question addresses the safety consideration in plant layout evaluation?
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What should operational auditors be cautious about when using external benchmarks?
What should operational auditors be cautious about when using external benchmarks?
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Which of the following questions would be least relevant in evaluating the effectiveness of a plant layout?
Which of the following questions would be least relevant in evaluating the effectiveness of a plant layout?
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What is the primary purpose of utilizing time and motion studies in operational audits?
What is the primary purpose of utilizing time and motion studies in operational audits?
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Which of the following is a key criterion for evaluating the layout of a production facility?
Which of the following is a key criterion for evaluating the layout of a production facility?
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Study Notes
Audit Practice and Procedures II
- Course title: Audit Practice and Procedures II
- Course content: Internal and Government Financial Auditing and Operational Audit
- Week: Eleven
- University: Commonwealth Caribbean (UCC)
Recap of Last Class
- No specific details provided about the recap
Internal Financial Auditing
- Definition of internal auditing: An independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
- Role of internal auditors: Expected to provide value to the organization through improved operational effectiveness, while also performing traditional responsibilities, which include reviewing the reliability and integrity of information, ensuring compliance with policies and regulations, and safeguarding assets.
- Objectives of internal auditors: Broader than external auditors; providing flexibility to meet company needs. May focus on different areas, and the extent of internal auditing may vary from one company to another. Internal audit reports are not standardized because reporting needs vary for each company and the reports are not relied on by external users.
Institute of Internal Auditors Ethical Principles and Rules of Conduct
- Integrity: Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information. They are not unduly influenced by their own interests.
- Objectivity: Internal auditors maintain the highest level of professional objectivity in gathering, evaluating, and communicating information. They are not unduly influenced by their own interests or by others.
- Confidentiality: Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
- Competency: Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services.
Rules of Conduct
- Integrity: Perform work honestly, diligently, and responsibly; observe the law and professional expectations; avoid illegal or unethical activities; respect and contribute to ethical organizational objectives.
- Objectivity: Avoid actions that threaten impartiality or professional judgment, refrain from accepting anything compromising judgment, disclose all relevant facts.
- Confidentiality: Safeguard information; avoid use for personal gain or to disadvantage the organization.
International Standards for the Professional Practice of Internal Auditing
- Purpose, Authority, and Responsibility: The internal audit activity must have clear objectives, authority, and functions defined in an independent audit charter, consistent with the Code of Ethics, and the Standards.
- Independence and Objectivity: Internal audit activity must be independent, and internal auditors must be objective.
- Proficiency and Due Professional Care: Engagements must be performed with competency.
- Quality Assurance and Improvement Program: The chief audit executive must develop and maintain a quality assurance program that covers all aspects of the internal audit activity.
- Managing the Internal Audit Activity: Internal audit head must ensure value to the organization, through evaluating and improving governance, risk management, and controls.
- Nature of Work: The audit must evaluate and contribute to the improvement of governance, risk management, and control processes using a systematic and disciplined approach.
Relationship of Internal and External Auditors
- Similar methodology and consider risk/materiality
- Differences: Responsibilities to management and the board (internal); to financial statement users (external).
External Auditors Reliance on Internal Auditors
- Effectiveness of internal audit function reduces external auditor control risk and substantive testing required, potentially reducing fees.
- Key factors for effective internal audit function: independence from operating units, competence, and having performed relevant audit tests.
Governmental Financial Auditing
- No specific details provided beyond the title
Operational Auditing
- Beyond financial auditing activities, deals with efficiency and effectiveness of an organization activities.
- Auditors may use management auditing or performance auditing interchangably
Differences Between Operational and Financial Auditing
- Purpose: Financial auditing focuses on historical record accuracy, while operational auditing focuses on improving future effectiveness/efficiency, evaluating cost savings etc.
- Report Distribution: Financial audit reports typically go to external users (stockholders etc.), while operational audit reports are targeted to management.
- Areas of Focus: Financial audits cover financial information only; operational audits include non-financial areas like operations' effectiveness and efficiency.
Effectiveness versus Efficiency
- Effectiveness: Meeting objectives; e.g., producing parts without defects.
- Efficiency: Using resources to achieve objectives; e.g., producing parts at minimum cost.
Types of Inefficiency
- Costly acquisition of goods/services
- Lack of readily available raw materials
- Duplication of employee effort
- Wasteful work activities
- Excessive number of employees
Relationship Between Operational Auditing and Internal Controls
- Management establishes internal controls for meeting objectives like reliability of reporting, efficiency/effectiveness, and compliance.
- Operational auditing relates to efficiency and effectiveness of operations, while other control objectives are also related to operational activities.
Two Things Distinguish Internal Control Evaluation
- Purpose: Operational focuses on efficiency/effectiveness and recommendations, while financial focuses on testing extent of substantive audits and effectiveness of reporting.
- Scope: Operational considers all controls influencing efficiency/effectiveness, while financial is restricted to effectiveness of controls over financial reporting
Scope of Operational Auditing
- Scope covers all controls affecting efficiency and effectiveness.
- Financial auditing scope is restricted to internal controls' effect on financial reports' accuracy.
Types of Operational Audits
- Functional: Categorized by business function (e.g., billing, production, accounting); often detailed studies of a single, or related functions.
- Organizational: Emphasis on interactions between functions and efficiency of an entire organizational unit (department, branch).
- Special Assignments: Wide variety of audits requested by management, including evaluation of process, investigations.
Who Performs Operational Audits
- Internal Auditors
- Government Auditors
- CPA Firms
Government Audits
- Purpose: Economy and efficiency audits; whether resources are acquired, protected, used efficiently. Includes program audits which determine whether benefits established by a legislature, or another entity are being achieved, effectiveness of program, and compliance with applicable laws.
- Type: Performance Audits
Independence and Competence of Operational Auditors
- Independence: Auditors need to be independent from the organization they are auditing.
- Competence: Auditors need the necessary skills and expertise in area of operation being audited.
Competence for Operational Auditors
- Must evaluate the cause of operational problems, make appropriate recommendations when dealing with wide-ranging problems and determine the efficiency/effectiveness of areas being audited.
Criteria for Evaluating Efficiency and Effectiveness:
- Criteria for evaluating efficiency/effectiveness should be used as a guide in an operational audit. Questions about the organization's layout, approval of design by appropriate level of management, and whether assets are used to at least sixty percent capacity for an adequate period are some of the many criteria an auditor should take into consideration.
Sources of Criteria to Develop Evaluation Criteria
- Historical performance: Audit criteria based on actual results from past periods or benchmarks
- Benchmarking: Other entities/orgs; comparable to client organization.
Phases in Operational Auditing
- Planning: Determining the scope, appropriate evidence to gather, and staffing of the audit engagement
- Evidence Accumulation and Evaluation: Collecting evidence, using methods of inspection, inquiry, analysis, etc.
- Reporting and Follow-up: Reporting findings/recommendations and monitoring follow up by management.
Examples of Operational Audit Findings
- Outside janitorial firm: Audit revealed cost savings by using an outside company.
- Use the Right Tool: Audit recommended replacing more expensive, less useful trucks with vans, realizing cost savings.
- Computer Programs: Audit uncovered and corrected several problems in the company's profit-sharing plan, saving manual labor and resources.
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Description
Test your knowledge of the key phases, concepts, and differences in operational auditing compared to financial auditing. This quiz covers essential aspects including planning, evidence accumulation, and the roles of auditors. Perfect for students and professionals in accounting and audit fields.
