Internal and

Governmental
Financial
Auditing
and Operational
Auditing

Chapter 26
Fauzan Rivaldy Syarif
Learning Objective 1

Explain the role of internal

auditors in financial auditing.
Internal Auditing

It is an independent, objective assurance and

consulting activity designed to add value and
improve an organizations 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.
Institute of Internal
Auditors Ethical Principles

Integrity
Objectivity
Confidentiality
Competency
Relationship of Internal and
External Auditors

Similarities:
1. Competency
2. Methodology
3. Audit risk mode
 Relationship of Internal and
External Auditors

Differences:
The internal auditor is responsible to
management

The external auditor is responsible to

financial statement users
Learning Objective 2

Describe the auditing and reporting

requirements under Government Auditing
Standards and the Single Audit Act
Governmental Financial
Auditing

The primary source of authoritative

literature for performance of government
audits is Government Auditing Standards
Governmental Financial
Auditing

The Yellow Book standards are often

called generally accepted government
auditing standards
Financial Audit and Reporting
Requirements Yellow Book

Materiality and significance

Compliance auditing
Reporting
 Audit Requirements

The audit should be in accordance with

generally accepted government auditing
Standards

The auditor must obtain an understanding of internal

control over federal programs sufficient to support a
low assessed level of control risk for major programs
 Audit Requirements

The auditor should determine whether the client

had complied with the laws, regulations, and the
provisions of contracts or grant agreements
that may have a direct and material effect
on each of its major programs.
Reporting Requirements

1. An opinion on whether the financial statements are

in accordance with GAAP
2. An opinion as to whether the schedule of federal
awards is presented fairly in all material respects in
relation to the financial statements as a whole
3. A report on internal control related to the financial
statements and major programs
4. A report on compliance with laws, regulations, and
the provisions of contracts or grant agreements
5. A schedule of findings and questioned costs
Learning Objective 3

Distinguish operational auditing from

financial auditing.
Operational Auditing

The purpose of operational auditing is

to determine the effectiveness or
efficiency of any part of an
organization
Differences Between
Operational
and Financial Auditing
Purpose of the audit

Distribution of the reports

Inclusion of nonfinancial areas

Learning Objective 4

Provide an overview of operational audits

Types of Operational Audits

Functional

Organizational

Special assignments
Who Performs Operational
Audits

Internal auditors

Government auditors

CPA firms
Independence and Competence
of Operational Auditors

The two most important qualities for an

operational auditor are:
Independence
Competence
Learning Objective 5

Plan and perform an operational audit.

Sources of Criteria

Historical performance
Benchmarking
Engineered standards
Discussion
Phases in Operational
Auditing

Planning
Evidence accumulation and evaluation
Reporting and follow up
Planning

Staffing
Background information
Understand internal control
Decide on appropriate evidence
Evidence Accumulation
and Evaluation

Documentation

Analytical Procedures

Observation
 Reporting and Follow Up

Two major differences in operational and

financial auditing reports:
1. In operational audits, the report is
usually sent only to management

2. Tailoring of each report is required

in operational audits
Thank You.