AUDITING CHAPTER 19 Compliance Internal Auditing By David

AUDITING CHAPTER 19 Compliance & Internal Auditing By David N. Ricchiute GBW 8 th ed. , Ch. 19

TOPICS Compliance auditing Internal auditing 2 GBW 8 th ed. , Ch. 19

TYPES OF AUDITING Objective Audit Type Standards Financial statement audit Compliance Financial GAO: GASB Performance Internal Operational 3 GBW 8 th ed. , Ch. 19 AICPA: GAAS IIA: Internal Auditing Standards

COMPLIANCE AUDITS: Government Entities Also recipients of governmental financial assistance (SAS 74) Audit must conform to n n n 4 GAAS GAO standards Single Audit Act GBW 8 th ed. , Ch. 19

COMPLIANCE AUDITS: Other Examples Compliance with: Minimum wage laws Employee benefits programs Commercial bank lending agreements Special engagements n n 5 Hazardous waste trust fund State-sponsored health insurance program GBW 8 th ed. , Ch. 19

RESPONSIBILITIES UNDER GAAS Responsibility for detecting violations of laws, regulations identical to responsibility for client error, fraud n n 6 Assess risk of violations creating material misstatements Design procedures to detect anticipated violations GBW 8 th ed. , Ch. 19

EFFECTS OF LAWS, REGULATIONS Management responsible for identifying laws, regulations having direct, material effect on financial statement Auditor designs procedures to detect violations 7 GBW 8 th ed. , Ch. 19

COMPLIANCE & INTERNAL CONTROL Compliance audit requires auditor to n n n 8 Understand internal controls Assess control risk Obtain knowledge about design, performance of internal control policies, procedures GBW 8 th ed. , Ch. 19

GOVERNMENT AUDITING STANDARDS Written by GAO GAGAS n n AICPA 10 GAAS Standards related to w Independence & Quality control w Audit documentation w Legal, regulatory requirements 9 GBW 8 th ed. , Ch. 19

GOVERNMENT FINANCIAL AUDITS: Financial Statement Audits Financial statement audits determine whether n n 10 Financial statements fairly presented Entity complied with laws, regulations GBW 8 th ed. , Ch. 19

GOVERNMENT FINANCIAL AUDITS: Financial-Related Audits Financial-related audits determine whether n n n 11 Financial reports, related items fairly presented Financial information in accord with established, stated criteria Entity adhered to financial compliance requirements GBW 8 th ed. , Ch. 19

GOVERNMENT PERFORMANCE AUDITS Economy & efficiency audits determine whether n n n 12 Entity acquires, protects, uses resources economically & efficiently Causes of diseconomies, inefficiencies Compliance with laws, regulations related to efficiency GBW 8 th ed. , Ch. 19

GOVERNMENT PROGRAM AUDITS Program audits determine n n n 13 Extent to which program achieves results, benefits Effectiveness of organization, program, activity, function Compliance with laws, regulations GBW 8 th ed. , Ch. 19

REPORTING ON COMPLIANCE Positive assurance on tests for noncompliance Description of material instances of noncompliance, if any 14 GBW 8 th ed. , Ch. 19

REPORTING ON INTERNAL CONTROL Government auditing standards require report on internal control in all governmental financial audits to n n n 15 Describe costs, benefits, objectives, limitations of internal control State that auditor assessed control risk Describe deficiencies in internal control not considered reportable conditions GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT Audit coverage n n 16 All governmental units that receive any federal assistance Reporting requirements for governments receiving over $300, 000 GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT: Reports 5 additional reports required on Compliance with General Requirements Major Program compliance with specific requirements Nonmajor Program compliance with specific requirements Schedule of Federal Financial Assistance Internal controls over Federal Financial Assistance 17 GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT: General Requirements 1 9 general requirements n n 18 Involve significant national policy Could materially effect entity’s financial statements GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT: General Requirements 2 Political activity Davis-Bacon Act: labor rates Civil Rights Cash Management Relocation assistance, real property acquisition Federal Financial Reports Allowable cost/cost principle Drug-free workplace Administrative requirements 19 GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT: Specific Requirements 1 Major programs n n n 20 Types services allowed, not allowed Eligibility Matching, level of effort, earmarking Reporting Special tests & provisions GBW 8 th ed. , Ch. 19

SINGLE AUDIT ACT: Specific Requirements 2 When transactions from nonmajor programs are tested n n n 21 Compliance with applicable laws, regulations Allowability program expenditures Eligibility GBW 8 th ed. , Ch. 19

INTERNAL AUDITING Internal auditing is an independent, objective assurance, consulting activity designed to add value, improve organizations operations. It helps organization accomplish objectives by bringing systematic, disciplined approach to evaluate, improve effectiveness of risk management, control, governance Institute of Internal Auditors 22 GBW 8 th ed. , Ch. 19

INTERNAL AUDITING: Independence, Objectivity Independence achieved by reporting to board of directors Objectivity achieved by appraising controls, not designing or implementing them 23 GBW 8 th ed. , Ch. 19

OPERATIONAL AUDITING Verification of data Appraisal of controls Compliance with policies, plans, procedures Protection of assets Appraisal of performance Recommendations for operating improvements 24 GBW 8 th ed. , Ch. 19

SCIENTIFIC METHOD & OPERATIONAL AUDITS Scientific Method Operational Audit Function Recognize problem Become familiar with activity to be reviewed Formulate hypothesis Hypothesis: control operating properly relevant to objective Gather evidence to test Select procedures; gather evidence hypothesis Evaluate evidence Develop conclusions 25 Evaluate evidence Report GBW 8 th ed. , Ch. 19

AUDITOR’S CONSIDERATION INTERNAL AUDIT FUNCTION SAS 65 n Guidance on w Considering work of internal auditors w Using internal auditors to provide direct assistance 26 GBW 8 th ed. , Ch. 19

UNDERSTANDING CONTROLS: Internal Auditor should obtain understanding of internal audit function as part of assessment of control risk n n n 27 Organizational status Adherence to professional standards Internal auditor’s audit plan Access to records; limitations on scope of activities Charter or mission statement GBW 8 th ed. , Ch. 19

ASSESSING COMPETENCE, OBJECTIVITY: Internal Auditor SAS 65 requires independent auditor to review competence, integrity of internal auditor n n 28 Education, experience, certification, continuing education Audit policies, programs, procedures Practices for assigning internal auditors Quality work paper documentation GBW 8 th ed. , Ch. 19

RELIANCE ON INTERNAL AUDITORS Independent auditor can rely on internal auditor after evaluating his/her work for n n n 29 Understanding internal control Assessing risk Performing substantive procedures GBW 8 th ed. , Ch. 19