22 - 1 Prentice Hall Business Publishing, Prentice Hall Business Publishing, Auditing 11/e, Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder Internal and Internal and Governmental Governmental Financial Auditing Financial Auditing and Operational and Operational Auditing Auditing Chapter 26 Chapter 26
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The New York Stock Exchange requires itsThe New York Stock Exchange requires itsregistrants to have an internal audit function.registrants to have an internal audit function.
It is an independent, objective assuranceIt is an independent, objective assuranceand consulting activity designed to addand consulting activity designed to addvalue and improve an organization’s operations.value and improve an organization’s operations.
It helps an organization accomplish its objectivesIt helps an organization accomplish its objectivesby bringing a systematic, disciplined approach toby bringing a systematic, disciplined approach toevaluate and improve the effectiveness of riskevaluate and improve the effectiveness of riskmanagement, control, and governance processes.management, control, and governance processes.
The primary source of authoritative literatureThe primary source of authoritative literaturefor performance of government audits isfor performance of government audits isGovernment Auditing StandardsGovernment Auditing Standards,,which is issued by the GAO.which is issued by the GAO.
Because of the color of the cover, it is usuallyBecause of the color of the cover, it is usuallyreferred to as the referred to as the ““Yellow BookYellow Book.”.”
The Yellow Book standards are often calledThe Yellow Book standards are often calledgenerally accepted government auditinggenerally accepted government auditingstandards (GAGAS).standards (GAGAS).
Financial Audit and Reporting Financial Audit and Reporting Requirements – Yellow BookRequirements – Yellow Book
Materiality and significanceMateriality and significance Quality controlQuality control Compliance auditingCompliance auditing ReportingReporting Audit filesAudit files
Audit and Reporting – Single AuditAudit and Reporting – Single AuditAct and OMB Circular A-133Act and OMB Circular A-133
The threshold for requiring a single auditThe threshold for requiring a single auditwas raised from $100,000 to $300,000was raised from $100,000 to $300,000to exempt many smaller entitiesto exempt many smaller entitiesfrom single audit requirements.from single audit requirements.
The OMB increased the single auditThe OMB increased the single auditthreshold to $500,000 beginning in 2004.threshold to $500,000 beginning in 2004.
Audit and Reporting – Single AuditAudit and Reporting – Single AuditAct and OMB Circular A-133Act and OMB Circular A-133
The office of Management and Budget issuedThe office of Management and Budget issueda revised Circular A-133, a revised Circular A-133, Audits of States,Audits of States,Local Governments, and Non-ProfitLocal Governments, and Non-ProfitOrganizationsOrganizations, , to provide administrativeto provide administrativeguidance for implementing theguidance for implementing thesingle audit requirements.single audit requirements.
The audit should be in accordanceThe audit should be in accordancewith generally accepted governmentwith generally accepted governmentauditing standards (GAGAS).auditing standards (GAGAS).
The auditor must obtain an understandingThe auditor must obtain an understandingof internal control over federal programsof internal control over federal programssufficient to support a low assessedsufficient to support a low assessedlevel of control risk for major programs.level of control risk for major programs.
The auditor should determine whether the clientThe auditor should determine whether the clienthad complied with laws, regulations, and thehad complied with laws, regulations, and theprovisions of contracts or grant agreementsprovisions of contracts or grant agreementsthat may have a direct and material effectthat may have a direct and material effecton each of its major programs.on each of its major programs.
An opinion as to whether the schedule ofAn opinion as to whether the schedule of federal awards is presented fairly in allfederal awards is presented fairly in all material respects in relation to thematerial respects in relation to the financial statements as a wholefinancial statements as a whole
An opinion on whether the financialAn opinion on whether the financial statements are in accordance with GAAPstatements are in accordance with GAAP
A report on internal control related to theA report on internal control related to the financial statements and major programsfinancial statements and major programs
A report on compliance with laws,A report on compliance with laws, regulations, and the provisions ofregulations, and the provisions of contracts or grant agreementscontracts or grant agreements
A schedule of findings and questioned costsA schedule of findings and questioned costs
The purpose of operational auditing is toThe purpose of operational auditing is todetermine the effectiveness or efficiencydetermine the effectiveness or efficiencyof any part of an organization.of any part of an organization.
Were all plant layoutsWere all plant layouts approved by home office approved by home office engineering at the time of original design?engineering at the time of original design?
Has home office engineering done a reevaluationHas home office engineering done a reevaluationstudy of plant layout in the past five years?study of plant layout in the past five years?
Is each piece of equipment operating atIs each piece of equipment operating at60 percent of capacity or more for at60 percent of capacity or more for atleast three months each year?least three months each year?
Does layout facilitate the movement of newDoes layout facilitate the movement of newmaterials to the production floor?materials to the production floor?
Does layout facilitate the production of finishedDoes layout facilitate the production of finishedgoods?goods?
Does layout facilitate the movement of finishedDoes layout facilitate the movement of finishedgoods to distribution centers? goods to distribution centers?
Does the plant layout effectively use existingDoes the plant layout effectively use existingequipment?equipment?
Is the safety of employees endangered by theIs the safety of employees endangered by theplant layout?plant layout?