AUDIT APPLICATIONS

O KTAV I A N T I , S . E . , M . S . A K . , A K .

OUTLINE AUDIT APPLICATIONS

Standards related to auditee
selection
Developing audit schedules
Audits requested by management or
the board
Audits requested by auditees

OPERATIONAL AUDITING
Operational audits examine and evaluate
systems of internal control and the quality of
performance in carrying out assigned
responsibilities, such functions as marketing,
production, inventory management, etc.
The key to understanding operational auditing is
to understand internal controls.
Exhibit 16-1 illustrates relationship among the
general methods, types, and objectives of
internal controls.

OPERATIONAL AUDITING (CONTD)

To examine and evaluate the effectiveness of
this control, internal auditor:
Determine that authorization procedures,
including approval signatures/initials, have
been established.
Examine relevant documents for the required
approvals.
Theres also management auditing typically
means the auditing of management controls.

PERFORMANCE AUDITING
Performance audits generally focus on efficiency
and effectiveness, and they require that
performance criteria be established. These
audits depend on the availability of a set of
accepted objectives and goals against which
performance can be evaluated.

PERFORMANCE AUDITING (CONTD)

Effectiveness and efficiency as
performance measures.
The internal auditors examination and
evaluation of effectiveness and efficiency does
not substitute for managements performance
evaluation. Rather, internal auditing provides
one source of information to assist
management in its evaluation.
Internal auditors are able to anticipate many
performance problems by identifying key
inefficiencies before overall effectiveness is
threatened.

PERFORMANCE AUDITING (CONTD)

Determining effectiveness and efficiency
Effectiveness refers to the accomplishment of
objectives
Efficiency refers to the resources consumed in
achieving those objectives.
A common approach to evaluating
effectiveness is to compare costs and benefits
prior to certain activities to cost and benefits
after those activities. Another approach is to
compare performance to another similar
operating units.

PERFORMANCE AUDITING (CONTD)

Example of effectiveness

COMPLIANCE AUDITING
The objective of these audits is to determine to
what degree an organization conforms to certain
specific requirements of policy, procedures,
standards, or laws and governmental regulations.
Usually, compliance audits require relatively little
initial survey work or review of internal controls,
except to outline precisely what requirements are
being audited.
The work of internal auditors can be helpful to
external auditors in planning these audits and in
assuring conformance to the relevant laws and
regulations prior to those audits

QUALITY AUDITS
Quality audits have become commonplace in many
organizations. Some auditors specialize in quality
audits. Good quality audits require an
understanding of four critical elements of quality
management:
Costumer needs.
The planning, production, and delivery of
product/service attributes intended to meet
costumers needs.
The planning and execution of processes by which
the product/service is produced and delivered.
Process controls, especially over the
product/service attributes related to costumer

AUDITING FINANCIAL CONTROLS

Internal auditors examine two aspects of
financial internal controls:
Controls over financial resources
Controls over the accounting for financial
resources.
Audits of the management of acquisition and
use of financial resource are considered
operational or management audits.
Audits of specific controls over the flow of funds
and the accounting function are generally
considered financial audits.

FINANCIAL CONTROLS CONCEPT

Financial controls are primarily designed to
accomplished internal control objectives:
The safeguarding of financial assets.
Safeguarding relates to the potential risk of loss
of an organizations funds and other assets,
these controls are designed to help ensure that;
The organization receives all of the funds to
which it is entitled.
The funds are adequately secured and
maintained.
The funds are appropriately spent for
authorized purposes.

FINANCIAL CONTROLS CONCEPT

Financial controls are primarily designed to
accomplished internal control objectives:
The reliability and integrity of financial
information
The need for reliability and integrity of financial
information reflects the detective and corrective
role this information plays in the control systems.
Financial data provides management with
information pertaining to the acquisition, security,
maintenance, and expenditure of financial
resources.
This information alerts management to problem
arising in the fund flow process, thereby assisting

FINANCIAL CONTROLS CONCEPT

Financial controls are primarily designed to
accomplished internal control objectives:
Compliance with GAAP
The range of compliance issues caries widely, some
of which relate primarily to prevention, some to
detection, and some to correction. Example:
compliance with income tax laws is intended
chiefly to prevent unnecessary related costs and
fines.
compliance with audit requirements is to detect
exceptions.
compliance with management review
requirements often is to correct deficiencies.

FINANCIAL CONTROLS SYSTEMS

An organizations financial management function
includes a number of integrated yet identifiable
subfunctions. These subfunctions might include
cash receipts, cash management, AR, AP, payroll,
etc.
Exhibit 14-6 outlines some of the more common
controls over cash receipts and cash
disbursement. The exhibit also outlines common
audit tests used to examine these various
controls.

AUDITING FINANCIAL STATEMENTS

AICPA has noted five assertion management
makes in an organizations financial
statements:
Existence or occurrence(i.e., the information
represents actual transactions and economic
events).
Completeness (i.e., no material information
has been ommited).
Rights and obligations (i.e., allamaterial
rights and obligations with respects to
assets, liabilities, and equity accounts have
been disclosed).

AUDITING FINANCIAL STATEMENTS

AICPA has noted five assertion management
makes in an organizations financial
statements:
Valuation or allocation (i.e., the number
reported on the financial statements are
materially correct).
Presentation and disclosures (i.e., (a) the
format, organization, and classification of
accounts on financial statements and (b)
disclosures in the accounts, footnotes and
accounting policies confirm to GAAP).

AUDITING FINANCIAL STATEMENTS

The purpose of audits of financial statements
is to evaluate these assertions and issue an
opinion on the fairness of the statements.
SAS 65 specifically addresses the relationship
between external and internal auditors.
External auditors are not required to consider
the work of internal auditors in conducting
audit of financial statements, basically, the
external auditor must be convinced of the
internal auditors competence and objectivity.