Internal Auditing and Governmental Financial Auditing and Operational Auditing | CPA Exam Auditing and Attestion

This page covers internal auditing, governmental financial auditing  and operational audit including single audit and yellow book.

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Internal auditors who perform financial auditing are responsible for evaluating whether their company’s internal controls are designed and operating effectively and whether the financial statements are fairly presented. This responsibility is essentially the same as the responsibility of external auditors who perform financial audits. The two types of auditors are also similar in that they both must be competent and must remain objective in performing their work and reporting their results. Despite these similarities, the role of the internal auditor in financial auditing differs from that of an external auditor in the following ways:

  • Because internal auditors spend all of their time with one company, their knowledge about the company’s operations and internal controls is much greater than the external auditor’s knowledge.
  • Guidelines for performing internal audits are not as well defined as the guidelines for external auditors.
  • Internal auditors are responsible to the management of the companies that they work for, while external auditors are responsible to financial statement users.
  • Because internal auditors are responsible to management, their decisions about materiality and risks may differ from the decisions of external auditors.

Governmental financial audits are similar to audits of commercial companies in that both types of audits require the auditor to be independent, to accumulate and evaluate evidence, and to apply AICPA auditing standards (GAAS). The two types of audits are different because governmental financial audits also require the auditor to apply generally accepted governmental auditing standards (GAGAS), which are broader than AICPA auditing standards and include testing for compliance with laws and regulations. Governmental financial auditing can be done either by auditors employed by federal and state governments (governmental auditors) or by CPA firms.

  1. The three major differences between financial and operational auditing are:
  • Purpose of the audit. Financial auditing emphasizes whether historical information was correctly recorded. Operational auditing emphasizes effectiveness and efficiency. The financial audit is oriented to the past, whereas an operational audit concerns operating performance for the future.
  • Distribution of the reports. For financial auditing, the report is typically distributed to many users of financial statements, such as stockholders and bankers. Operational audit reports are intended primarily for management.
  • Inclusion of nonfinancial areas. Operational audits cover any aspect of efficiency and effectiveness in an organization and can therefore involve a wide variety of activities. Financial audits are limited to matters that directly affect the fairness of financial statement presentations.
    • Materiality and significance. The Yellow Book recognizes that acceptable audit risk and performance materiality may be lower in governmental audits than in audits of commercial enterprises.
    • Quality control. Organizations that audit government entities must have an appropriate system of internal quality control and must participate in an external quality control review program.he Single Audit Act was created in 1984 to eliminate redundancy in the audits of governmental agencies. The Single Audit Act provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies. The Single Audit Act was originally only applicable to audits of state and local governments, but the requirements of the Act were extended in 1990 to higher-education institutions and other not-for-profit organizations through the issuance of OMB Circular A-133. The auditing standards of the Yellow Book are consistent with the principles in AICPA auditing standards.Some important additions and modifications are as follows:
  • Compliance auditing. The Yellow Book requires that the audit be designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements.
  • Reporting. The audit report must state that the audit was made in accordance with generally accepted government auditing standards (GAGAS). In addition, the report on financial statements must describe the scope of the auditors’ testing of compliance with laws and regulations and internal controls and present the results of those tests, or refer to a separate report containing that information.Audit files. The Yellow Book indicates that audit files should contain sufficient information to enable an experienced reviewer with no previous connection to the audit to ascertain from the audit files evidence that supports the auditors’ significant conclusions.