auditing answer

Topics: Auditing, Internal audit, Financial audit Pages: 17 (4703 words) Published: December 10, 2013
1Chapter 26

Internal and Governmental Financial
Auditing and Operational Auditing

Review Questions

26-1Internal 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.

26-2The two categories of standards in the IIA International Standards for the Professional Practice of Auditing are (1) Attribute Standards and (2) Performance Standards.

The Attribute Standards are:

Purpose, authority, and responsibility
Independence and objectivity
Proficiency and due professional care
Quality assurance and improvement program

The Performance Standards are:

Managing the internal audit activity
Nature of work
Engagement planning
Performing the engagement
Communicating results
Monitoring progress
Management’s acceptance of risks
26-3External auditors are considered more independent than internal auditors for the audit of historical financial statements because their audit report is intended for the use of external users. From an internal user's perspective, internal auditors are employees of the company being audited.

Internal auditors can achieve independence by reporting to the board of directors or president. The responsibilities of internal auditors affect their independence. The internal auditor should not be responsible for performing operating functions in a company or for correcting deficiencies when ineffective or inefficient operations are found.

26-4Governmental 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 generally accepted 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 GAAS 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.

26-5The 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.

26-6The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA.
Some important additions and modifications are as follows:

Materiality and significance. The Yellow Book...
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