Overview of Auditing
Internal & Performance Auditing
by David R. Hancox, CIA, CGFM
Overview of Auditing- Week 1 ©
- What is Auditing?
- Independent, Objective
- Verify Information
- Report on Facts
- Offer Opinion
- Definition of Auditing:
- It is a systematic process of objectively obtaining and evaluating evidence regarding assertions by management. Those assertions could be of financial statements, economy and efficiency of operations or effectiveness of operations. The auditor measures against established criteria and communicates the results to interested users.
- Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
- A performance audit is an objective and systematic examination of evidence to provide an independent assessment of the performance and management of a program against objective criteria or an assessment of best practices and other information. Performance audits provide information to improve program operations and facilitate decision-making by parties with responsibility to oversee or initiate corrective action, and improve public accountability. Performance audits encompass a wide variety of objectives including objectives related to assessing program effectiveness and results; economy and efficiency; internal control;7 and compliance with legal or other requirements; and objectives related to providing prospective analyses, guidance, or summary information. Performance audits also may encompass a broad or narrow scope of work and a variety of methodologies; involve a level of analysis, research, or evaluation; generally provide conclusions and recommendations; and result in a report.
- Basic Premises of Performance Auditing
- The assertions are by management
- Assertions should be quantifiable
- There should be a relationship between the assertions and the criteria
- Independence and objectivity are necessary to satisfy the user
- Management must be accountable
- use resources efficiently, economically and effectively
- should report to those whom they are accountable
- Relationship between accounting and auditing
- Any information which is quantifiable and verifiable can be audited
- Much data comes from accounting records, but other information systems are also important to the success of an organization.
- Discuss deployment of troopers, food to inmates
- Role of the auditor
- Traditional Role
- Financial statements – attest function
- Compliance – IRS auditors
- Expanded Scope
- Performance audits
- Financial and financial related
- Compliance
- Economy and efficiency
- Program results (effectiveness)
- Performance audits
- Traditional Role
- Expectation Gap – What the Public Expects
- Public does not understand the auditors limitations
- Business failure=audit failure
- If fraud is there, you should find it
- SAS 82, SAS 99
- Limitations of Auditing
- Cannot predict future events
- Do not look at 100% of transactions
- Fraudulent transactions are not always recorded
- Evidence obtained is persuasive, rather than conclusive – beyond a reasonable doubt
- Obtain reasonable assurance – not absolute assurance
- Types of Auditors
- Independent Auditors – CPAs
- Internal Auditors – CIA
- Government Auditors – CGFM
- Specialized Auditors – CBA (IRS, Unemployment Insurance)
- Environment Auditors Work In
- Small business, Individuals
- CPAs – tax services – not audit
- IRS, Sales Tax, Unempl. Ins.
- Large Business
- CPAs – Tax and audit services
- CIAs – Service to management (important part of the internal control system)
- Government
- CPAs, CIAs, CISAs
- Small business, Individuals
- Professional Standards Guide Audit Work
- AICPA – Statement on Auditing Standards
- IIA – Professional Internal Auditing Standards
- Comptroller General – Government Auditing Standards
- Professional Organizations
- Professional Certifications
- CPA
- CIA
- CISA
- CGFM
- CFE
- Auditing – A Historical Perspective
- Initially a check on cash
- Period of Emergence
- Late 19th Century to 1920’s
- 1900’s – credit problems – bankers wanted balance sheet certified
- Industrial revolution – emergence of major companies
- 1916 – the predecessor of the AICPA came into existence – profession became a national organization, promoting uniform goals and standards
- Consolidation – 1929 – 1940’s
- Stock market crash – public reaction
- faulty financial information
- 1933 – SEC comes into existence and NYSE required audits of all listed companies (regulatory influence)
- 1939 – McKesson & Robbins Fraud
- Fictitious assets, examined records, no physical inventory (start of Statement on Auditing Procedures)
- Stock market crash – public reaction
- Technology – 1950’s
- Development of more sophisticated tools
- Computer auditing
- Refine statistical sampling
- increased reliance on internal controls
- Development of more sophisticated tools
- Professionalism – 1960’s
- Expansion of auditing role
- Management services
- US Army audit agency
- GAO
- NYS Comptroller – Arthur Levitt, Marty Ives
- Standard Setting Bodies
- Expansion of auditing role
- Conflict and Uncertainty
- 1972 – GAO audit standards
- Expanded scope – went far beyond the private sector for government
- Increased litigation – public criticism of accounting principles and limited extent of disclosure (what do the financial statements really say?)
- Auditors role in detecting fraud is cloudy – GAO redefines
- 1972 – GAO audit standards
- Refinement of Profession – 1980 – 1990’s
- Expanded scope audits
- provides more information and allows the auditor to better understand the program or activity – gives public what it wants to know.
- GASB
- Service Efforts and Accomplishments
- Recognition of Specialists
- EDP Auditors, Stat Sampling, etc
- Expanded scope audits
- To Whom is the Auditor Responsible?
- Traditional View
- Management
- Owner
- Competing View
- Public
- Creditors
- Traditional View
Homework
- Read: The Auditing Function and work on the Internet links at the end of the article.
- Read Chapters 1 and 2 in Government Performance Audit in Action
- Find an article in the Wall Street Journal that has some relationship to auditing. Be prepared to discuss the article in the next class.