Deck 26: Internal and Governmental Financial Auditing and Operational Auditing

Question 1

External auditors would consider internal auditors effective if they are:

A) independent of the operating units being evaluated.
B) competent and well trained.
C) have performed relevant audit tests of the internal controls and financial statements.
D) all of the above.

Answer 1

D

Question 2

An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was performed in accordance with:

A) GAAS.
B) GAGAS.
C) GASA.
D) SAS.

Answer 2

B

Question 3

What are several similarities between internal and external auditors?

Answer 3

• Both must be competent as auditors and remain objective in performing their work and reporting their results.
• Both follow a similar methodology in performing their audits, including planning and performing tests of controls and substantive tests.
• Both consider risk and materiality in deciding the extent of their tests and evaluating results. However, their decisions about materiality and risks may differ, because external users may have different needs than management or the board.

Question 4

The Institute of Internal Auditors has established Ethical Principles for its members. List each of the principles.

Question 5

Integrity is one of the IIA's ethical principles.

Question 6

Internal auditing standards are included in the Red Book.

Question 7

Current professional auditing standards allow external auditors to use internal auditors for direct assistance on external audits.

Question 8

Statements on Internal Auditing Standards are issued by the:

A) AICPA.
B) SEC.
C) Internal Auditing Standards Boards.
D) Auditing Standards Boards.

Question 9

External auditors typically consider internal auditors effective if they meet three criteria. What are these criteria?

Question 10

Internal auditors are responsible to:

A) the board of directors.
B) management.
C) both A and B.
D) neither A nor B.

Question 11

The International Standards for the Professional Practice of Auditing list 7 performance standards. List three.

Question 12

Which of the following is most correct regarding external auditors use of internal auditors directly on the audit engagement?

A) discourage
B) prohibit
C) encourage
D) permit

Question 13

Which of the following is not a similarity between external and internal auditors?

A) Both must be independent of the company.
B) Both must be competent.
C) Both follow a similar methodology in performing their audits.
D) Both consider risk and materiality deciding the extent of their tests and evaluating results.

Question 14

The professional organization which is responsible for providing guidance for internal auditors is the:

A) APA.
B) IIA.
C) ABA.
D) AIA.

Question 15

Independence is a fundamental ethical principle for internal auditors.

Question 16

External financial statement auditors must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on the internal auditor's work?

A)
B)
C)
D)

Question 17

Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance on external audits.

Question 18

The objectives of internal auditors are considerably broader than the objectives of external auditors.

Question 19

Internal Auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except:

A) reviewing the reliability and integrity of information.
B) ensuring compliance with the company's accounting policies.
C) verifying accounting information for external users.
D) ensuring compliance with applicable governmental regulations.

Question 20

The international standards for the professional practice of internal auditing include which two categories of standards?

A) attribute and performance
B) competency and professional skepticism
C) performance and integrity
D) ethics and rules of conduct

Question 21

Which one of the following is NOT a major difference between operational and financial auditing?

A) purpose of the audit
B) distribution of the report
C) testing the effectiveness of internal controls
D) audits of non-financial areas

Question 22

How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company?

Question 23

Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.

Question 24

Internal auditors should have the authority to require implementation of suggestions for improvement.

Question 25

Auditors involved in planning, performing, or reporting on audits under GAGAS must complete ________ hours of continuing professional education in each two-year period.

A) 20
B) 40
C) 60
D) 80

Question 26

The primary source of authoritative literature for doing government audits is the:

A) Purple Book.
B) Yellow Book.
C) Green Book.
D) Red Book.

Question 27

Governmental Auditing Standards recognize that because of public accountability over governmental activities the acceptable tolerable misstatement as compared to commercial businesses may be:

A) equal.
B) lower.
C) higher.
D) indeterminable.

Question 28

For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.

Question 29

When a state or local government agency receives federal funds, it is subject to the audit requirements of:

A)
B)
C)
D)

Question 30

An audit 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 would be called a(n):

A) performance audit.
B) management audit.
C) operational audit.
D) compliance audit.

Question 31

Which of the following is most correct with regard to the comparison of the financial auditing standards of the Yellow Book with the 10 General Auditing Standards for financial audits?

A) the same as
B) quite different from
C) incompatible with
D) consistent with

Question 32

Which of the following is not one of the major differences between financial and operational auditing?

A) The financial audit is oriented to the past, but an operational audit concerns performance for the future.
B) The financial audit report has widespread distribution, but the operational audit report has limited distribution.
C) Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers.
D) Financial audits are limited to matters that directly affect the fairness of the financial statement presentation, but operational audits cover any aspect of efficiency and effectiveness.

Question 33

The "Red Book" specifies all auditing standards issued by the U.S. General Accounting Office.

Question 34

The formal name of the Yellow Book is Government Auditing Standards.

Question 35

Government auditing standards are included in the Yellow Book.

Question 36

The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:

A) $1,000,000 or more.
B) $500,000 or more.
C) $300,000 or more.
D) $100,000 or more.

Question 37

A major challenge of operational auditing is in selecting the specific criteria for evaluation whether efficiency and effectiveness have occurred in the client's organization. For example, in financial statement auditing the criteria for consideration is US GAAP or Other Comprehensive Basis of Accounting. There are no such "overriding" objectives in internal auditing.
Discuss below sources of specific criteria that could be used by the internal auditor in planning the engagement.

Question 38

In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other reports required by the OMB Circular A-133.

Question 39

The correct title of the Yellow Book is:

A) Government Auditing Standards.
B) IIA Practice Standards.
C) Statement of Responsibilities of Internal Auditing.
D) Statement of Standards on Accounting and Review Services.

Question 40

The Internal Auditing Standards Board issues Statements on Internal Auditing Standards.

Question 41

Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the terms "effectiveness" and "efficiency."

Question 42

A typical objective of an operational audit is to determine whether an entity's:

A) internal control is adequately operating as designed.
B) financial statements present fairly the results of operations.
C) specific operating units are functioning efficiently and effectively.
D) operational information is in accordance with generally accepted government auditing standards.

Question 43

Which of the following is not a purpose of a program audit as performed by government auditors?

A) Determination of the extent to which the desired results established by the legislature are being achieved.
B) Determination of the causes of inefficiencies in sponsored programs.
C) Determination of the effectiveness of organizations, programs and activities.
D) Determination as to whether the entity has complied with laws and regulations applicable to the program.

Question 44

Which of the following groups could not be involved in an operational audit?

A) CPA firms
B) Internal auditors
C) Government auditors
D) None of the above answers are correct; that is, all of the above could be involved.

Question 45

The "Yellow Book" defines and sets standards for performance audits. Discuss below the purpose of a program audit.

Question 46

Which is not a purpose of an economy and efficiency audit?

A) Whether the entity is acquiring, protecting, and using resources economically and efficiently.
B) The causes of inefficiencies and uneconomical practices.
C) Whether the entity has complied with laws and regulations concerning matters of economy and efficiency.
D) Each of the above is a purpose.

Question 47

Operational audits are primarily geared towards improving a company's operational efficiency and effectiveness.

Question 48

What distinguishes internal control evaluation and testing for financial and operational auditing?

A) purpose of the work
B) scope of the work
C) both A and B
D) neither A nor B

Question 49

Discuss each of the three broad categories (types) of operational audits.

Question 50

Which of the following can affect the independence of operational auditors?

A)
B)
C)
D)

Question 51

Which of the following best describes an audit that emphasizes how efficiently and effectively functions interact?

A) operational
B) compliance
C) financial
D) organizational

Question 52

The two most important qualities for an operational auditor are:

A) personality and appearance.
B) independence and competence.
C) competence and technical training.
D) academic background and sufficient experience.

Question 53

Discuss three major differences between operational and financial auditing.

Question 54

Which of the following statements regarding types of operational audits is likely incorrect?

A) A functional audit has the advantage of permitting specialization by auditors.
B) An advantage of functional auditing is its ability to evaluate interrelated functions.
C) The emphasis in an organizational audit is on how efficiently and effectively functions interact.
D) Special operational auditing assignments arise at the request of management.

Question 55

Which of the following is not a difference between operational auditing and financial auditing?

A) Both must be CPAs.
B) Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed.
C) Operational audits often cover non-financial issues while financial audits do not.
D) None of the above is a difference.

Question 56

Which of the following operational audits are best described by "deals with one or more of the activities as represented by functions within an organization"?

A) functional
B) special assignment
C) organizational
D) internal control

Question 57

Effectiveness refers to the degree to which costs are reduced without reducing efficiency.

Question 58

The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA. There are, however, important additions/modifications in the Yellow Book. For example, the Yellow Book recognizes that materiality and risk are lower due to the nature of the government enterprise. Discuss the other additions/modifications.

Question 59

Efficiency refers to the degree to which costs are reduced without changing effectiveness. The auditor's opinion as to the appropriateness and sufficiency of evidence in forming an opinion on the financial statements.

Question 60

Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7):
a. Compliance audit
b. Economy and efficiency audit
c. Effectiveness
d. Efficiency
e. Functional audit
f. Government Auditing Standards
g. Government audit
h. Institute of Internal Auditors
i. Operational auditing
j. Organizational audit
k. Program audit
l. Single Audit Act
m. Special assignment
n. IIA Practice Standards
o. Statements on Internal Auditing Standards
________ 1. The official title of the Yellow Book.
________ 2. A management request for an operational audit for a specific purpose, such as investigating the possibility of fraud in a division or making recommendations for reducing the cost of a manufactured product.
________ 3. A government audit to determine whether an entity is acquiring, protecting, and using its resources economically and efficiently and whether the entity has complied with laws and regulations concerning such matters.
________ 4. The degree to which the organization's objectives are accomplished.
________ 5. The review of an organization for efficiency and effectiveness.
________ 6. Federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies.
________ 7. Statements issued by the Internal Auditing Standards Board of the IIA to provide authoritative interpretation of the IIA Practice Standards.

Question 61

Operational audits are often categorized as functional, organizational, or special assignments.

Question 62

To be effective, an internal audit department must report to:

A)
B)
C)
D)

Question 63

To help them remain independent of the operations they audit, internal auditors should report directly to the controller.

Question 64

Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the goals are achieved with a minimum use of resources.

Question 65

Program audits are primarily focused on inefficient uses of federal funds in sponsored programs.

Question 66

One disadvantage of functional auditing is the failure to evaluate interrelated functions.

Question 67

When performing an operational audit, the internal audit team must first determine that:

A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness.

Question 68

Benchmarking is one source of evaluation criteria for completing an operational audit.

Question 69

Discuss each of the three phases of an operational audit.

Question 70

An operational auditor may use "engineered standards" as evaluation criteria.

Question 71

Which of the following is not one of the three phases in an operational audit?

A) planning
B) training and supervising employees
C) evidence accumulation and evaluation
D) reporting and follow-up

Question 72

The two most important qualities for an internal auditor to possess are independence and competence.

Question 73

Operational audits may be performed by internal auditors and government auditors, but not by external auditors.