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Audit Applications

Audit Applications. Chapter 16. Different Types of Audits. Operational Audit Performance Audit Compliance Audit Quality Audit Financial Control Audit Financial Statement Audit. Operational Audit. Examine and evaluate system of internal control and the quality of operational activity

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Audit Applications

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  1. Audit Applications Chapter 16

  2. Different Types of Audits • Operational Audit • Performance Audit • Compliance Audit • Quality Audit • Financial Control Audit • Financial Statement Audit

  3. Operational Audit • Examine and evaluate system of internal control and the quality of operational activity • Activities examined include marketing, facility management, production, inventory management, security, EDP, HR • The key to understand operational auditing is to understand internal control ( see Exhibit 16-1 on p. 754-756)

  4. Management Auditing • Often considered the same as operational auditing • Some reserve the term for audits of specific management activity such as planning, budgeting, supervising, and reviewing

  5. Performance Auditing • Focus on efficiency and effectiveness • Effectiveness refers to the accomplishment of objectives. (e.g, is work safety achieved by an organization?) • Efficiency refers to the resources consumed in achieving those objectives

  6. Key Questions related to Performance Audit • Is the activity conducted as intended by top management? • Are prescribed policies being followed? • Is the function being performed necessary? • Are administrative and financial controls effective? • Are the costs of such controls justified by benefits?

  7. Common Examples of Inefficiency • Unwarranted duplication of efforts • Existence of “shadow system”: informal system created by employees when the formal system fails to work as intended • Improper staffing • Inadequate personnel utilization • Unauthorized use of assets • Under-utilization of assets

  8. Compliance audit • To determine an organization’s conformity to policy, laws and regulations • The Single Audit Act of 1984 requires external audits of state and local government agencies receiving $100,000 or more of federal grants. The auditors need to report on (1) financial statements, (2) compliance with law, (3) internal control

  9. For Federal Government Agencies • Government Auditing Standards and Circular A-128 and A-133 issued by the federal Office of Management and Budget also require external audits of governmental entities to examine the entity’s compliance with relevant laws and regulation

  10. Quality Audit • Increasing emphasis on quality as evidenced by Shingo Prize for Excellence in Manufacturing, the Malcon Baldrige Award, the President’s Quality Award, and the Deming Award • Organization qualifying for ISO 9000 certification are required to perform quality audits (Administered by ASQC in US)

  11. Four Elements of Quality Management • Customer needs • The planning, production, and delivery of products/service attributes intended to meet customer needs • The planning and execution of processes by which the product/service is produced and delivered • Process control

  12. Customer Needs • High quality • Low costs • Short lead times • Greater flexibility in meeting individual customer needs • Low variability from required specifications • Outstanding service

  13. Quality Production and Delivery Processes • Common goals understood by all employees • A “customer first” orientation • Training for everyone to learn quality control • Cross-training everyone for multiple skills • High levels of cooperation & communication • Spotless housekeeping • Preventive maintenance program on machines • Information available to local decision-makers • Use of product platforms

  14. Process Control • Statistical Quality Control • Championed by Edwards Deming and Joseph Juran • Non-statistical Quality Control • Promoted by Phillip Crosby • Developed by Shigeo Shingo • poka yoke: design a foul-proof production process • source inspections: workers check own work before sending it on

  15. Crosby’s Quality Control Principles • Management commitment to quality as a top priority • A team orientation • Education in quality management for everyone • Measurement of specific quality attributes • Production systems that remove the cause of errors, not just fix the errors • Reward employees for excellent performance

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