Audit Applications

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