Operational audit

1. Differentiation between op and

financial audit:
Financial Audit
Financial audit is simply an
attestation that the clients
financial
statement
is
accurate. Financial audit or
audit of financial statements is
a statutory requirement of
each and every registered
company.
Financial
statements audit is carried
out by professionally qualified
personnels known as auditors.
The primary objective of
carrying out financial audit is
to obtain an unbiased and
independent
opinion
from
auditors that the financial
statements are giving a true
and fair view, and they are out
of material misstatements. For
all companies, it is mandatory
to carry out financial audit,
done by external auditors,
before publishing the financial
statements. The shareholders
or owners of the company
appoint auditors to verify that
the work done and financial
statements prepared by the
stewards-the
management
appointed by them are correct
and show the clear picture of
the
companys
financial
status.
Accept client -> plan audit ->
perform
audit
->
report
findings to stockholders
Purpose: to add credibility to
the reported financial position
and
performance
of
a
business. Similarly, lenders
typically require an audit of
the financial statements of any
entity to which they lend
funds.
Operational Audit

Operational
audit
is
a
structured
review
of
the
systems, internal controls, and
procedures of an organization
in order to evaluate whether
they are being constructed
efficiently and effectively and
to
make
suggestions
to
improve them, if necessary.
The
operational
audit
is
designed to assess the control
level
exercised
by
management, and it mainly
focus on effectiveness and
efficiency
of
operations,
reliability and integrity of
financial
and
operational
information, safeguarding of
assets, and compliance with
laws, rules and regulations.
Generally, operational audit is
carried
out
by
internal
auditors. Internal auditors are
the
auditors
who
are,
basically, employees of the
organization.
Operational
auditors are generally internal
auditors who are there to
facilitate the activities of
management via checking the
efficiency and effectiveness
and hence making suggestions
to improve efficiency.
Select auditee -> plan audit ->
perform
audit
->
report
findings to management ->
follow up
Purpose: determine whether
the internal controls of the
business, such as policies and
procedures, are sufficient to
produce the efficiency and
effectiveness. This is critical
for businesses, because a lack
of efficiency and effectiveness
typically translates to fewer
sales or increased operational
costs, which sometimes mean
the inability of the business to
compete and stay in business.

Types of operational auditing:

functional, organizational, and
special assignment.
2. What
is
effective
and
efficiency? What are the
purposes?
Effectiveness:
refers
to
accomplishment of objectives.
Companies
measure
effectiveness
often
by
conducting
performance
reviews. The effectiveness of a
workforce has an enormous
impact on the quality of a
companys product or service,
which
often
dictates
a
companys
reputation
and
customer satisfaction.
Type of ineffectiveness:
- Work is done but serves no
purpose: vendors invoice
and receiving report are
filed without being used
- There
are
too
many
employees:
office
work
could be done with one less
assistant
Efficiency:
reducing
cost
without
reducing
the
effectiveness. Efficiency and
effectiveness are mutually
exclusive. A manager or
employee who's efficient isnt
always effective and vice
versa.
Efficiency
increases
productivity and saves both
time and money.
Types of inefficiency:
- Acquisition of goods and
services are too costly:
purchase materials that is
not needed
- Raw materials are not
available when needed
- A duplication of effort by
employees
exist:
production and accounting
keep identical records
3. Procedure
of
operational
audit?
- Planning:
scope
of
engagement, select staff

for
the
engagement,
understand
companys
background
information,
understand internal control,
decide
on
appropriate
evidence.
- Evidence accumulation and
evaluation: documentation
(checking documents such
as invoices, client inquiry
(making
discussion,
questionnaire,
interview)
observation.
- Reporting and follow up:
report usually sent to
management,
tailored
reports,
follow
up
on
recommendations
with
management.
Competence means the evidence
must be believable or worthy of
trust.
Seven
characteristic
of
competence evidence are:
- Relevance--to the audit
objective that the auditor is
testing;
- Independence
of
the
provider--information
received from outside the
entity is presumed to be
more reliable than from
inside the entity.
- Effectiveness of the client's
internal controls--evidence
from
a
client
whose
internal
controls
are
effective
is
more
trustworthy.
- Auditor's
direct
knowledge--data
or
calculations prepared by
someone
inside
the
organization will not be as
reliable as data computed
or
discovered
by
the
auditor directly.
- Qualifications
of
the
individuals providing the
information--reliability
of
the
information
is
enhanced if the person
providing it is qualified to
do so.

Degree
of
objectivity-objective evidence is more
reliable than evidence that
is subjective.
- Timeliness--data that are
timely for the purpose
intended are considered
more reliable.
4. Why should internal
auditor understand about
business activities?
In order to assessing the
effectiveness and efficiency
the orgs performance, the
internal auditor should know
the business process and its
threats for each process. Thus,
the internal auditor will easily
find the findings during the
audit process and will be easy
in making report and also
giving the suggestions. Ps:
threats and IC in different
docs.

5. Revenue
cycle
activities?
Explain how is the efficiency
and effectiveness of this cycle.
The revenue cycle is a
recurring set of business
activities
and
related
information
processing
operations associated with
providing goods and services
to customers and collecting
their cash payments. The
primary external exchange of
information is with customers.
Information about revenue
cycle activities flows to other
accounting
cycles.
The
general ledger and reporting
function prepares financial
statements and performance
reports from the information.