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Principles of Auditing and Other Assurance Services

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CHAPTER 21 Internal, Operational and Compliance Auditing Review Questions 21-1 Internal auditing may be defined as 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. SAS No. 55 states that one aspect of an organization's control environment is management's control methods for monitoring and following up on performance, including internal auditing. 21-2 The scope of internal auditing has evolved from a primary concern with financial controls to a scope that includes: (4) Reviewing and evaluating all types of internal controls, (5) Evaluating the organization’s risk assessment processes, (6) Making recommendations regarding the organization’s system of governance, and (7) Performing other assurance and consulting services for the benefit of management. 21-3 Internal auditing has evolved to meet the needs of business, government, and nonprofit organizations. Initially, internal auditors supplemented the work of the independent auditors by helping to ensure the accuracy of the organization's financial information. However, as organizations became more complex, operational controls became more important, and the scope of the internal auditors' work expanded to include evaluating and testing financial and operational controls. The enactment of the Foreign Corrupt Practices Act also expanded the demand for internal auditing activities. The accounting provisions of the act require public companies to establish and maintain effective internal accounting controls. An internal auditing function helps to ensure that a company complies with these provisions. The Report of the National Commission on Fraudulent Financial Reporting included a recommendation that public companies establish and maintain an internal auditing function staffed with appropriately qualified personnel and fully supported by top management. Finally, the Sarbanes-Oxley Act of 2002 prohibits auditors from performing internal audit services for public-company audit clients. This has increased the demand for internal auditors.
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21-4 In addition to knowledge and skills about accounting and auditing, modern internal auditing requires knowledge in such disciplines as economics, law, finance, statistics, computer processing, engineering, and taxation. 21-5 This statement is false. The scope of the work of independent auditors is generally confined to the audit of the organization's financial statements and, possibly, performing other attestation services such as examining internal controls over financial reporting. Therefore, independent auditors are primarily concerned with only those controls that affect the reliability of the organization's financial statements. The work of the internal auditors encompasses evaluation of all financial, compliance, and operating policies and procedures.
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