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An operational audit is an examination of the manner in which an organization conducts business, with the objective of pointing out improvements that will increase its efficiency and effectiveness. This type of audit is substantially different from a normal audit, where the objective is to examine the adequacy of controls and to evaluate the fairness of presentation of the financial statements.
Operational audits are usually conducted by the internal audit staff, though specialists can be hired to conduct reviews in their areas of expertise. The primary users of the audit recommendations are the management team, and especially the managers of those areas that have been reviewed. Related CoursesHow to Conduct an Audit Engagement March 06, 2022/
The role of the audit committee involves making recommendations to the board about the appointment of the auditor, agreeing audit fees, reviewing the scope of external audit work, and holding private meetings with the auditor to discuss its findings. It also includes reviewing, with the external auditor, the external auditor's independence. The objective of an external audit of financial statements is to determine whether, in the auditor's opinion, the statements present fairly in all material respects - that is, they show a true and fair view in all material respects of the company's financial position, results of operations, and cash flows, in conformity with national or international generally accepted accounting principles (GAAP). This covers a range of matters, many of which are a part of the audit committee's responsibilities. Hence, regular communication with the external auditor can be extremely valuable in assisting the audit committee's work. Broadly, discussions with the external auditor can cover four key areas, which range from specifics about the auditor and its relationship with the company, to discussion about the industry, business and control environment of the company. These areas can be summarised as follows:
Commonwealth entities’ annual financial statements must be audited by the ANAO, who issue their auditor’s report on the entity’s financial statements to the responsible Minister in accordance with section 43 of the PGPA Act (or shareholders in the case of Commonwealth companies in accordance with the Corporations Act). The ANAO auditor’s report is then included with the entity’s financial statements in its annual report. The purpose of the ANAO is to support accountability and transparency in the Australian Government sector through independent reporting to the Parliament, and thereby contribute to improved public sector performance. 10.1 Understanding the auditor’s roleThe auditor plays an important and ongoing role in assuring the integrity of an entity’s financial reports and reviews the entity’s financial reporting arrangements and the integrity of financial reports throughout the year. The auditor’s report is formed on the basis of audit procedures, which include:
The audit procedures also extend to key aspects of legislative compliance, such as requirements relating to the appropriation of money. The results of relevant performance audits are also considered in determining the auditor’s report on the financial statements. 10.2 Establishing clearly defined roles and responsibilities with the auditorsThe preparation of the financial statements involves applying appropriate accounting policies and financial management practices that comply with legislative and financial reporting requirements. Therefore, engagement with the auditor will often involve discussions about the interpretation and application of appropriate accounting standards, policies and procedures. At the beginning of the process, it is useful to develop, in consultation with the auditor, clearly defined and documented roles and responsibilities for liaison, feedback and issues escalation. It is the CFO’s responsibility to identify and bring to the auditor’s attention in a timely manner all matters that may have an effect on the entity’s financial statements. Better practice entities will strive for the adoption of a ‘no surprises’ approach by both parties and will foster a relationship based on mutual co-operation and understanding, characterised by regular and open communication, supported by an Audit Issues Register that details both parties’ agreement on the impact of the issue on the financial statements and tracks the status of issues identified by both the entity and auditor. The auditor attends audit committee meetings as an observer and to provide information on entity-specific financial statements and performance audit coverage and assurance reviews where applicable. 10.2.1 Audit liaison officerAn audit liaison officer may be appointed as a central point of contact for all audit related matters. The responsibilities of this role typically include:
10.2.2 The role of the audit committee in the external auditAuditor staff attend entity audit committee meetings as observers, and are able to speak to matters relating to the audit and provide other assistance to the audit committee as required. Important matters that may be discussed by the audit committee and the auditor include:
10.2.3 The role of internal audit in the external auditAuditing Standard ASA 610 Using the Work of Internal Auditors (ASA 610) applies to auditors conducting:
Auditing Standard ASA 610 also applies, as appropriate, where auditors are conducting an audit of other historical financial information. Much of the information obtained by the auditor’s enquiries is obtained from management and those responsible for financial reporting, however, information may also be obtained by enquiries with the internal audit function and others within the entity. Paragraph 6 (a) of ASA 315 requires external auditors to make enquiries to the internal audit function irrespective of whether or not the auditor intends to rely on the work of the internal auditor. This requirement arises as the internal audit function is considered a key internal control and may provide information to assist the auditor in obtaining an understanding of the entity and its environment, and in identifying and assessing risks of material misstatement at the financial statement and assertion levels. Where the auditor elects to use internal audit functions in the conduct of the audit of the entity’s financial statements, the use of work by internal audit is governed by ASA 610. In performing its work, the internal audit function is likely to have obtained insight into the entity’s operations and business risks, and may have findings based on its work, such as identified control deficiencies or risks, that may provide valuable input into the auditor’s understanding of the entity, the auditor’s risk assessments or other aspects of the audit. The role the internal auditor may have in the preparation of an entity’s financial statements should be discussed with the auditor at an early stage. This will enable both parties to ensure that working arrangements will comply with auditor standards and be completed within an agreed timeframe. 10.2.4 Documenting and communicating working arrangementsDocumenting key elements of the working arrangements between an entity and the auditor, and sharing this information with the financial statements team, will support consistent understanding of the agreed approach. These arrangements, developed in consultation with the auditor, could usefully cover matters such as:
10.2.5 Additional resources10.2.6 Actions that may be taken by the CFO to support the auditParticular actions that may be taken by the CFO to support the audit by the auditor include:
10.3 Seeking auditor feedback on proposed positionsThe iterative nature of the preparation and audit processes, and the ongoing dialogue between the financial statements team and the auditor will often involve discussions about the interpretation and application of appropriate accounting standards, policies and procedures. It is recognised that clarification and/or confirmation of the entity’s proposed position on a range of minor technical and procedural matters is part and parcel of an ongoing relationship between the entity and the auditor, and these would generally be resolved during regular dialogue between the parties. Leaving significant issues ‘on the back burner’, or not discussing the entity’s proposed approach to addressing them with the auditor, increases the risk that the issue will affect the timely finalisation and audit of the financial statements. Further information is available at: 7.7 Preparing accounting position papers. Page 2
AAI Accountable Authority Instructions AAO Administrative Arrangements Order AAS Australian Accounting Standards as issued by the AASB AASB Australian Accounting Standards Board ABS Australian Bureau of Statistics ACSC Australian Cyber Security Centre ANAO Australian National Audit Office APS Australian Public Service APSC Australian Public Service Commission ASA Auditing standards as issued by the AUASB AUASB Auditing and Assurance Standards Board BPG Financial Statements Better Practice Guide Budget, the The Australian Government budget CBMS Central Budget Management System CFO Chief Financial Officer CFS Consolidated Financial Statements Charter of Budget Honesty Charter of Budget Honesty Act 1998 Corporations Act Corporations Act 2001 Entity This BPG uses ‘entities’ to mean Commonwealth entities and Commonwealth companies as defined by the Public Governance, Performance and Accountability Act 2013 (PGPA Act). Fraud Rule Section 10 of the PGPA Rule ICT Information and communication technology IFRS International Financial Reporting Standards FBO Final Budget Outcome Finance Minister The Minister for Finance FMIS Financial Management Information System FRR Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 GBE Government Business Enterprise GGS Monthly Financial Statements The Australian Government general government sector Monthly Financial Statements Australian GFS Australian System of Government Finance Statistics Australia: Concepts, Sources and Methods 2015, issued by the Australian Bureau of Statistics ISM Australian Government Information Security Manual JCPAA Joint Committee of Public Accounts and Audit MoG Machinery of Government PBS Portfolio Budget Statements PDF Portable document format PGPA Act Public Governance, Performance and Accountability Act 2013 PGPA Rule Public Governance, Performance and Accountability Rules 2014 PPE Property, plant and equipment PRIMA Primary Reporting and Information Management Aid PSPF Protective Security Policy Framework RMG Resource Management Guide SRP Supplementary Reporting Pack UPF Uniform Presentation Framework
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