FRAMEWORK OF PHILIPPINE STANDARDS ON which the auditor and the entity and any business should be restricted to a review

ess should be restricted to a review of the

AUDITING appropriate third parties have agreed and appropriateness of, and extent of compliance with,
Auditing to report on factual findings. The recipients key internal controls or should be a more
 The objective of an audit of financial of the report must form their own comprehensive review of the operation generally.
statements is to enable the auditor to conclusions from the report by the auditor. Internal control is broadly defined as a
express an opinion whether the financial Compilation process, effected by the entity’s board of directors,
statements are prepared, in all material  In a compilation engagement, the management and other personnel, designed to
respects, in accordance with an identified accountant is engaged to use accounting provide reasonable assurance regarding the
financial reporting framework. expertise as opposed to auditing expertise achievement of objectives in the following
 The auditor's opinion enhances the to collect, classify and summarize financial categories:
credibility of financial statements by information. • Effectiveness and efficiency of operations.
providing a high, but not absolute, level of  This ordinarily entails reducing detailed data • Reliability of financial reporting.
assurance. to a manageable and understandable form • Compliance with applicable laws and regulations.
Review without a requirement to test the assertions
 The objective of a review of financial underlying that information. 5 Components of Internal Control (CRIME)
statements is to enable an auditor to state  The procedures employed are not designed 1. Control Activities
whether, on the basis of procedures which and do not enable the accountant to 2. Risk Assessment
do not provide all the evidence that would express any assurance on the financial 3. Information and Communication
be required in an audit, anything has come information. 4. Monitoring
to the auditor's attention that causes the 5. Control Environment
auditor to believe that the financial
statements are not prepared, in all material Definitions of Operational Auditing So COSO’s broad view of internal control is
respects, in accordance with an identified The term “operational auditing” conjures up that internal control (i.e. management control) is
financial reporting framework. different images for internal auditors. It may be used everything that management does in order that
 A review comprises inquiry and analytical to mean any of the following: there is reasonable assurance the business will
procedures which are designed to review  The audit of operating units such as achieve all of its objectives. A narrower view of
the reliability of an assertion manufacturing plants, depots, subsidiaries, internal control is that it is only one of a number of
 While a review involves the application of overseas operating units, and so on. While facets of management—among others being
audit skills and techniques and the the audit scope may cover only accounting, planning, organising, staffing and leading. It is true
gathering of evidence, it does not ordinarily financial and administrative controls it may that these facets overlap and an internal audit which
involve: be broadened in scope to cover the intends to focus more narrowly on key internal
 an assessment of accounting and administrative and operational controls, risk controls is likely to need to address planning,
internal control systems management and governance processes of organising, staffing and/or leadership issues to some
 tests of records and of the operating unit under review. extent, since deficiencies in these may weaken
 responses to inquiries by obtaining  The audit is how the functional areas of a control. But there will be many aspects of planning,
corroborating evidence through business (such as sales, marketing, organising, staffing and leading which are neutral in
inspection, observation, production, distribution, HR, etc.) account their effect on the functioning of key controls but
confirmation and computation, for their activities and exercise financial which contribute to providing reasonable assurance
which are procedures ordinarily control over them. of the achievement of efficient and effective
performed during an audit operations.
Agreed-upon Procedures SCOPE The audit function, however, in operational
 In an engagement to perform agreed-upon A key issue for a business and its internal auditing will have to define those aspects of the
procedures, an auditor is engaged to carry audit function to decide upon is whether the scope organisation which are to be subject to review. In
out those procedures of an audit nature to of internal audit work in an operational area of the practice, of course, this will vary considerably
between organisations, and will be related directly • purchaser contracting Steps:
to the nature of the business and the way the • provider contracting 1. What are your objectives?
organisation is structured. • general practitioner fund holding 2. What information do you need to be
Example • charitable funds receiving so that you know whether these
• management and administration • use of health centres objectives are being achieved?
• financial and accounting • private patients 3. Can you show us the information or
• personnel and human relations • welfare foods evidence?
• procurement • residential accommodation 4. Established Audit Objectives (Focus of
• stock and materials handling • joint finance auditors)
• production/manufacturing • residents’ monies
5. Draw up audit program (list of detailed
• marketing and sales • cashiers
audit procedures)
• after sales support • family health service authority
a. confirming the reliability of the
• research and development • road traffic accidents
management information
• information technology • nursing homes
b. undertaking audit fieldwork so as
• contracting. • trading agencies
to develop audit recommendations
• insurance products
on issues they are already aware of
The activities covered in financial institution and • pharmacy stores
with respect to incompleteness,
health sector-specific sets are • risk management
lack of clarity, inconsistency and
Sector: Financial institutions • cash collection—car parks
untimeliness;
• branch security • cash collection—telephones
c. determining whether other
• branch operations • cash collection—prescriptions
significant events are occurring
• management • cash collection—shops/restaurants
which should be reported to the
• treasury dealing • cash collection—staff meals
oversight function.
• investments—new accounts • cash collection—vending machines
• investments—account maintenance • income generation
Auditing for the Three and Six Es
• investments—account statements • staff expenses
• Economy – means “doing them cheap” – with, for
• secured personal loans • losses and compensations.
instance, unit costs for labour, materials, etc. being
• unsecured loans
under control. Economy is the ratio between
• commercial lending—new business AUDIT APPROACH TO OPERATIONAL AUDITS
planned inputs and actual inputs in terms of unit
• commercial lending—account maintenance Auditors of operations should keep firmly in their
costs of given quality. (Actual cost < budgeted cost?)
• cheque accounts mind the objectives of management for the
• Efficiency – means “doing things well” – smoothly,
• ATM services operations being audited. At an early stage in
for instance with good systems which avoid waste
• credit and debit cards planning the audit engagement, the audit team need
and rework. Efficiency is the ratio of actual inputs to
• new mortgage business to establish what are management’s objectives.
actual outputs. Every organisation, whether a service
• mortgage account maintenance Note: No time should be expended during the audit
organisation or a manufacturing business, has such a
• mortgage arrears engagement on issues which are immaterial to the
conversion process.
• mortgage possessions and sales achievement of management’s objectives. Nothing
• Effectiveness – means “doing the right things” –
• mortgage mandates should appear in the audit report of the engagement
i.e. achieving objectives. Effectiveness is the ratio of
• mortgage annual statements which is immaterial to the achievement of business
actual outputs to planned outputs (i.e. planned
• treasury environment objectives by management.
objectives) Budgeted output = Actual output?
• staff accounts Note: The audit findings will be addressed to the
• Equity—avoidance of discrimination and
• securities. level of management (higher level of management)
unfairness; acceptance and promotion of diversity.
that needs to know and that is capable of ensuring
Sector: Health appropriate action on audit findings is taken.
• Environment—acting in an environmentally often not possible to distinguish between one and variations in performance are identified and
responsible way. the other. explained between different operating units
• Ethics—legal and moral conduct by management
and staff. Examples: BENCHMARKING
• Ratio of actual input to actual output Benchmarking can be defined simply as a
PRODUCTIVITY AND PERFORMANCE • Breakdown per production day comparison of one’s own performance in a specific
MEASUREMENT SYSTEMS • Accidents at work per 1000 personnel area with that applied by others in compatible
Organisations are likely to have in place a number of • Degree success in comparison to school circumstances. As a technique it is founded on the
key performance measures, so as to, among other examination grades. premise that there may be viable alternative ways of
things, assess the achievement of their objectives performing a process and fulfilling a requirement.
and goals, assess their progress, and compare Effectiveness Performance Measures These The principal objectives of benchmarking are likely to
relative performance (for example, over time). performance measures focus on how objectives are include:
Example Performance Measures being achieved— regardless of economy, efficiency • maintaining a competitive advantage in the
Workload/Demand Performance Measures - or equity (except where the objectives relate appropriate market;
Indicate the volume of output, whether services, specifically to economy, efficiency and equity). • establishing current methods, best practice and
products or other, and when linked to measures of Examples: related trends;
input of resources, give useful information on quality • Actual output in comparison to planned output • ensuring the future survival of the organisation;
or quantity matters. • Degree success (in a college or university) • maintaining an awareness of customer
Examples: • Research output per 100 research staff expectations (and being able to address them);
• Number of users • Ratio of customer complaints to sales. • ensuring that the organisation has the appropriate
• Number of units produced approach to quality issues.
• Number of books in a library Equity Performance Measures These performance
• Percentage of first class degrees in a university. measures draw attention to unfairness or potential
social irresponsibility in terms of corporate policy
Economy Performance Measures - These may and practice.
highlight waste in the provision of resources Examples:
indicating that the same resources may be provided • Departmental grant per member of staff
more cheaply or that more enterprise may be • Number of library books per category of user
conducted at the same cost. • Proportion of female employees
Examples: • Proportion of disabled employees.
• Cost of actual input in comparison with planned
input Value for Money Auditing
• Cleaning costs per hour worked Value for money auditing is sometimes used
• Maintenance costs per unit area in a different context to refer to a style of
• Cost of the finance function per 100 staff operational auditing which makes extensive use of
• Cost of the chief executive’s department per 1000 key performance indicators to explore the cost of
clients. achieving standards of efficiency and effectiveness
and whether these costs represent good value.
Efficiency Performance Measures - These may Value for money auditing takes account of
highlight potential opportunities to convert given the three Es. It frequently makes extensive use of
resources to end product with less waste. Many performance indicators in the form of ratios and
performance measures will point to either other statistics to give an indication of value for
uneconomic or inefficient practices, or both. It is money—especially when trends are explored in
these performance indicators over time, or