Chapter 2:

Auditing Classification
 Audit Classification

2.1. Types of Audit

2. 2. Types of Auditor
 Types of audits

• Financial statements audit

• Compliance audit
• Operational audit (performance audit)

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 2.1.1. Financial Statement audit

• Definition of Financial statement audit:

Conducted to determine whether the
overall financial statements are stated
in accordance with specified criteria.

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 Characteristics of financial statement audit
• Objective of FA: the auditors express an
opinion whether FS are presented true and
fair view in all material respects.
• Object of FA (verified information) :
financial statements
• Performed by: independent auditors (almost
universally) government auditor (frequently),
internal auditor (rarely)
• Established criteria: Accounting standards
• Reporting: audit report => outsiders of the
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entity being audited (External users)

 Audit of Financial Statements

Annual audit of Boeing’s financial

Example
statements

Information Boeing's financial statements

Established Generally accepted accounting

Criteria principles

Available Documents, records, and outside

Evidence sources of evidence

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 2.1.2. Operational audit
Definition:
• An Operational audit is a review of any part
of an organization’s operating procedures
and methods for the purpose of evaluating
economy, efficiency and effectiveness
• Operational audit focuses on the appraisal of
the economy, effectiveness and efficiency of
an activity or an operation of an organization
in order to determine whether it meets
management objectives and achieves other
established criteria. 1-7
 Objective of Operational Audit
• Economy: The resources are acquired and used at
the lowest cost but still at the appropriate
quantity, quality and times.
• Effectiveness: the degree to which the
organization’s objectives are accomplished
• Efficiency: This is the relationship between
goods or services produced (outputs) and the
resources (inputs) used to produce them. An
efficient operation produces the maximum
output for the given set of resource input, or it
has minimum input for any given quantity and
quality of good and services provided.
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 Characteristics of operational audit
• Object of OA (verified information): operations or
activities undertaken by any part of an organization.
• Performed by: internal and government
auditor, external auditor (perform primarily by
internal auditor)
• Established criteria: depend on nature,
characteristics and extent of specific operations
or activities audited.
• OA is more like consulting function than assurance
• Reporting reported to insiders of the entity being
audited (internal users) 1-9
 Operational Audit

Evaluate computerized payroll system

Example
for efficiency and effectiveness

Number of records processed, costs of

Information
the department, and number of errors

Established Company standards for efficiency and

Criteria effectiveness in payroll department

Available Error reports, payroll records, and

Evidence payroll processing costs

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Differences between operational audit
and financial auditing
• Object of the audit (verified information)
• Purpose of the audit
• Established criteria
• Who is responsible for performing the
audit?
• Distribution of the report
• Inclusion of non financial areas
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 2.1.3. Compliance audit

Definition:
• Compliance audit is to determine
whether the auditee is following
specific procedures or rules set down
by a higher authority.

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 Characteristics of compliance audit
• Objective of CA: the degree of
compliance with prescribed regulations
and rules of auditee
• Performed by: different types of auditor,
especially government and internal auditor
• Established criteria: government
legislation, regulations, ordinances,
directives, internal policy …
• Reporting: External and internal users.
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 Compliance Audit

Determine whether bank requirements

Example
for loan continuation have been met

Information Company records

Established
Loan agreement provisions
Criteria

Available Financial statements and

Evidence calculations by the auditor

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 2.2. Types of auditors
• What type of auditor would you like to be?
– Certified public accountant (CPA)
– Government auditor
– Internal auditor

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[Link] public accountant (CPA)
& CPA firms
– CPA firms are business entities that provide
auditing services and other services to
meet the need and demand of their client
– CPA & CPA firms are usually responsible for
published financial statements of all listed
companies, public companies,…
– Auditors who express audit opinion on
financial statements must be licensed
as CPAs
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 Requirements for becoming a
CPA in Viet nam
• Which organization does have
authority to license CPA in Viet nam?
• Which requirements does a person
have to meet to become a CPA in Viet
nam?
• Distinguish differences between
requirements for becoming a CPA in US
and in Viet nam?
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 Hierarchy of a typical audit firm

Partner

Manager
Positions and
duties in an
audit firm
Supervisors or senior

Assistants
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 Positions and duties in an audit firm
• Partner (10+ years)
– Top level client relationships
– Review of audit work
– Resolve significant issues arising from the audit
– Signature on audit report
– Attend annual general meeting
– Approval of billings to client
– Ultimate responsibility for everything related to auditor’s report
• Manager (5 -10 years)
– Close contact with client
– Direct supervision of auditengagement
– Detailed review of audit work
– Billings to client
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 Internal structure of an audit
firm
• Supervisor or senior (2 -5 years)
– Direct responsibility forplanning and performance of
audit work
– Supervision of assistants and provisions of on the job
training
– Review of assistants’work
• Assistant (0 – 2 years)
– May plan portions of theaudit
– Direct responsibility for audit work on assigned
segment of audit
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 Type of audit firms
• International firms: have offices in most
major cities throughout the world and
dominate the practice of public
accountancy (Big 4)
• National firms: have offices in the major
city in a country and serve mainly medium
sized and small clients.
• Regional and local firm: serve small
business and individuals in a restricted
geographical area in the city or country
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 [Link] auditor
• Government auditor are responsible for
auditing public assets and state budget
• Government auditors perform different type
of audits
• Organization structure of government audit
varies considerably in many countries in
the world

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Organizational structure of
Government Audit
 Government audit is separated
from Congress and
Government, Ministry of
Justice.
 Government audit is controlled
by Congress
 Government audit is Controlled
by Government
 2.2.3. Internal auditor
• Internal auditing is an independent,
objective assurance and consulting activity
designed to add value and improve an
organization’s operations.
• Internal auditors are employed by
organizations to audit for management
• Internal auditors’ responsibilities vary
considerably, depending on the employer
(managers and BOD) 1-26
 Internal audit organization

• Internal Resources (In – house the IA

function): internal audit department
(appointed and overseen, reported
directly to Audit Committee)

• External Resources: Outsourcing and

Cosourcing the internal audit
function
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 Distinction among
internal audit and CPA,
Government audit
 Objectives
 Reporting
 Scope
 Relationship
 Organizational structures
 Distribution of report
Identify the Primary types of auditors (US)

The primary types of auditors:

 Certified public accounting firms
(independent auditors)
 Government accountability office
auditors (GAO)
 Internal revenue agents
 Internal auditors
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