Question

Compare and contrast materiality and evidence auditors assess, and identify materiality in both. Contrast between Operation Audit, Compliance Audit, Financial Statement Audit. Provide examples from a publicly-traded company.

Answer 1

• 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. For example, in a dry-cleaning business, operations would include all work that contributes directly to cleaning customers' clothing. An operational audit in this case would consist of an examination of those procedures used to complete the dry-cleaning process.

• A compliance audit is a comprehensive review of an organization's adherence to regulatory guidelines. Audit reports evaluate the strength and thoroughness of compliance preparations, security policies, user access controls and risk management procedures over the course of a compliance audit.What precisely is examined in a compliance audit varies depending on whether an organization is a public or private company, what types of data it handles, and if it transmits or stores sensitive financial data.For instance, a Sarbanes-Oxley Act compliance audit would have to prove that any electronic communication is backed up and secured with a reasonable disaster recovery infrastructure. Healthcare providers that store or transmit e-health records, including personal health information, are subject to Health Insurance Portability and Accountability Act laws and regulations. And financial services companies that transmit credit card data are subject to Payment Card Industry Data Security Standard requirements.

• Financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor's report must accompany the financial statements when they are issued to the intended recipients.The purpose of a financial statement audit is to add credibility to the reported financial position and performance of a business. The Securities and Exchange Commission requires that all entities that are publicly held must file annual reports with it that are audited. Similarly, lenders typically require an audit of the financial statements of any entity to which they lend funds. Suppliers may also require audited financial statements before they will be willing to extend trade credit (though usually only when the amount of requested credit is substantial).