Chapter 2 Organization and Structure of the Auditing Profess(3)

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requires established criteria (such as those contained in a law or regulation) to measure the relevant assertions against. Compliance audits are performed by independent auditors and by internal and government auditors (often as part of a performance audit).

If a policy, contract, law, or regulation has a direct and material effect on the entity's financial statements, determining the extent of compliance with it usually will be an integral part of a financial statement audit. For example, an auditor reviews an entity's conformity with the restrictive covenants in a long-term debt agreement to ascertain that a violation of the

covenant has not made the entire bond issue due and payable at the lender's option, which might require that the debt be reclassified as a current liability. Independent auditors do not, however, plan their audits of financial statements to provide assurance about an entity's compliance with policies, contracts, laws, and regulations that do not have a direct and

material effect on the financial statements. Chapter 4 describes the auditor's responsibilities when a possible illegal act is detected. Compliance audits are discussed further in Chapter 32. (c) Performance Audits1

Performance audits, also referred to as operational audits, include economy and efficiency audits and program audits. Government Auditing Standards, issued by the U.S. General Accounting Office and revised most recently in 1994, defines those audits as follows:

Economy and efficiency audits include determining (1) whether the entity is acquiring, protecting, and using its resources (such as personnel, property, and space)

economically and efficiently, (2) the causes of inefficiencies or uneconomical practices, and (3) whether the entity has complied with laws and regulations concerning matters of economy and efficiency.

Program audits include determining (1) the extent to which the desired results or

benefits established by the legislature or other authorizing body are being achieved, (2) the effectiveness of organizations, programs, activities, or functions, and (3) whether the entity has complied with significant laws and regulations applicable to the program. Using resources economically means achieving a specified output or performance level at the lowest possible cost. An entity that met or exceeded the specified level at the lowest cost would be using its resources economically. Using resources efficiently means attaining the highest possible output or performance level at a specified cost. If output or performance can be increased without incurring additional costs, the implication is that a more efficient use of resources is possible. The achievement of desired results or benefits refers to the extent to which a program meets objectives and goals that are proper, suitable, or relevant. Results that are consistent with established objectives and goals indicate that the program is being carried out effectively.

Objectives and goals may be established by federal or state legislatures or granting agencies, or they may be set by an entity's management. As noted in Chapter 1, the subject matter of auditing usually is quantifiable information about economic actions and events. Some