- 20 Marks
Question
Expert Ltd (Expert) is a wholesaler of furniture (such as chairs, tables, and cupboards). Expert buys the furniture from six major manufacturers and sells them to over 1,000 customers ranging from large retail chain stores to smaller owner-controlled businesses. The receivables balance includes customers owing up to GHȼ200,000 to smaller balances of about GHȼ20,000, all with different due dates for payments and credit limits. All information is stored on Expert’s computer systems, although previous audits have adopted an ‘audit around the computer’ approach.
You are the Audit Senior in charge of the audit of the receivables balance. For the first time with this client, you have decided to use audit software to assist with the audit of the receivables balance. IT staff at Expert are happy to help you, the Auditor. However, they cannot confirm the completeness of systems documentation and warn that the systems have very old operating systems, limiting file compatibility with modern programs.
To limit the possibility of damage to Expert’s computer files, a copy of the files will be provided by Expert’s IT staff for the Auditor to use with their own audit software.
Required:
a) State SIX (6) substantive tests that should be carried out using audit software on the receivables balance of Expert Ltd. (9 marks)
b) Identify FOUR (4) potential problems of using audit software at Expert Ltd. For each problem, explain how it can be resolved. (8 marks)
c) Explain the concept of “auditing around the computer” and discuss why this increases audit risk for the Auditor. (3 marks)
Answer
a) Substantive Test Objective
- Cast the receivables ledger to ensure it agrees with the total on the receivables control account.
- Compare the balance on each receivable account with its credit limit to ensure this has not been exceeded.
- Review the balances in the receivables ledger to ensure no balance exceeds total sales to that customer.
- Calculate receivables days for each month-end to monitor control of receivables over the year.
- Stratify receivables balances to show all material items and select an appropriate sample for testing.
- Produce an aged receivables analysis to assist with the identification of irrecoverable receivables.
(6 points @ 1.5 marks each = 9 marks)
b) Problems of using audit software:
- Cost: There may be substantial setup costs to use the software, especially where the client’s computer systems have not been fully documented. Resolution: A cost-benefit analysis from the audit point of view should be carried out before deciding to use audit software.
- Lack of software documentation: Expert’s IT department cannot confirm that all system documentation is available, especially for older ‘legacy’ systems. Resolution: Postpone the use of audit software until next year to avoid setup costs that cannot be recouped due to system changes.
- Change to clients’ systems: Changes to clients’ computer systems can result in costly amendments to the audit software. Resolution: Wait for system stability before implementing the audit software.
- Use of copy files: Using copy files means the Auditor may not be certain that these are the actual files being used within Expert’s systems. Resolution: The Auditor should supervise the copying process or use ‘live’ files from Expert’s system.
(4 points @ 2 marks each = 8 marks)
c) Auditing around the computer:
This term means that the internal workings of the computer system are not tested by the Auditor. Instead, the Auditor compares the inputs to the expected outputs.
This approach increases audit risk because the Auditor does not verify that the computer programs are functioning as documented. Errors may occur in the system, but without testing the actual system itself, these issues may not be detected, increasing the risk of audit qualifications.
(3 marks)
- Tags: Audit Around the Computer, Audit risks, Audit Software, Receivables, Substantive Test
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: MAY 2021
- Uploader: Dotse