- 20 Marks
AA – L2 – Q58 – Auditing in a Computerized Environment
Question
Cal & Co has been appointed as the auditor for Mount Co, a company providing motor vehicle repair services across 25 locations, with a year-end of 30 June 2009 and an audit completion deadline of 15 August 2009. Each location uses the same computerized inventory, sales, and purchasing systems, with data consolidated monthly at the head office. The audit manager is planning the audit approach, considering rewriting Cal & Co’s audit software to test Mount Co’s inventory systems on a live basis. However, July is a major holiday period for the audit firm, posing potential resource constraints
(a) (i) Explain the benefits of using audit software in the audit of Peak Ltd.
(a) (ii) Explain the problems that may be encountered in the audit of Peak Ltd and for each problem, explain how that problem could be overcome.
(b) Following a discussion with the management at Peak Ltd you now understand that the internal audit function is prepared to assist with the statutory specification on the computerised inventory systems at Peak Ltd. Documentation provides details of the software and shows diagrammatically transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.
Required:
Explain how you will evaluate the computer systems documentation produced by the internal audit function in order to place reliance on it during your audit.
Answer
(ai) Standard systems at client
The same computerised systems and programs are used in all 25 branches of Peak Ltd. This means that the same audit software can be used in each location providing significant time savings compared to the situation where client systems are different in each location.
Use actual computer files not copies or printouts
Use of audit software means that Peak Ltd’s actual inventory files can be tested rather than having to rely on printouts or screen images. The latter could be incorrect, by accident or by deliberate mistake. The audit firm will have more confidence that the ‘real’ files have been tested.
Test more items
Use of software will mean that more inventory records can be tested – it is possible that all product lines could be tested for obsolescence rather than a sample using manual techniques. The auditor will therefore gain more evidence and have greater confidence that inventory is valued correctly.
Cost
The relative cost of using audit software decreases the more years that software is used. Any cost overruns this year could be offset against the audit fees in future years when the actual expense will be less.
Timescale – six week reporting deadline – audit planning
The auditor’s report is due to be signed six weeks after the year end. This means that there will be considerable pressure on the auditor to complete audit work without compromising standards by rushing procedures.
This problem can be overcome by careful planning of the experienced staff and ensuring other staff such as second partner use are booked well in advance.
(ii) Timescale – six week reporting deadline – software issues
The auditor’s report is due to be signed about six weeks after the year end. This means that there is little time to write and test audit software, let alone use it.
This problem can be alleviated by careful planning. Access to Peak Ltd’s computer system must be arranged as soon as possible so that the systems can be documented and audit software written and tested prior to the year end.
Computer systems
The client has 25 locations, with each location maintaining its own computer system. It is possible that computer systems are not common across the client due to amendments made at the branch level.
This problem can be overcome to some extent by asking staff at each branch whether systems have been amended and focusing audit work on material branches.
Usefulness of audit software
The use of audit software at Peak Ltd does appear to have significant problems this year. This means that even if the audit software is ready, there may still be some risk of incorrect conclusions being derived due to lack of testing, etc.
This problem can be alleviated by seriously considering the possibility of using a manual audit this year. The manager may need to investigate whether a manual audit is feasible and if so whether it could be completed within the necessary timescale with minimal audit risk.
(b) There are two issues to consider; the ability of internal audit to produce the documentation and the actual accuracy of the documentation itself.
The ability of the internal audit function to produce the documentation can be determined by:
- Ensuring that the department has staff who have appropriate qualifications. Provision of a relevant qualification e.g. membership of a computer related institute would be appropriate.
- Ensuring that this and similar documentation is produced using a recognised plan and that the documentation is tested prior to use. The use of different staff in the internal audit function to produce and test documentation will increase confidence in its accuracy.
- Ensuring that the documentation is actually used during internal audit work and that problems with documentation are noted and investigated as part of that work. Being given access to internal auditor’s reports on the inventory software will provide appropriate evidence.
Regarding the actual documentation:
- Reviewing the documentation to ensure that it appears logical and that terms and symbols are used consistently throughout. This will provide evidence that the flowcharts, etc should be accurate.
- Comparing the documentation against the ‘live’ inventory system to ensure it correctly reflects the inventory system. This comparison will include tracing individual transactions through the inventory systems.
- Using part of the documentation to amend Hill & Co’s audit software, and then ensuring that the software processes inventory system data accurately. However, this stage may be limited due to the need to use live files at Peak Ltd.
- Tags: Audit Challenges, Audit Planning, Software Development, Time Constraints
- Level: Level 2
- Topic: Audit Evidence
- Uploader: Samuel Duah