- 15 Marks
Question
The auditor takes a systems-based approach wherever possible and focuses on testing the systems and internal controls that produce the financial reporting figures of an organization rather than focusing on the figures themselves. Specialised techniques of obtaining audit evidence may be required by the auditors in an organization where the systems are Information Technology (IT) based.
Required:
a. Explain the TWO conditions that are necessary before the auditor can adopt a systems-based approach to audit assignment. (2 Marks)
b. Explain the term Computer-Assisted Audit Techniques (CAATs) and its disadvantages. (7 Marks)
c. Explain the term “Major Transaction Cycles” of an organization that the auditor should focus much of his audit work. (3 Marks)
d. State the elements of the sales system of an organization that the auditor should apply tests of controls. (3 Marks)
Answer
a. Two conditions necessary for adopting a systems-based approach:
- Well-designed systems and controls: The systems and controls should be designed to minimize the risks of misstatements.
- Effective operation of controls: The systems and controls should actually operate effectively, evidenced by tests of control that confirm their practical functioning.
b. Computer-Assisted Audit Techniques (CAATs):
CAATs refer to techniques that allow auditors to use IT systems as a source of audit evidence. These involve using computer techniques to obtain audit evidence when traditional methods are inadequate, such as when transaction processing is electronic.
Disadvantages of CAATs:
- Cost: Purchasing or developing the necessary software can be expensive.
- Maintenance: Programs need to be continually updated to account for changes in hardware and software.
- Training: Audit staff need to be trained on how to operate the IT systems effectively to implement CAATs.
c. Major Transaction Cycles:
These are the recurring sets of transactions in an organization, such as:
- Sales
- Purchases
- Payroll
The auditor focuses much of their audit work on these cycles as they have a direct impact on both the statement of financial position and the income statement.
d. Elements of the Sales System:
The auditor applies tests of controls to the following elements of the sales system:
- Receiving orders from customers
- Dispatching goods and invoicing customers
- Recording sales and the amounts receivable in the accounts
- Tags: Audit evidence, CAATs, Major Transaction Cycles, Sales System, Systems-Based Approach
- Level: Level 2
- Topic: Auditing in a Computerized Environment
- Series: NOV 2021
- Uploader: Kwame Aikins