i) Challenges in performing an assurance engagement on an electronic processing system:

• The need for specialist knowledge about e-commerce systems.
• Problems that may arise when some aspects of the e-commerce system (such as the electronic payments system) are outsourced by the client to another entity.
• The role of the client’s internal auditors in monitoring the integrity of the e-commerce system.
• The need for specialist controls (general and application controls) for the system.
• Possible problems of independence and conflicts of interest if the audit firm was involved in designing or setting up the e-commerce system that is now subject to ‘audit’. (Any 4 points @ 1 mark each = 4 marks)

ii) Audit approaches K. O. and Associates should adopt in performing an assurance engagement on an electronic processing system:

• The audit firm should first decide whether the engagement should be accepted, as in any professional engagement.
• The firm should then plan the engagement; an important aspect of planning may be to make available audit staff with appropriate expertise in e-commerce systems.
• The firm should obtain a detailed knowledge of the client’s business.
• It should consider liaising with the internal auditors of the client, especially if there have been internal audit investigations into the client’s e-commerce transactions or system.
• The firm should identify and evaluate the risks in the system.
• It should ascertain and evaluate the control environment and the specific internal controls that are in operation.
• It may also be appropriate to perform a going concern review, particularly in the case of entities that rely mainly on e-commerce activities for their income. (Any 4 points @ 1.5 marks each = 6 marks)