AA – L2 – Q46 – Audit Evidence

Describe how audit software can assist in auditing revenue and receivables at Brighton Components. Discuss external auditor reliance on internal audit’s use of embedded software at Brighton Components.

Question

The audit manager of Brighton Components has decided that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with the finance director of Brighton Components and this approach has been agreed as a feasible one. Furthermore, the finance director has asked his internal audit function to investigate the possibility of installing embedded software to help the external auditors in their work.

Required:
(a) Describe, giving examples, how audit software in general could assist the audit firm in their audit of revenue and receivables.

(b) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software.

Answer

(a) Use of audit software in the audit of revenue and receivables

Tests of controls
Audit software could be used in the reperformance of computer controls sequence checks on pre-numbered documents.

Master file data
Audit software could be used to detect the violation of system rules or the presence of unreasonable items on the master file. Examples of such techniques might include the following:

Identify (by comparison with sales ledger balances) all those customers who have exceeded their credit limits.
Print a report of those customers with no entry in their credit limit field.
Print a report of all customers whose trade discount exceeds, say, 30%.

Substantive procedures
Audit software can scrutinise large volumes of data very quickly and extract information for the auditor to check/investigate. Examples might include the following:

Reperformance of the client’s work (e.g. an aged analysis of receivables)
Checking the casts on transactions making up a balance.
Calculating key ratios, e.g. trade receivables collection period.
Selecting a stratified sample for the direct confirmation of receivables and printing confirmation requests.
Identifying unmatched transactions (e.g. round sum payments on account).
Listing all credit notes issued after the year end in excess of a certain amount.
Listing all accounts with a credit balance in excess of a certain amount.

(b) Extent of external auditor’s reliance on the internal auditor’s use of embedded software

The external auditor may not place uninformed reliance on the work of internal auditors. Before using internal audit, the external auditor must assess the internal auditor’s organisational status, the scope of his work, his due professional care and technical competence.

In addition, the following factors would affect reliance on the embedded software as an audit tool:

Involvement of the external auditor’s computer audit department in the design, development, implementation and monitoring of the software.
The security of the software. The external auditor could keep a copy for periodic comparison with the operational program.
The security of the data extracted for review.
The specific tasks carried out by the software and their relevance to the external audit.
The subsequent procedures carried out by the internal auditors on the data obtained.

Tags: Audit Evidence, Auditor Reliance, Embedded Software, Internal Audit
Level: Level 2

Topic: Audit Evidence

Uploader: Samuel Duah