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In auditing the financial statements of companies which use computerized accounting systems, the auditors may find that this traditional (audit) trail is often obscured. Various...

      

In auditing the financial statements of companies which use computerized
accounting systems, the auditors may find that this traditional (audit) trail is
often obscured. Various techniques can be used in order to give the
auditors greater assurance when the audit trail is lost.
Required;
a) Explain why there is a possible loss of audit trail when companies
utilize computerized accounting systems and why auditing through
the computer assists the auditors in overcoming this loss of audit
trail.
b) Explain how the auditors can use analytical procedures in order to
give them greater assurance when there is a loss of audit trail.

c) Outline how audit software can be used by the auditors in order to
assist them in carrying out their analytical procedures.

d) Explain the possible reasons and implications (audit) of significant
changes in the following ratios when compared to the prior years
ratios:
i. The debtors turnover ratio has decreased over the year.
ii. The stock turnover ratio has decreased from the previous year‟s
rate.

  

Answers


johnson
a) The original concept of an audit trail was to print out data at all stages
of processing. Computer auditing methods have now cut out much of
this (a bonus, time consuming,) working and make use of:
i) a more limited audit trail
ii)efficient control total
iii) use of enquiry facilities
iv) audit packages
v)file dumps
This can however mean that auditors have difficulty tracing individual
transactions within the system.
Auditing through the computer
This involves an examination of the detailed processing routines of the
computer to determine whether the controls in the system are adequate to
ensure complete and correct processing of all data.
Audit test data consists of data submitted by the auditors for processing by
the enterprises computer based accounting system either during a normalproduction run or during a special run at a point in time outside the normal
cycle.
Audit software comprises computer programs used by the auditors to
examine an enterprise computer files. Types of audit software include:
i) Package programs consist of prepared generalized programs for which
the auditors will specify their detailed requirements by means of
parameter or supplementary program code.
ii) Purpose written programs involve the auditors satisfying their detailed
requirements by means of program code specifically written for the
purpose.
iii) Utility programs consist of programs available for performing simple
functions, such as sorting and printing data files.
b) Analytical procedures are substantive process which can be useful at
most stages of the audit. As well as confirming figures directly (such
as the PAYE due on salaries for a period) they may also be used to
give additional comfort where other audit tests and other figures are
also available.
The analytical procedures will not guarantee that certain transactions
have been processed, but they will give some assurance that the
records are accurate and complete.
Analytical procedures compare figures, trends and ratios to one
another, to prior periods and to budgeted or forecast figures where
variations occur from what is expected then investigations can be
made to establish the reasons.
c) The auditors can use audit software for analytical procedures in the
following ways:i) It can read computer files and extract data, such account
balances, agreeing analysis for stock and debtors etc.
ii) If the relevant information is on the computer, the audit
software can compare current results to prior year or to budget.
iii) Other computational aspects would be the calculation of days
sales in debtors or days purchases in stock and creditors.
iv) The audit software can calculate any amount of variance, trends
and ratios. The auditor must still analyse what the software
produces which will involve them using professional judgment
in analyzing the figures.
d) (i) Debtors turnover ratio=Debtors/Sales
A decrease in debtors turnover means that debtors have risen faster
than sales. This could be due to:-
? Changes in sales mix
? Changes in credit terms
? Worsening economy or industrial conditions
? Changes in credit control department staffing
? Changes in customers
? Teeming and lading frauds taking place
? Cut-off errors
? Sales may have declined suddenly
Audit Implications
i) Recoverability of debtors becomes more doubtful as age of
debtors increases. This could raise the need to increase the
provisions for doubtful debts.
ii) Questions as to the completeness of sales ideally a growth in
debtors should be a reflection of a growth in sales.
ii) Stock turnover ratio = Cost of sales/Stock

Possible reasons for the decrease:
A new method of valuing stock may have been adopted
? Sales may have declined suddenly
? Cut-off errors
? Increase in stock quantities perhaps due to bulk buying to obtain
discounts
? Stock values and amounts incorrectly calculated
? Changes in types of stock held due to change in sales mix
Audit Implication
i) Dead/ slow moving stock. There is need to review stock and possibly
create a provision.
johnson mwenjera answered the question on March 30, 2018 at 07:12


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