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Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company owns 25 shops.

      

Walsh Co sells motor vehicle fuel, accessories and spares to retail customers. The company
owns 25 shops. The company has recently implemented a new computerized wages system.
Employees work a standard eight hour day. Hours are recorded using a magnetic card system;
when each employee arrives for work, they hold their card close to the card reader; the reader
recognizes the magnetic information on the card identifying the employee as being ‘at work’.
When the employee leaves work at the end of the day the process is reversed showing that the
employee has left work.
Hours worked are calculated each week by the computer system using the magnetic card
information. Overtime is calculated as any excess over the standard hours worked. Any overtime
over 10% of standard hours is sent on a computer generated report by e-mail to the financial
accountant. If necessary, the accountant overrides overtime payments if the hours worked are
incorrect.
Statutory deductions and net pay are also computer calculated with payments being made directly
into the employee’s bank account. The only other manual check is the financial accountant
authorizing the net pay from Walsh’s bank account, having reviewed the list of wages to be paid.

Required:
a. Using examples from Walsh Co, explain the benefits of using Computer-Assisted Audit
Techniques to help the auditor to obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the audit opinion.
b. List SIX examples of audit tests on Walsh Co’s wages system using audit software.
c. Explain how using test data should help in the audit of Walsh Co’s wages system,
noting any problems with this audit technique.

  

Answers


Wilfred
(a) Use of Computer-Assisted Audit Techniques (CAA Ts)
Testing programmed controls
Reliance on CAATs will force the auditor to rely on programmed controls during an audit;
in fact using CAATs may be the only way to test controls within a computer system. Use
of the CAAT enables the auditor to meet the auditing standard requirement of obtaining
appropriate audit evidence. For example, in Walsh Co, an overtime report is generated by
the computer, although this can also be overridden by the accountant. Test data can be used
to check that the overtime report is being created correctly and audit software can monitor
that only the accountant’s password can be used to override the overtime payment.
Test larger number of items
Using CAATs enables the auditor to test a larger number of items quickly and accurately,
meeting the auditing standard requirement of obtaining sufficient audit evidence.
Using audit software, the auditor can check the deduction and net pay calculations of a
significant proportion of wages calculations – or all of them if necessary. Checking each
calculation manually would take a long time.
Test actual accounting records
Using CAATs enables the auditor to test the actual accounting records (the electronic
version) rather then relying on printouts or other copies of the data. It is always appropriate
for the auditor to test original documentation where possible. In the case of Walsh, the actual
wages will be tested rather than any paper copies.
Cost
After initial set-up costs, using CAATs is likely to be cost effective; the same audit software
programs can be run each year as long as the client does not change the accounting
systems.
In Walsh Co, the system has just been implemented. Hopefully the wages system will be
used for a number of years, making the use of CAATs cost-effective for the audit firm.

(b) Examples of the use of audit software
•• Calculation checks: For example, re-calculation of net pay for a number of employees
to ensure the mathematical calculation is correct.
•• Reviewing the list of employees paid each week/month and printing a list of employees,
who have not be been paid, for further investigation.
•• Detecting unreasonable items: Reviewing the list of net wages for large or negative
payments.
•• Detecting violation of system rules: For example, where other people besides the
accountant have been overriding overtime payments or employees amending their own
gross wages.
•• Conducting new analysis as part of the analytical review of wages. For example,
calculating total wages for the year from the number of employees and average wages
paid.
•• Completeness checks – ensuring there is an electronic record of all employees who
‘clocked in’ for a day’s work and ‘clocked out’ again.

(c) Audit test data consists of data submitted by the auditor for processing on the client’s
computer-based accounting systems.
The data can be processed during a normal processing run (a ‘live’ testing situation) or in a
special run outside of the normal processing cycle (a ‘dead’ testing situation).
In Walsh, the auditor can create a ‘dummy employee’ record on the wages master file, and
then use a magnetic card to mimic that employee working a certain number of hours in the
company over the course of, for example, one week.
Knowing how many hours has been input into the wages system; the auditor can calculate
the expected net pay and then compare this to the actual net pay produced by the computer
system.
If the amounts agree then this provides appropriate audit evidence of the accuracy of
recording and processing of the wages software.
The problems of using this audit technique include:
•• The possibility that the client’s computer system will be damaged by the testing being
undertaken by the auditor. For example, by errors being caused by entering data that
the client’s software cannot process.
•• The need to reverse or remove any transactions input by the auditor. The transactions
may be incorrectly or incompletely removed leaving dummy data in the client’s live
computer system.
•• Use of test data can be expensive – the auditor needs to ensure that the benefit gained
from the test outweighs the expense. In this situation, it will take a long time to input
employee details and there may be more efficient audit tests available.
Wilfykil answered the question on April 13, 2019 at 06:57


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