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(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
- List and briefly explain some of the difficulties of using audit software.(Solved)
List and briefly explain some of the difficulties of using audit software.
Date posted: April 13, 2019. Answers (1)
- Nagaya a limited liability company is a reseller of sports equipment, specializing in racquet
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Nagaya a limited liability company is a reseller of sports equipment, specializing in racquet
sports such as tennis, squash and badminton. The company purchases equipment from a
variety of different suppliers and then resells this using the Internet as the only selling media.
The company has over 150 different types of racquets available in inventory, each identified
via a unique product code.
Customers place their orders directly on the Internet site. Most orders are for one or two
racquets only. The ordering/sales software automatically verifies the order details, customer
address and credit card information prior to orders being verified and goods being dispatched.
The integrity of the ordering system is checked regularly by Archer Web, an independent
Internet service company.
You are the audit manager working for the external auditors of Nagaya, and you have just
started planning the audit of the sales system of the company. You have decided to use test
data to check the input of details into the sales system. This will involve entering dummy
orders into the Nagaya’s system from an online terminal.
Required:
List the test data you will use in your audit of the financial statements of Nagaya to confirm the
completeness and accuracy of input into the sales system, clearly explaining the reason for each
item of data.
Date posted: April 13, 2019. Answers (1)
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Computer-Assisted Audit Techniques (CAATs) are used to assist an auditor in the collection
of audit evidence from computerized systems.
Required:
List and briefly explain four advantages of CAATs.
Date posted: April 13, 2019. Answers (1)
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accountant in practice who may be advising his client...(Solved)
Computer security is of vital importance not only to the accountant in industry but also to the
accountant in practice who may be advising his client as to suitable security controls or who
may be auditing a computer system. Security is the means by which losses are controlled and
therefore involves the identification of risks and the institution of measures to either prevent such
risks entirely or to reduce their impact.
a. State four areas of risk which may arise in relation to a computer system and in each
case explain one factor which could lead to the system being exposed to such risk.
b. Describe the different forms of control which should be instituted to safeguard against
computer security risks.
Date posted: April 13, 2019. Answers (1)
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accounting system to a computerized one. State and explain the...(Solved)
A medium size firm which has been your client for several years has changed from manual
accounting system to a computerized one. State and explain the factors which you will take into
account when planning the first audit under the new system.
Date posted: April 13, 2019. Answers (1)
- There are a number of different methods of obtaining audit evidence. Methods include:(Solved)
There are a number of different methods of obtaining audit evidence. Methods include:
•• Analytical procedures.
•• Audit sampling
•• Tests of controls.
•• Detailed testing of transactions and balances.
•• Computer assisted audit techniques (CAATs)
These methods overlap and may be used for different purposes during an audit of financial statements.
Required:
Describe the relationship between the five methods of evidence gathering described above.
Date posted: April 12, 2019. Answers (1)
- (Solved)
Curdco is a company that runs a chain of fast food restaurants. The company has a centralized
operating style and managers of individual restaurants have very limited decision-making powers
on day-to-day operational matters. The company’s centralized administration is responsible for
the buying of food, the payment of staff, the maintenance and cleaning of restaurants by staff
employed by a national agency, and all other matters relating to the running of the business. The
company has good internal controls over purchasing. Inventory counts are conducted at each
restaurant at the year-end. Your firm has recently been appointed as auditor to Curdco.
Required:
a. List the account headings you would expect to find in Curdco’s schedule of accounts payable and accrued expenditure.
b. Describe and give reasons for the audit tests you would carry out to obtain audit evidence for Curdco’s accounts payable and accrued expenditure.
Date posted: April 12, 2019. Answers (1)
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Date posted: April 12, 2019. Answers (1)
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The external audit process for the audit of large entities generally involves two or more recognizable
stages. One stage involves understanding the business and risk assessment, determining the
response to assessed risk, testing of controls and a limited amount of substantive procedures.
This stage is sometimes known as the interim audit. Another stage involves further tests of
controls and substantive procedures and audit finalization procedures. This stage is sometimes
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Date posted: April 12, 2019. Answers (1)
- Explain whether the following types of audit evidence meets the standards of relevancy,
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• Written confirmation...(Solved)
Explain whether the following types of audit evidence meets the standards of relevancy,
reliability and sufficiency as required by the auditor’s operational standards regarding:
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• Work-in-progress stocks identified during the annual physical stock count
• Solicitor’s letter confirming pending legal action
Date posted: April 12, 2019. Answers (1)
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Date posted: April 12, 2019. Answers (1)
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The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.
Explain the responsibilities of external auditors in respect of the risk of fraud and error in an audit
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Date posted: April 12, 2019. Answers (1)
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Stone Holidays is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that Stone Holidays sells. The networked reservations system through which holidays are booked and the computerised accounting system are both well-established systems used by many independent travel agencies. Payments by customers, including deposits, are accepted in cash and by debit and credit card. Stone Holidays is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations.
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Date posted: April 12, 2019. Answers (1)
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Fraud and error present risks to an entity. Both internal and external auditors are required to deal
with risks to the entity.
Required:
Explain how the internal audit function helps an entity deal with the risk of fraud and error.
Date posted: April 12, 2019. Answers (1)
- You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line...(Solved)
You are the audit manager for Parker, a limited liability company which sells books, CDs, DVDs
and similar items via two divisions: mail order and on-line ordering on the Internet. Parker is a
new audit client. You are commencing the planning of the audit for the year-ended 31 May 2005.
An initial meeting with the directors has provided the information below.
The company’s turnover is in excess of Kshs85 million with net profits of Kshs4 million. All profits
are currently earned in the mail order division, although the Internet division is expected to return
a small net profit next year. Turnover is growing at the rate of 20% p.a. Net profit has remained
almost the same for the last four years. In the next year, the directors plan to expand the range of
goods sold through the Internet division to include toys, garden furniture and fashion clothes. The
directors believe that when one product has been sold on the Internet, then any other product
can be as well.
The accounting system to record sales by the mail order division is relatively old. It relies on
extensive manual input to transfer orders received in the post onto Parker’s computer systems.
Recently errors have been known to occur, in the input of orders, and in the invoicing of goods
following dispatch. The directors maintain that the accounting system produces materially
correct figures and they cannot waste time in identifying relatively minor errors. The company
accountant, who is not qualified and was appointed because he is a personal friend of the
directors, agrees with this view, The directors estimate that their expansion plans will require a
bank loan of approximately Kshs30 million, partly to finance the enhanced web site but also to
provide working capital to increase inventory levels. A meeting with the bank has been scheduled
for three months after the year end. The directors expect an unmodified auditor’s report to be
signed prior to this time.
Required:
Identify and describe the matters that give rise to audit risks associated with Parker .
Date posted: April 12, 2019. Answers (1)
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Ajio is a charity whose constitution requires that it raises funds for educational projects. These
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country from which Ajio operates have recently become subject to new audit and accounting
regulations. Charity income consists of cash collections at fund raising events, telephone
appeals, and bequests (money left to the charity by deceased persons). The charity is small
and the trustees do not consider that the charity can afford to employ a qualified accountant.
The charity employs a part-time bookkeeper and relies on volunteers for fund raising. Your firm
has been appointed as accountants and auditors to this charity because of the new regulations.
Accounts have been prepared (but not audited) in the past by a volunteer who is a recently
retired Chartered Certified Accountant.
Required:
Describe the risks associated with the audit of Ajio under the headings inherent risk, control risk and detection risk and explain the implications of these risks for overall audit risk
Date posted: April 12, 2019. Answers (1)
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List and explain the audit tests to be performed on income and expenditure from fund raising events.
Date posted: April 12, 2019. Answers (1)
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ISA 400 (Risk Assessments and Internal Control) deals with internal control objectives and
internal controls. ISA 500 (Audit Evidence) deals with audit objectives and audit procedures. A
proper understanding of internal controls is essential to auditors in order that they understand the
business and are able to effectively plan and execute tests of controls and an appropriate level
of substantive procedures.
You are the auditor of a small manufacturing company, Dinko, that pays its staff in cash and by
bank transfer and maintains its payroll on a small stand-alone computer.
Required:
(a) For the payroll department at Dinko, describe the:
i. Internal control objectives that should be in place.
ii. Internal control environment and internal control procedures that should be in place to achieve the internal control objectives.
(b) For the payroll charges and payroll balances (including cash) in the financial statements of Dinko:
i. Describe the external auditor audit objectives.
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Date posted: April 12, 2019. Answers (1)
- Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in...(Solved)
Rhapsody Co supplies a wide range of garden and agricultural products to trade and domestic
customers. The company has 11 divisions, with each division specializing in the sale of specific
products, for example, seeds, garden furniture, and agricultural fertilizers. The company has an
internal audit department which provides audit reports to the audit committee on each division
on a rotational basis.
Products in the seed division are offered for sale to domestic customers via an Internet site.
Customers review the product list on the Internet and place orders for packets of seeds using
specific product codes, along with their credit card details, onto Rhapsody Co’s secure server.
Order quantities are normally between one and three packets for each type of seed. Order details
are transferred manually onto the company’s internal inventory control and sales system, and
a two part packing list is printed in the seed warehouse. Each order and packing list is given a
random alphabetical code based on the name of the employee inputting the order, the date, and
the products being ordered.
In the seed warehouse, the packets of seeds for each order are taken from specific bins and
dispatched to the customer with one copy of the packing list. The second copy of the packing list
is sent to the accounts department where the inventory and sales computer is updated to show
that the order has been dispatched. The customer’s credit card is then charged by the inventory
control and sales computer. Bad debts in Rhapsody are currently 3% of total sales.
Finally, the computer system checks that for each charge made to a customer’s credit card
account, the order details are on file to prove that the charge was made correctly. The order file
is marked as completed confirming that the order has been dispatched and payment obtained.
Required:
a) In respect of sales in the seeds division of Rhapsody Co, prepare a report to be sent to the
audit committee of Rhapsody Co which:
i. Identifies and explains four weaknesses in that sales system.
ii. Explains the possible effect of each weakness.
iii. Provides a recommendation to alleviate each weakness.
Date posted: April 12, 2019. Answers (1)