Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

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. (6 marks)
b) Explain how the auditors can use analytical procedures in order to give them greater assurance when there is a loss of audit trail. (4 marks)
c) Outline how audit software can be used the auditors in order to assist them in carrying out their analytical procedures. (6 marks)
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. (2 marks)
ii. The stock turnover ratio has decreased from the previous year‘s rate.
(2 marks)
(Total: 20 marks)
ANSWER
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 the auditors for processing the enterprises computer based accounting system either during a normal production run or during a special run at a point in time outside the normal cycle.

Audit software comprises computer programs used 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 means of parameter or supplementary program code.

ii) Purpose written programs involve the auditors satisfying their detailed requirements 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 = Sales/Debtors

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) Recover ability 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

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.



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