Automated Audits
(printed in the June/July 1996 issue of CA Magazine)
If you’ve been disillusioned with audit software in the past, either because data transfer was too difficult or your audit staff spent hours wrestling with the program, it’s time to reconsider. Data transfer is simpler now than it was even a few years ago, and graphical user interfaces have made today’s software programs easier to learn and use. More than ever, audit software is a tool that can make your audits more efficient and effective.
For one of our clients (a credit union), we normally spend about two weeks selecting deposit and loan confirmation samples, footing the subledgers and preparing the confirmation letters. This year, however, one of our CAs, who had very limited audit software experience, completed it all in one day with audit software - including transferring the client data to our portable computer.
Doane Raymond decided to use audit software several years ago for a number of reasons: to increase efficiency and productivity; to gain time by automating manual tasks; to perform analysis (such as extensive testing) that would be difficult to do manually; to audit systems for which a traditional paper audit trail was inadequate; to meet the expectations of clients who had invested heavily in technology and wanted their auditors to use it; to provide general audit staff with the most productive tools; and to offer value-added services, such as trends analysis.
Since then, both IDEA and ACL, leading suppliers of microcomputer-based audit software have introduced Windows-based versions that are easier to learn and use than the former DOS-based programs. In addition, many of our clients now regularly transfer data to their microcomputers from networks and mainframe systems, so data transfer is no longer a problem.
Generally, firms first use audit software to automate current tasks such as the selection of samples from general ledger transactions, accounts receivable outstanding items, inventory items, capital asset additions and payroll. Audit software reduces the time required to select a statistical or systematic sample - a measurable benefit.
You don’t realize how powerful the software really is, however, until you go beyond sampling. In the inventory area, for instance, we use audit software to re-foot the inventory file, re-perform the extension of quantity times cost and compare the result to the client’s calculation. Previously, a few samples would have been tested manually. Now, with the computer, and in significantly less time, 100% can be confirmed. Audit software can also be used to help assess valuation and obsolescence. Common procedures include extracting all inventory items where cost is more than net realizable value, extracting items that have not been sold in the last twelve months, aging the inventory based on the last sales date, and extracting items with negative costs or quantities. All these procedures would be very time-consuming or impractical to perform manually, especially for large inventory files. For clients whose accounting systems are unable to perform these analyses, we use the audit software to generate reports to help value their inventory. We also use audit software to match inventory test counts to the physical inventory file and then to perpetual inventory. At the same time, we can also check for duplicate inventory tickets.
In the receivables area, audit software is used to re-age the accounts receivable outstanding items and is then compared to the client’s aging. We can re-age the entire accounts receivable file, rather than just a few samples. In addition, the software is generally flexible, so that aging periods other than those on the client’s standard reports can be used. In instances where a significant number of accounts receivable are selected for confirmation, audit software can be used to select the sample and export the results to a mail-merge file, saving support staff the need to rekey the information.
There are many possible uses for audit software, depending on the type of client. In the case of a charitable organization, for instance, we use audit software to check the continuity of donation receipts and search for duplicate receipt numbers, work orders and bills of lading. For one of our municipality audits, we use such software to generate payroll exception reports, which can include unusually large pays, overtime payments or the largest 20 pays during the year. For financial institutions, we use audit software to identify loans with unusual interest rates or payment terms, or recompute accrued interest on all outstanding loans - tasks that used to be restricted to manual test-checks.
In many industries, audit software can be used to extract unusual items (such as repair and maintenance expenses exceeding a certain amount) for further follow-up. The software can also search for all missing sales invoices, based on beginning and ending invoice numbers. It can be used to extract any large debit entries in revenue accounts or to identify related-party transactions; and it can also be used to compare clients’ actual balances with budgeted balances, extracting accounts with a large variance for further analysis.
Audit software can be beneficial in non-audit engagements as well. We have used it for analytical procedures, to identify and extract related party transactions and to generate reports for clients on inventory obsolescence or other matters. Audit software is also used frequently to import the client’s trial balance and then export it into a format supported by our working paper software.
The 1994 CICA Audit Technique Study “Application of Computer Assisted Audit Techniques Using Microcomputers” is a good reference for implementing audit software. (See Appendix A of the study for further examples of audit procedures that can be performed with this software).
Audit software is useful not only for large clients of large public practices, but for smaller practices and internal auditors. One internal auditor was able to reduce his travel to the branch offices by obtaining branch data in advance and using audit software to look for unusual items and select samples. He then sent this information back to the branch so the supporting documents would be available when he arrived.
Audit software is not just for computer audit specialists, either. At Doane Raymond, all audit staff are trained to use IDEA, the software selected by the firm. Staff learn about the key functions of the software, how to obtain client data, and how to document their work. Such training is necessary to ensure staff learn the most proper and efficient use of the software.
There is a learning curve, especially on the first two or three engagements. Although we are able to obtain net savings in the first year on many of our audits, savings are much more likely in the second and subsequent years. That is because in the first year, it is necessary to spend time rethinking our audit approach. Because of this initial investment, it is imperative that partners be committed to this change. Staff will not use a tool, even one that ultimately makes them more efficient, if they think they’ll be blamed for spending too much time in the current year. In such a case, it’s much safer for them to do the audit the old way.
With appropriate planning and supervision, however, it’s possible to minimize the first-year investment. After providing adequate staff training, you should choose clients who can easily export data from their accounting software such as ACCPAC Plus. Also, consider selecting smaller clients first, to ensure the task is manageable. And try to target clients who are using the same software or are in the same industry, so you can apply your knowledge from one client to the next.
Consider adding new audit applications each year rather than all at once. If inventory is a high-risk area, for example, start by implementing procedures to assist in checking obsolescence and valuation. Then, the following year, expand procedures to other areas such as receivables or payroll.
It’s important to investigate data transfer implications as early as possible. Although the ability to transfer data from a client’s system has been a significant barrier to the use of audit software in the past, that barrier has been minimized in recent years. Many of our clients now connect microcomputers to their networks or mainframe systems and download data regularly, in order to manipulate them with spreadsheet software such as Excel and Lotus. The summer season is an ideal time to meet with clients and plan the transfer of their data. (Additional information on downloading and understanding data is provided in appendixes D and F of the study mentioned earlier.)
There are several ways to transfer data between microcomputers:
· Copy the data to a diskette on the client's microcomputer and then onto the hard drive of your own.
· For a data file too large to fit on one diskette, use a compression program such as PKZip.
· If the data file is larger than 2 MB, you can connect two microcomputers with a parallel or serial cable and then transfer the file. DOS 6 includes a program called Interlnk for such transfers. Other popular programs are LapLink, FileShuttle, and Brooklyn Bridge. Or, use Windows 95’s Direct Computer Connect to connect two computers. You can also use Windows or DOS backup and restore commands, or a portable tape backup unit.
Small business clients often use accounting software programs on their microcomputers and several of these systems have record definitions included in the audit software. You need to find out the name of the appropriate data file and copy it to your microcomputer. If the audit software does not contain a record definition for the client’s accounting software, determine what export capabilities are available in the accounting software. Most mainstream accounting software can export data in formats such as dBASE, ASCII text or Lotus 1-2-3. If you are using IDEA, the best format is dBASE, since it automatically includes the record definition information in the file.
If the client's software does not have an export capability, it might be capable of printing the desired information in a report format. You may be able to import the report file directly into the audit software or by using a file translation utility such as AutoImport, Monarch or DataImport.
If these methods are not successful, ask the software vendor if he or she can provide the layout of the data files so you can generate a record definition. The vendor may also be willing to develop a program to convert the client's data to a format readable by IDEA.
There are definite benefits to be gained from using audit software in your practice. Not only will it lead to greater efficiency and productivity but it will enhance your firm’s image. Moreover, the software is easier to use than it used to be. If you have ignored audit software for the past few years, it’s time to take another look.
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CA Magazine June/July 1996