CHINHOYI UNIVERSITY OF TECHNOLOGY
Surname Name(s) Registration Number
Chimusoro Janet N. C1111154Y
Chiwara Shingai C1111078Q
Dari Michelle R. C1111546Z
Mapundu Mutsa M. C1110919S
Mhambare Nigel T. C1111693J
Musemburi Fortune C1111918D
Mutambanengwe Luckia S. C1112193C
Mutizwa Stanley-Lee C1111053N
Phekenye Arnold S. C1111948L
Program B.S.C.A.C
Level 2.1
Auditing Presentation
Audit Procedures
Definition
Auditor technique used in gathering audit evidence to substantiate the reliability of the accounting records. The auditor evaluates whether the information presented is logical and reasonable. Examples of auditing procedures are observing assets to verify existence and amount (e.g. non-current assets), collecting independent confirmations from external parties (e.g. bank confirmations), evaluating internal controls, appraising management’s activities, and obtaining management representation. There are three types of audit procedures, and these are substantive procedures, compliance procedures and also the analytical review.
Substantive Procedure/Tests
After the assessment of control risk, the auditor collects sufficient competent evidential matter in order to render an opinion on the financial statements. The collection of this evidence is defined as substantive testing. The purpose of substantive testing in computer auditing is the same as for the a+uditing of manual and mechanical systems. The purpose of substantive testing is to detect whether there are material monetary errors in account balances. The auditor focuses on several objectives in his or her search for material monetary errors. Are the recorded amounts valid and supported by adequate documentation? Have the recorded amounts been properly authorized? Have all the transactions that occurred and should have been recorded, been in fact recorded? Have the recorded transactions been classified in the correct accounts? Have the transactions been recorded in the proper time period? Have the transactions been recorded for the proper amounts? Substantive testing has two components that are relevant whether a manual, mechanical or computer system processes the accounting data: [1] tests for balances; and [2] analytical procedures applied for financial information.
Testing of Details of Transactions and Balances
The scope of, and approach to, testing the details of transactions and balances will differ depending on the sophistication of the system. If the computer is simply used as a giant electronic bookkeeping machine, performing exactly the same type of processing as the manual or mechanical device, the substantive testing may not be different from those used in other systems. For example, the computer may use the same format to prepare the journals, subsidiary ledgers, and general ledger postings found in a manual system. In this situation, the auditor may have no difficulty in tracing source documents to entries in these journals and ledgers, or vice versa. Manual procedures, utilizing the same tick marks, may be appropriate. If a computer is used in a more sophisticated manner, however, the substantive testing may be vastly different. A more sophisticated computer system, for example, may be programmed to authorize sales transactions within certain limits, or even executive transactions by issuing checks of vendors on appropriate due dates. There may, however, be no journals. The subsidiary ledgers may exist only on a magnetic tape or disk. The general ledger may contain only current balances with no details of debits or credits that can lead to that balance. The substantive testing in this situation is different in the sense that the computer can no longer be ignored. The computer auditor must utilize a computer or program(s) to obtain, at a minimum, the balances of the subsidiary and general ledger accounts. The substantive testing in computer auditing becomes even more complex when the auditor wants something other than just accounts balances. Examples of additional testing include testing transactions and processing through the computer system or examining the contents and files on a magnetic medium. For such testing, the auditor may rely heavilyon a computer and sophisticated software.
Analytical Procedures
The role of substantive testing pertaining to analytical procedures in computer auditing is not significantly different from that in a manual or mechanical system. Analytical procedures are performed to detect unusual relationships among financial data or information. Such relationships may result from errors or irregularities in the processing of accounting data. Procedures performed to detect these trends include ratio and trend analysis. Although the computer may be used to perform such tests, such use is not normally a significant issue in computer auditing. A major aspect of analytical procedures consists of comparing a set of financial information, such as: [1] this year’s statement’s amounts with last year’s or other prior periods; [2] this year’s actual results with the budgeted or forecasted results; and [3] the client’s financial statement ratios, such as working capital or net income as a percentage of revenue, with industry averages. Even with a fully computerized or relatively sophisticated system, many of these comparisons may be performed manually, with a pocket calculator, or with an electronic spreadsheet program on a microcomputer. Although many detailed analyses, such as comparing sales, costs and expenses fromseveral production lines, may sometimes be performed using a computer and details contained in magnetic files, it is typically not cost effective to do so. Other analytical procedures, such as determining the financial information and pertinent nonfinancial information, may have to be performed manually or with a pocket calculator because the information is not contained in the computer data base. The square feet of selling space by department or branch used in performing reasonableness tests on sales, for example, may not be stored in a computer system.
Compliance Procedures
A compliance audit is the review of the business functions to determine whether or not a company is meeting specific, contractual, regulatory or predetermined requirements. Compliance procedures can be defined as tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect.
The auditor needs to ensure that the internal control exists and that the internal controls are operating effectively and are being operated continuously throughout the period under audit to ensure that they can be relied upon. In doing the compliance tests, the auditor can then be able to ascertain the existence, effectiveness and continuity of the internal control system. Compliance audit procedures can review a company’s employees and departments. Large organizations use compliance audit to conduct internal reviews that measures how well each department operates according to the standard operating procedures. Contractual and regulatory compliance audits review how well a company follows written agreements or meets third party guidelines. Each compliance audit follows a few universal procedures:
Initial Meetings
Compliance audits begin when auditors meet with company’s management. External auditors are usually responsible for conducting compliance audits. Auditors will discuss with management the type of compliance audit and what business functions specifically needs reviewing. The scope of the audit is another issue to discuss. Auditors and company’s management will determine the information sample size or number of functions to review. Any appropriate manuals, contracts or other paperwork to review, during the compliance audit, are also discussed during this meeting.
Employee Review
Auditors will review each employee’s performance to determine the level of individual compliance. Employees are responsible for completing business functions in accordance with the company standards and contractual regulatory requirements. Auditors may also review the availability of operational managers who oversee employees. A lack of oversight can indicate that employees have free rein to complete business functions regardless of standard operating procedures or contractual obligations. Auditors will make notes regarding employee performance, especially any violations of contractual, regulatory or company standards.
Departmental Review
Individual department’s reviews are another procedure in compliance audits. Auditors commonly review operational or financial paperwork from each business department. This information provides auditors with a quantitative analysis of the department’s performance. A department audit is usually where the information sample size comes into play. Auditors review the specific information sample discussed in the management meeting. Auditors ensure the information is compliant and in accordance with operating standards or contractual agreements. If too many violations exist in the departments’ initial paperwork sample, auditors usually pull a second sample of information. Additional violations may result in the department being out of compliance.
Final Report
Auditors will have a final meeting with the company management upon completing the compliance audit. Auditors will discuss the audit results and which significant violations were found. Company management can dispute the findings or provide additional insight into the employee or department performance. Auditors will issue a final report at the end of this meeting. The report will outline the violations found during the audit and how well the company maintains standards or contractual agreements. Outside organizations or regulatory agencies may require a copy of the official auditor’s report. The Auditor reports positive or negative opinion on the company’s compliance with contractual agreements.
Analytical Review
The term ‘analytical review’ is used to describe a variety of audit procedures, and encompassing the following:
-analyzing the relationship between items of financial data (for example, between sales and cost of sales), or between financial and nonfinancial information (for example, between payroll costs and the size of the workforce);
-comparing actual data with predictions derived from the analysis of known or expected relationships between items of data;
-comparing information for the latest period with corresponding information for earlier periods, other comparable entities or industry averages;
-investigating unexpected variations which are identified by such analysis comparison;
-obtaining and substantiating explanations of those variations;
-evaluating the results of such analysis, comparison and investigation in the light of other audit evidence obtained to support the auditor’s opinion on the financial statements.
Analytical review procedures range from simple comparisons (for example, current periods amounts or ratios with earlier year’s figures) to more sophisticated methods using company audit software and advanced statistical techniques (for example, multiple regression analysis)
Factors Determining the Extend Of Use
The extent of use of analytical review procedures by auditors will be determined by his assessment of a number of factors:
-the nature of the entity and its operations;
-his knowledge of the client gained during previous years and any relevant knowledge and experience gained by him when auditing similar entities in the past, together with his or her understanding of the types of problems that have occurred in the previous periods;
-the availability of different forms of financial and nonfinancial information (for example, production figures expressed in volume terms), since the correlation of financial and nonfinancial information may be more persuasive than comparison of financial data alone;
-the relevance and the reliability of the various forms of information available, and the comparability and independence of information from different sources; and
-the relative cost-effectiveness of analytical review procedures vis a vis alternative means of obtaining audit evidence.
Analytical procedures may be applied to:
-individual account areas (for example, sales payroll costs or depreciation charges);
-financial information on individual entities or particular entities (for example, subsidiaries, divisions or segments); and
-financial information relating to consolidated financial statements.
In the case of diversified entities, analytical review procedures are more effective when applied to financial information on individual business segments rather than to the financial statements of the entity as a whole.
Procedures
The auditor should begin his analytical review procedures by obtaining a thorough understanding of the business and by identifying factors likely to have a material effect on the items in the financial statements. He should consider the relationship between these factors and items, ensuring that the expected relationship is both credible and relevant for the purpose of the review. It is important that the validity of the data used by the auditor to calculate the expected values should be established. This may be done by testing either the data itself or the adequacy of the system which produced it. The auditor should carefully consider the implications of variations from expected or past comparable values or any features identified which are inconsistent with evidence obtained from other sources. Explanations for material unexpected variations should be sought from an appropriate level of management. However, before placing reliance on such explanations, the auditor should seek to corroborate them by other evidence and should subject them to a critical evaluation in the light of other audit evidence and his knowledge of the entity. Management may perform various procedures similar to the auditor’s analytical review procedures (for example, for performance measurement purposes). In such cases, the auditor should consider whether the approach, the data used, and the results obtained are relevant for the purposes of his or her audit. Where he decides to use the results of management’s procedures, he or she should first evaluate the reliability of the procedures and the validity of data used. Auditors use the analytical review procedures, and his or her considerations of, and reaction to, the results of these procedures will vary depending upon the stage of the audit at which they are performed. Accordingly, the following procedural guidance is given in three sections dealing with analytical review procedures: [1] at the planning stage; [2] at the detailed testing stage; [3] at the final review of financial statements stage.
At the planning stage
In planning his or her audit, the auditor should consider preparatory procedures which include:
[a] assessing the effects of any changes in the legislation or accounting practice affecting the financial statements of the entity;
[b] reviewing the interim or management accounts where these are available and consulting with the management and staff of the entity. Matters which should be considered include current trading circumstances, and significant changes in: [1] the business carried on; and [2] the entity’s management.
The auditor’s work on planning the audit will usually take place before annual financial statements are available hence any analytical review procedures performed at this stage of the audit will necessarily be based upon interim financial statements and also budgeted financial statements among others. Their primary purpose at this stage is to identify, and therefore enable the auditor, to direct audit resources to areas of financial statements where the recorded values may vary from the values the auditor expected. In developing his expectations, the auditor should consider nonfinancial data and the likely impact of changes external to the environment entity.
Detailed testing stage
Analytical review procedures include studying significant ratios, trends and other statistics and investigating unusual expected variations. The precise nature of these procedures and the manner in which they are documented will depend on the circumstances of each audit. The comparisons which can be made will depend on the nature, accessibility and relevance of the data available. Once the auditor has decided on the comparisons which he intends to make in performing his analytical review, he should determine the variations which he expects to be disclosed by them. Usual or unexpected variations, and the expected variations which fail to occur, should be investigated. Explanations obtained should be verified and evaluated by the auditor to determine whether they are consistent with his or her understanding of the business and his or her general knowledge. Explanations may indicate a change in the business of which the auditor was previously unaware of, in which case he should reconsider the adequacy of his or her audit approach. Alternatively, they may indicate the possibility of misstatements in the financial statements. In these circumstances, the auditor will need to extend his testing to determine whether the financial statements do include material misstatements. The auditor will be carrying out audit tests which may be classified as substantive or compliance, according to their primary purposes, and both such purposes are sometimes achieved concurrently.
At review of financial statement stage
In addition to any analytical review procedures carried out during the course of the audit, the auditor should carry out an overall review of the information in the financial statements themselves and compare it with other available data. For such a review to be effective, the auditor needs to have sufficient knowledge of the activities of the entity and of the business which it operates to be able to determine whether particular items are abnormal. This background information should be available in the auditor’s working papers as a result off his planning and earlier audit procedures.
Circularization
It refers to an external source of evidence provided in the support of the assertion of the existence and to a lesser extent, valuation and completeness with respect or creditors. It is a verification procedure whereby trade debtors and creditors are contacted directly by the auditors to confirm their balances. It has become so extensive that auditors have developed a standard format for this purpose. The fundamental reason for the usage of this circulation is that it is reliable audit evidence coming from an independent source and it is in documentary form. Confirmation letter from the debtors and creditors in reply to auditors’ request confirming their account balances, are compared items and final balances. Circularization is also the verification procedure whereby trade debtor o creditors are contacted directly by the auditors to confirm their balance.
Importance of debtor or creditor circularization
[1] It provides the entity and the debtor the chance to come to a consensus as to how well they will pay their owings either by sequestration or otherwise. This is case where the debtor is bankrupt. Moreover, also when the entity is no longer able to pay its creditors it can also do the same with its creditors and come to an understanding.