May 2021 Q3 b & c
Expert Ltd (Expert) is a wholesaler of furniture (such as chairs, tables and cupboards). Expert buys the furniture from six major manufacturers and sells them to over 1,000 customers ranging from large retail chain stores to smaller owner-controlled businesses. The receivables balance includes customers owing up to GHȼ200,000 to smaller balances of about GHȼ20,000, all with different due dates for payments and credit limits. All information is stored on Expert’s computer systems, although previous audits have adopted an ‘audit around the computer’ approach.
You are the Audit Senior in charge of the audit of the receivables balance. For the first time with this client, you have decided to use an audit software to assist with the audit of the receivables balance. IT staff at Expert are happy to help you the Auditor. However, they cannot confirm the completeness of systems documentation and warn that the systems have very old operating system, limiting file compatibility with modern programs.
To limit the possibility of damage to Expert’s computer files, a copy of the files will be provided by Expert’s IT staff for the Auditor to use with their own audit software.
Required:
b) Identify FOUR (4) potential problems of using audit software at Expert Ltd. For each problem, explain how it can be resolved. (8 marks)
View Solution
- Cost
There may be substantial setup costs to use the software, especially where the client’s computer systems have not been fully documented, as is the situation in Expert Ltd. Therefore, a cost-benefit analysis from the audit point-of-view should be carried out prior to deciding to use audit software. - Lack of software documentation
The computer audit department at Expert cannot confirm that all system documentation is available, especially for the older ‘legacy’ systems currently in use. This again confirms the view that audit software should be deferred until next year to avoid extensive setup costs that cannot be recouped due to system changes. - Change to clients’ systems
Changes to clients’ computer systems can result in costly amendments to the audit software. Given that Expert’s systems will change next year, this is almost certain to result in modifications to the software. Starting to use audit software this year is therefore not advisable. - Outputs obtained
The audit manager must be clear about precisely what audit assertions are to be tested with the audit software and what outputs are expected. Starting testing to obtain knowledge of the system is inappropriate as testing may be too detailed and output produced that is not required, increasing the cost for the client. - Use of copy files
The use of copy files means that the Auditor will not be certain that these are the actual files being used within Expert’s computer systems, especially as the provenance of those files will not be checked. To ensure that the files are genuine, either the Auditor should supervise the copying or the ‘live’ files on Expert’s computer systems should be used.
(Any 4 points @ 2 marks each = 8 marks)
c) Explain the concept of “auditing around the computer” and discuss why this increases audit risk for the Auditor. (3 marks)
View Solution
This term means that the ‘internal’ software of the computer is not documented or audited by the Auditor, but that the inputs to the computer are agreed to the expected outputs from the computer.
This method of auditing increases audit risk because:
First, the actual computer files and programs are not tested; the Auditor has no direct evidence that the programs are working as documented.
Where errors are found in reconciling inputs to outputs, it may be difficult or even impossible to determine why those errors occurred. As a result, constructive amendments to clients’ systems cannot be made, and there is an increased likelihood of audit qualifications.