May 2021 Q5 b.
Mike Developers’ Audit Manager is of the view that audit software can be used effectively in the audit of revenue and trade receivables. He has discussed this with the firm’s computer audit department and with Mike Developers’ Finance Director, and this approach has been agreed as a feasible one. Furthermore, the Finance Director has asked the internal audit team to investigate the possibility of installing embedded software to help the external auditors in their work.
Required:
i) Describe, giving examples, how audit software, in general, could assist the audit firm in their audit of revenue and trade receivables. (6 marks)
View Solution
Use of audit software in the audit of revenue and receivables tests of controls.
• Audit software could be used in the performance of computer controls such as sequence checks on pre-numbered documents.
• Audit software could be used to detect the violation of system rules or the presence of an unreasonable item on the master file. Examples of such techniques might include the following:
o Identify (by comparison with sales ledger balance) all those customers who have
o Print a report of customers with no entry in their credit limit field.
o Print a report of all customers whose trade discounts exceed, say, 30%.
• Substantive procedures
Audit software can scrutinise a large volume of data quickly and extract information for the auditor to check/investigate. An example might include the following:
o Performance of the client’s work (an aged analysis of receivables)
o Checking the cast on the transaction making up a balance.
o Calculating keys ratios, e.g. trade receivables collection period.
o Selecting a stratified sample for the direct confirmation of the receivables printing confirmation request.
o Identifying unmatched transactions (e.g. round sum payments on account)
o Listing all credit notes issued after the year-end in excess of a certain amount.
o Listing all accounts with a credit balance in excess of a certain amount. ( 3 principles @ 2 marks=6 marks)
ii) Discuss the extent to which the external auditor could rely on the results of the internal auditor’s use of embedded software. (4 marks)
View Solution
The extent of external auditor’s reliance on the internal auditor’s use of embedded software includes.
- Assessment of internal auditors’ organisational status
- The scope of internal auditor’s work
- Due professional care and competences
- Independence
- The security of the software
- The security of the data extracted for review
- The specific tasks carried out by the software and their relevance to the external audit.