7591 Use of computer-assisted audit techniques (CAATs)

Jul-2017

Information Processing—Application Controls

The basic approach is to identify the conditions that should not be present in the entity’s data files if the controls were working properly. By analyzing the entity’s data, we can identify where controls may not have been working properly or that they have been overridden. The following are some examples of CAATs that could be used for automated controls:

• Tests to determine if transactions are authorized based on the user responsible for entering transaction.

• Tests of transactions that fall outside control parameters, such as:

  • Amounts over specified monetary limit;

  • Null amounts;

  • Negative amounts;

  • Blank fields;

  • Invalid dates, or dates outside specified range;

  • Invalid field data (for example, location codes, product codes);

  • Lack of dual approval, where required;

  • Lack of appropriate approval level;

  • Duplicate transactions;

  • Gaps in transaction numbers;

  • Payments for goods or services to vendors not in the entity’s vendor masterfile.

• Tests for the following:

  • Purchase order present, where required;

  • Matching of purchase order, invoice and receiving advice;

  • Matching of delivered goods advice with invoice generation.

Information Processing—IT General Controls

• Automated testing of access logs.

• Generate list of failed attempts (compare over time).

• Compare successful attempts with list of authorized users.

• Generate list of changes in access from prior periods.

• Search for unusual activity (needs to be defined on a client by client basis).

• Extract lists of authorized individuals from system and:

  • Test with employee lists.

  • Compare with terminated employee list.

  • Generate list of users with high level of access (i.e. super-users).

  • Search for multiple levels of access for same user.

  • Search for software developers with access to production systems.

  • Search for non-developers with access to software development systems.

  • Generate report of dormant users (no access for extended period of time).

  • Compare current access lists with previous periods to detect changes.

  • Make selections of program changes for further testing (targeted testing).

  • Compare program changes in tracking software with changes registered in system.

  • Generate report of system interruptions over time.

Revenue and accounts receivable

• Accounts receivable liquidation (or subsequent cash receipts test)

  • Matching subsequent cash receipts and other accounts receivable activity (credits, write-offs, adjustments, etc.) to specified month end balances on an invoice level basis. The purpose is to assess the collectability of receivables by analyzing subsequent activity.

    • See a detailed example of an accounts receivable liquidation using CAATs below.

• Accounts receivable circularization (confirmation)

  • Use IDEA to make targeted or audit sampling selection of accounts to be confirmed with customers.

Note: IDEA is a software tool used to query entity data. It can be used to isolate and extract transactions based on pre-set query parameters.

• Aging of accounts receivable

  • Testing of aging as at a specified period end by recalculating the age of each individual invoice and confirming it is being reported in the proper aging category. Where the entity has no aging, we can produce one independently for analysis. Also, additional aging categories can be generated where the entities categories are not in sufficient detail. For example, if the client categories only cover 30 days, 60 days and 90 days and older, we might consider producing a report that would include categories for 120 days, 150 days, etc.

• Testing sales cut-off

  • Cut-off can be tested using CAATs by generating a report of sales transactions with shipping dates outside the current accounting period

• Listing of non-standard sources of revenue

  • Analyzes all revenue general ledger accounts and generates a report of revenue by source (i.e., the originating billing system). Non-standard sources can be investigated if material. Examples might be revenue generated by previously unknown billing systems, manual revenue adjustments, etc.

• Producing reports of top monetary accounts receivable balances or invoices

  • An analytical test for highlighting potentially uncollectable accounts or invoices. Unusually large balances or invoices would be investigated further.

• Producing reports of credit accounts receivable balances

  • Identifies amounts to be investigated, if material, and to potentially reclassify from assets to liabilities

• Producing reports of past due accounts receivable balances or invoices

  • Analytical test for highlighting potentially uncollectible accounts or invoices. Unusually large past due balances or invoices would be investigated further.

• Testing accumulation of credit note transactions

  • Analytical test for identifying potential high-risk accounts. These can be compared with prior periods (months, quarters or years) to highlight any unfavorable trends in credit note activity.

• Stratification of accounts receivable invoices/balances

  • Analytical test that shows how many invoices or balances fall into specific amount categories (i.e. negative, 0 to 100000, 100001 to 500000, 500000 to 1000000, etc.). The report also shows the total amounts per category. This can be used to better understand the nature of the data being tested and also to highlight unusually large or small amounts.

Inventories and production costs

• Producing reports of obsolete, excess or slow moving inventory

  • Analytical test that compares inventory quantities on hand at a point in time with actual or projected inventory usage. Resulting report shows number of months or years supply of each particular inventory item assuming the same inventory usage in the future. Report can be sorted to highlight low usage / high value items, and used to assist in the assessment of the adequacy of inventory reserves.

• Producing reports of unusual inventory quantities, costs or descriptions

  • Analytical test designed to highlight unusual inventory items. Examples include negative quantities or unit costs, extremely high quantities or unit costs or unusual quantities or unit costs (i.e. 999999).

• Identifying old or inactive inventory.

  • Report showing the age of inventory on hand and/or the last used or sold date for individual inventory items. The report can be sorted to highlight extremely old or inactive inventory items, which would assist in assessment of the adequacy of inventory reserves.

• Selecting items to be counted during physical inventory observation

  • CAATs can be used either to statistically select inventory items to be counted, or for targeted selection of items. Statistical selections might be necessary if the results of the physical inventory observation need to be extrapolated to the entire population. Targeted selections can be made using CAATs to focus on high value items or items deemed to have a higher risk.

• Testing mathematical accuracy of perpetual inventory records

  • CAATs can be used to automate the process of testing the accuracy of the various inventory reports. Examples include the report of tags used, unused or voided or report of final valued inventory. In addition, CAATs can be used to identify gaps and duplicate tags used as part of the physical inventory count.

• Producing reports of products where costs exceed market value

  • Analytical test that compares inventory costs with the most recent market value, either by comparison to recent sales amounts (for finished goods) or by comparison to purchasing data (for raw materials). The report would highlight where inventory items might be recorded at values above their current market value and would help assess the reasonableness of any associated inventory reserves.

• Inventory valuation testing (LIFO, average cost, etc.)

  • CAATs can be used to test various calculations used by the entity for valuing inventory, whether it uses LIFO, average cost or some other approach. The results of the testing would highlight any errors in the entity’s calculations.

• Producing reports of changes in unit costs and/or quantities from prior year

  • A comparison of costs or quantities with previous periods can highlight unusual changes. These changes can then be followed up if deemed necessary.

• Analysis of unusual inventory transactions

  • A summary of inventory transactions by transaction type and amount can be generated. Unusual transaction types and amounts can be tested further, if material.

Purchases and payables

• Search for unrecorded liabilities

  • Uses an automated approach to select cash disbursements after the period end being audited and matching those against items recorded in accounts payable at period end. A report is then generated showing all potential unrecorded liabilities, as indicated by disbursements made after the period end that related to costs incurred prior to the period end, but are not recorded in accounts payable. The report can be used to calculate the total amount of potential understatement (including all unmatched items), and can then also be sorted to highlight items that would need to be further tested.

  • See a detailed example of an unrecorded liability test using CAATs below.

• Producing reports of large or unusual payments

  • Analytical test that can be used to highlight high-risk payments. Payments over specified amounts are listed, as well as any unusual payments. The specification of unusual would be determined on an entity-by-entity basis, but might include non-standard payment types (manual cheques, wire transfers to foreign banks), or unusual vendor names (related parties, employee names, etc.).

• Generate listing of duplicate payments to vendors

  • Report would show potential duplicate payments to vendors by highlighting multiple similar payments. Payments might be considered similar if they have the same values for some combination of information, including vendor name, vendor number, invoice number, invoice amount, P.O. number, etc. While significant amounts of duplicate payments could have an audit impact, even large but non-material amounts are generally of interest to the entity because they could represent amounts potentially recoverable from vendors.

• Accounts payable circularization (confirmation)

  • CAATs can be used to make targeted or audit sampling selection of accounts to be confirmed with vendors.

Property and equipment

• Producing reports of large acquisition and disposition transactions

  • Used as either an analytical test to highlight higher risk acquisitions and disposals or as part of a substantive test to target transactions for detailed testing. The report can be sorted by amount and type of asset to further refine the analysis.

• Testing mathematical accuracy of depreciation expense by asset

  • CAATs can be used to recalculate depreciation expense by category of asset using information on the entity’s property report (useful lives, acquisition date, asset type, etc.). This can also be used to highlight any unusual components of the calculation (i.e., extremely long useful lives, unusual acquisition dates, items with accumulated depreciation greater than acquisition cost, etc.).

• Test for improper capitalization of expenditures

  • Report of all items capitalized into property can be generated and then sorted/summarized by type and source of item being capitalized (payroll, purchases, overhead, etc.). The report can be sorted to highlight large items by asset type and source type. In addition, the report can be generated for various time periods (monthly, quarterly, yearly) to identify any unusual trends in amounts being capitalized.

Other tests

• Mathematical accuracy testing of reports/balances

  • Mathematical accuracy testing is applicable to all audit areas and is a basic step to be completed when testing any report or schedule. CAATs can be used to test both the accumulation of amounts on the reports/schedules as well as any other related calculations (i.e., aging of item).

• Evaluate analysis

  • IDEA may be used to run a series of standard analyses, including mathematical accuracy, stratification of amounts, field level pattern analysis, and outlier analysis (items three standard deviations from the mean). This analysis can be performed on any data set as a starting point to identify potential unusual or high-risk items.

• Review of non-standard journal entries

  • CAATs can be used to generate a list of non-standard journal entries. Non- standard would need to be defined on a client-by-client basis, but might include the following type of entries: manual journal entries, entries with blank or unknown posting sources, entries over a certain amount threshold, entries made by unauthorized users. This list can then be used to select items for further testing. For further guidance on journal entry testing see OAG Audit 5509

• Audit Sampling

  • A statistical approach may be appropriate in some circumstances. The two most common types of statistical audit sampling used currently are attributes and monetary unit. Attributes sampling involves selecting a random sample of items and testing whether a specific condition is present or absent (e.g., authorization of a purchase order), and extrapolating the results to the entire population to obtain comfort that a specific control is in place. Monetary unit sampling involves selecting a random sample of items and testing the accuracy of monetary amounts, and extrapolating the results to the entire population to obtain comfort on the recorded balances. CAATs can be used to calculate the appropriate sample size, given a specified level of materiality and statistical confidence needed, select the sample, and then evaluate the results of the sample items tested.

• Targeted testing

  • Targeted testing differs from audit sampling in that items are selected for testing using specific criteria designed to target higher risk items, rather than on a random basis. A simple example using the accounts receivable confirmation process would be to select all balances over a specified monetary amount for sending confirmations. Another example when testing revenue transactions would be to summarize all transactions by type code, then make a selection of transactions with non-standard type codes possibly adding a monetary amount threshold to further refine the test. In many cases, targeted testing is more efficient and more effective than audit sampling. Fewer items will generally need to be tested using a targeted approach, because the focus of the testing is on higher risk transactions and because we are focusing on risk, the test is generally more effective. CAATs are ideal for targeted testing because they allow us to easily make selections from large populations of data using the target criteria. As our knowledge of the data being tested increases, we can quickly modify the target criteria to better focus the testing for the future.

• Search for related party transactions

  • CAATs can be used to provide substantial coverage to our testing of related party transactions. The software can be designed to search for the names of key related parties (e.g., Board of Directors, affiliates, officers) in specified transaction files. Files that could be searched might include: cash disbursements, cash receipts, sales transactions and other general ledger transactions (particularly manual entries). The report generated can then be sorted by monetary amount and/or by related party and be used to determine whether further follow-up/testing is necessary.

• Gap and duplicates analyses

  • Identification of gaps and duplicates in a series of transactions is a common test that can apply across many audit areas. Examples might include identifying gaps/duplicates in the following:

    • Tags, as part of a physical inventory stock take
    • Check numbers in a disbursements register
    • Invoice numbers in a sales register
    • Purchase order numbers in a procurement system
    • Employee numbers in a payroll system

Inventories and production costs

Production costing

• Selecting standard costs for detailed testing.

• Producing reports of changes in standard costs from prior year.

• Comparing inventory quantities with production information.

• Testing accumulation of production costs.

• Producing reports of unusual usage or costs.

• Testing mathematical accuracy of variance analyses.

• Testing mathematical accuracy of overhead cost allocations.

• Comparing usage data from the manufacturing process to relief from inventories.

• Comparing total production costs incurred (labour, materials, overhead) to amount applied to inventories.

• Accumulating detailed cost elements and comparing to company standards.

Cost of goods sold

• Producing reports of large cost of goods sold transactions.

• Producing reports of quantities shipped and quantities relieved from inventory.

• Comparing amounts recorded as cost of goods sold with amounts relieved from inventory.

• Producing reports of inventory shipments not recorded in the proper period.

• Summarising sales and cost of goods sold by product or product line.

• Comparing total cost of goods sold from transaction listings to posting in general ledger control accounts.

• Testing accumulation of cost of goods sold transactions.

Inventories

• Producing reports of recent shipments of inventory for cutoff testing.

• Comparing recent invoice prices to costs on perpetual inventory records.

• Selecting inventory items for detailed testing.

• Producing reports of inventory by class in value order.

• Identifying raw materials related to obsolete finished goods.

• Testing mathematical accuracy of allocation of over- or under-absorbed overhead costs.

• Analysing gross margin by product.

• Testing accumulation of inventory balances.

• Test for duplication/omission of inventory in transit (recorded in two places).

Purchases and payables

Purchases of goods and services

• Producing reports of large purchases of goods and services.

• Producing reports of purchases of materials or services for each month or the entire year.

• Comparing data on separate files to identify goods received but not invoiced, goods invoiced but not received or discrepancies between purchase orders, receiving documents and supplier invoices.

• Producing reports of new suppliers.

• Producing reports of entries from unusual sources.

Payments for goods and services

• Producing reports of the volume and amount of payments per period.

• Testing accumulation of cash disbursements.

Accounts payable

• Aging of payables balances.

• Producing reports of debit balances.

• Producing reports of large or old suspense items.

• Testing accumulation of payables balances.

• Producing reports of balances with no scheduled payment date.

• Producing reports of new suppliers.

• Producing reports of entries from unusual sources.

Property and equipment

Acquisitions and disposals

• Producing reports of significant gain or loss transactions based on original cost, amount or other criteria.

• Testing mathematical accuracy of gains or losses.

• Producing reports of assets included in prior year listings and excluded from current year listings.

• Testing mathematical accuracy of capitalised lease amounts for new leases.

• Producing reports of maintenance and repairs expenses by department or asset.

• Accumulating acquisitions and gains, losses and proceeds from disposals for presentation in the statement of changes in financial position.

Depreciation

• Producing reports of depreciable lives not in accordance with client policies.

• Producing reports of depreciation expense by type, age and location of assets.

• Testing accumulation of depreciation amounts.

• Producing reports of entries from unusual posting sources.

Property and equipment

• Producing reports of large balances.

• Producing reports of assets by type, age or location.

• Producing reports of fully depreciated assets.

Employee Costs

Employee costs

• Producing reports of employees receiving net pay over a given amount.

• Test for duplicate employees (based on name, addresses and other).

• Producing reports of employees working an abnormal amount of overtime.

• Producing reports of employees with excessive holiday / vacation time.

• Producing reports of recent terminations and hirings.

• Selecting samples for testing.

• Testing mathematical accuracy of payroll totals.

• Testing accumulation of payroll totals.

• Producing reports of large or unusual payments.

• Testing mathematical accuracy of payment files.

Employee related liabilities

• Testing accumulation of journal adjustments.

• Producing reports of large journal adjustments.

• Producing reports of entries from unusual sources.

Cash

Cash balances

• Producing reports of excessive idle cash balances.

• Determining outstanding cheques.

• Analysing cash balances.

• Testing accumulation of cash balances.

Investments

Investments

• Selecting investment transactions for testing.

• Selecting investments for confirmation.

• Identifying changes in investment carrying values.

• Testing mathematical accuracy of investment market values;

• Testing mathematical accuracy of gains or losses on sales of investments.

• Producing reports of costs in excess of market values.

• Producing reports of unusual activity.

• Producing reports of related party transactions.

• Testing accumulation of investment balances.

• Net Asset Value (NAV) trend analysis.

• Generate list of non-income producing securities.

• Recalculate OID (Original Issuer Discount) accretion.

Investment income (loss)

• Testing mathematical accuracy of investment income.

• Testing mathematical accuracy of amortisation of premiums or discounts on investments.

• Selecting specific transactions for testing.

• Producing reports of unusual investment income amounts.

• Producing reports of investment income by type.

• Producing investment yield analyses.

• Testing accumulation of investment income (loss).

Other Assets

Deferred costs and intangibles

• Testing mathematical accuracy of amortisation.

• Identifying unusual additions or write- offs of deferred costs.

• Identifying unusual additions or disposals of intangible assets.

• Producing reports of unusual posting sources.

• Testing accumulation of deferred costs and intangibles transactions and balances.

Prepaid Expenses

• Testing mathematical accuracy of amortisation.

• Analysing prepaid expenses at period end.

• Analysing prepaid expenses account activity.

• Producing reports of unusual posting sources.

• Testing accumulation of other assets transactions and balances.

Other Liabilities

Accrued and other liabilities

• Summarising activity within the various accrued and other liability accounts.

• Testing mathematical accuracy of an estimated liability for accrued warranty costs.

• Listing accrued and other liabilities in excess of a certain amount for detailed testing.

• Identifying the age of accrued and other liabilities.

• Testing accumulation of accrued and other liability transactions and balances.

Deferred revenue

• Testing mathematical accuracy of amounts allocated to deferred revenue.

• Testing mathematical accuracy of deferred revenue amounts recognised in income.

• Summarising significant account activity.

• Testing accumulation of deferred revenue transactions and balances.

Leasing

• Reperform calculations related to determination of capital versus operating lease.

• Generate report of large/unusual lease transactions.