BAC 3624

Advanced Auditing

Tutorial 11

Question 1
MESET Bhd sells electronic goods to retail customers. The company has twenty branches.
The company has recently implemented a new computerised wages system. Employees work a standard eight
hour day. Hours are recorded using a magnetic card system.
When an employee arrives for work, he holds his card close to the card reader; the reader recognises the
magnetic information on the card identifying the employee as being at work. When the employee finishes work
at the end of the day the process is reversed showing that the employee has left work.
Hours worked are calculated each week by the computer system using the magnetic card information.
Any overtime over 10% of standard hours is sent on a computer generated report by e-mail to the financial
accountant. If necessary, the accountant overrides overtime payments if the hours worked are incorrect.
Any deductions and net pay are also computer calculated with payments being made directly into the
employees bank account. The only other manual check is the financial accountant authorising the net pay from
MESETs bank account, after having reviewed the list of wages to be paid.
Required:
(a) Using examples from MESET Bhd, explain the benefits of using Computer-Assisted Audit Techniques to help
the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to
base the audit opinion.
(b) List six examples of audit tests on MESETs wages system using audit software.
(c) Explain how using test data should help in the audit of MESETs wages system.
Answer
(a) Benefits of using Computer-Assisted Audit Techniques (CAATs)
(i) Testing programmed controls
Reliance on CAATs will force the auditor to rely on programmed controls during an audit; in fact using CAATs
may be the only way to test controls within a computer system. Use of the CAAT enables the auditor to meet the
auditing standard requirement of obtaining appropriate audit evidence.
(ii) Test larger number of items
Using CAATs enables the auditor to test a larger number of items quickly and accurately, meeting the auditing
standard requirement of obtaining sufficient audit evidence.
(iii) Test actual accounting records
Using CAATs enables the auditor to test the actual accounting records (the electronic version) rather then relying
on printouts or other copies of the data. It is always appropriate for the auditor to test original documentation
where possible.
(iv) Cost
After initial set-up costs, using CAATs is likely to be cost effective; the same audit software programs can be run
each year as long as the client does not change the accounting systems.
(b) Examples of audit tests on the companys wage system using audit software.
(i) Calculation checks: For example, re-calculation of net pay for a number of employees to ensure the
mathematical calculation is correct.
(ii) Reviewing the list of employees paid each week/month and printing a list of employees, who have not be
been paid, for further investigation.
(iii) Detecting unreasonable items: Reviewing the list of net wages for large or negative payments.

BAC 3624

Advanced Auditing

Tutorial 11

(iv) Detecting violation of system rules: For example, where other people besides the accountant have been
overriding overtime payments or employees amending their own gross wages.
(v) Conducting new analysis as part of the analytical review of wages. For example, calculating total wages for
the year from the number of employees and average wages paid.
(vi) Completeness checks ensuring there is an electronic record of all employees who clocked in for a days
work and clocked out again.
(c) Audit test data consists of data submitted by the auditor for processing on the clients computer-based
accounting systems.
The data can be processed during a normal processing run (a live testing situation) or in a special run outside
of the normal processing cycle (a dead testing situation).
In MESET, the auditor can create a dummy employee record on the wages master file, and then use a
magnetic card to mimic that employee working a certain number of hours in the company over the course of, for
example, one week.
Knowing how many hours has been input into the wages system; the auditor can calculate the expected net pay
and then compare this to the actual net pay produced by the computer system.
If the amounts agree then this provides appropriate audit evidence of the accuracy of recording and processing
of the wages software.
Question 2
You are a member of the audit team engaged on the audit of the financial statements of Robat Bhd. for the year
ended 30 June 2013. The company is a wholesale distributor of automobile parts and operates a sophisticated
computer-based accounting system.
In April 2013 you assisted the audit manager in evaluating the effectiveness of the internal controls exercised
over the companys purchasing and trade creditors system. This involved enquiring into specific control activities
relating to information processing comprising application controls and general controls, and also those relating
to the segregation of duties.
When reviewing the controls exercised over information processing, you noted that there were a number of
application controls, including format (character) checks. As a consequence of the work you carried out you
became familiar with computer assisted audit techniques (CAATs), being techniques using audit software to
audit through an audit clients computer system and obtain evidence by examining input, processing and output
routines.
Following the evaluation, the audit manager concluded that there was a high level of control risk in the
purchases and trade creditors area of the companys financial statements. He had already ascertained that
there was a high level of inherent risk associated with the area.
Required:
(a) In the context of control activities pertaining to information processing, explain what is meant by:
(i) Application controls;
(ii) General controls.
(b) Identify and describe FOUR application controls, in addition to format or character checks that should exist
within Robat Bhd.s application programme for purchases and trade creditors, to ensure accuracy over the input
of data.
(c) (i) Explain what is meant by segregation of duties;

BAC 3624

Advanced Auditing

Tutorial 11

(ii) Identify SIX responsibilities that should be segregated to ensure adequate control is maintained over
purchases and trade creditors in Robat Bhd..
(d) Identify THREE matters that your audit manager would need to consider when deciding on the extent to
which your firm should rely on CAATs as compared to manual procedures, when carrying out audit work.
ANSWER
Robat Bhd.
(a) (i) Applications controls are manual or automated procedures that operate at a business level and apply to
the processing of individual applications. They can be preventive or detective in nature and are designed to
ensure the integrity of the accounting records.
(ii) General controls are policies and procedures that exist over applications and support the effective functions
of applications controls by helping to ensure the continued proper operation of information systems.
(b) The following application controls should exist within Robat Bhd.s purchases and trade creditors application
programme to ensure accuracy over the input of data:
Reasonableness or range checks these ensure that information entered appears to be reasonable or that an
amount or value falls within given parameters (for example, checking to ensure that invoice values for
automobile parts purchased do not exceed RM. 20,000).
Dependence or compatibility checks these ensure that all data entered is compatible (for example,
automobile parts supplier invoices being posted only to purchases/cost of sales codes in the companys nominal
ledger).
Sequence checks these ensure completeness of processing (for example, by ensuring that prescribed
internally generated sequences are maintained when inputting supplier invoices).
Control total checks these are to ensure completeness of processing (for example, the use of batch control
totals when inputting supplier invoices).
Existence checks these ensure accuracy of input by validating specified data or input with regard to a
specific aspect of input data (for example, with regard to a supplier name).
Digit verification checks these ensure that only valid information is input with regard to a specific aspect of
input data (for example, a supplier code reference number).
(c)
(i) The term segregation of duties is used to describe the activity of assigning different people the
responsibilities of authorising transactions, recording transactions and maintaining the custody of assets.
(ii) To ensure that adequate control is maintained over purchases and trade creditors in Robat Bhd., there
should be segregation of duties with regard to:
Approving suppliers
Approving purchase requisitions
Approving purchase orders
Placing of purchase orders
Receipt and inspection of goods
Returning goods
Receipt of invoices and credit notes
Approving invoices and credit notes for computer processing
Authorising of payment of invoices
Paying invoices
Authorising amendments to the supplier details master file
Computer processing of invoices, credit notes, payments and master file amendments
Reconciling supplier statements.

BAC 3624

Advanced Auditing

Tutorial 11

(d) When deciding on the extent to which my firm should rely on CAATs as compared to manual
procedures, my audit manager would need to consider the following matters:
The amount of visible evidence available on which to carry out audit procedures. If the audit team have no
visible audit trail to follow then it will not be practicable to carry out meaningful manual procedures therefore
they will need to rely on CAATs.
The cost of carrying out CAATs as compared to manual audit procedures where both are feasible. The audit
firm may already have CAATs software that can be used for testing at Robat Bhd.. If it does not then it will need
to consider investing in software designed specifically for use on the Robat Bhd. audit.
The timescale for the completion of the audit. The use of CAATs should speed up the audit testing and
therefore result in a shorter time span being required to complete the audit work. This is clearly an important
consideration and would need to be weighed against the lower costs of carrying out practicable manual
procedures.
Access to Robat Bhd.s computer files including the availability of relevant staff, computer facilities,
programmes and files. If reliance is to be placed on CAATs then detailed planning will be required, and
communicated in good time to the management of Robat Bhd.. For effective use of CAATs audit staff will need
access to all of the above at appropriate times.