Question
Identify three steps in the audit program where audit software can be used to perform testing. Explain how the audit software can be used to
Identify three steps in the audit program where audit software can be used to perform testing. Explain how the audit software can be used to perform these steps .Here is a helpful hint on how to go about responding to this question. I am going to use accounts payable as an example. Lets say the audit step is to test for payments to unauthorized suppliers. One approach is to match the vendor master file to the payment history file using vendor number as the common piece of data in the two files. List any records in the payment history file without a corresponding match in the vendor master file.
Pre-Audit
Review the most recent prior audit report and relevant press releases (acquisitions).
Obtain the completed inventory internal controls questionnaire from the plant controller. Document any potential control weaknesses or unusual practices and investigate upon arrival.
Obtain and document the following as of the audit date:
Trial balance
Manufacturing statement (YTD)
Manufacturing budget (YTD)
The date of last physical
Cycle counting accuracy history
Inventory turnover and days of sales in inventory and margin
The date and scope of the external auditor's most recent visit
Details of excess and obsolete inventory
Details of inventory held on consignment
Details of inventory held at subcontractor and outside vendor
The type of inventory system
The size of the facility (square footage)
Primary products
Top five customers and competitors
Ensure that the financial statement trial balance agrees with the trial balance maintained by the facility. Obtain explanations for any differences with the plant controller upon arrival.
Obtain the following reports as of the audit date:
Inventory aging report
Perpetual inventory listing
All open work orders
Reconcile the perpetual inventory listing with the account balances that appear on the GL. Obtain and document explanations for differences from the controller upon arrival.
Obtain and document explanations from the controller for all open work orders older than two months.
Describe the procedures for developing the current years material, labor and overhead standards, and the date of the last revision. If a standard system is not used, obtain and document an explanation from the controller and/or corporate operations as to why a standard system has not been implemented.
Compare and document budgeted variances to actual variances for materials, labor and overhead. Obtain and document explanations for significant (5% plus) variances from the controller and/or corporate operations.
For facilities that do not employ a standard costing system, recalculate labor and overhead allocations and compare to the amount capitalized. Obtain and document explanations for significant (10% plus) variances from the controller upon arrival.
Discuss conclusions/observations with the senior associate. Obtain and document senior management concerns and ensure that there are adequate procedures in the program to address those risks.
Receiving
Interview employees associated with the receiving process in order to gain an understanding of it. Map this process and include all applicable financial journal entries.
Through inquiry and observation, ensure that the following controls are in place and operating effectively and are included in the process map. Identify all control gaps.
Goods are received at a designated receiving bay.
Receipts are checked for quantity and quality.
All goods received are based on a valid purchase order (PO) number.
The PO is stated on delivery documents and is verified for validity.
The number of goods received is verified to the packing slip and the bill of lading.
The receiver signs delivery documents.
All receipts are recorded in a log and can be cross-referenced to the appropriate delivery documents.
The log is regularly reviewed.
Receipts are accurately, promptly and completely updated in the inventory system.
Raw materials are safeguarded.
Transfers of raw materials are documented.
Items not meeting qualifications are kept separate from other items.
Process map the procedures for vendor returns. Through inquiry and observation, ensure that returns are communicated to the purchasing department and debit memos are prepared and forwarded to accounts payable in a timely manner. In most instances, this will require sampling returns during the audit period.
Through inquiry and observation, ensure that shipment discrepancy reports are prenumbered and reviewed by the appropriate purchasing and accounting personnel to ensure that debit memos have been taken.
Production Process/Physical Security
Interview employees associated with the production process. Map the production process and include all applicable financial journal entries. Ensure that the following controls are present and are included in the process map. Identify all control gaps.
Authorized people approve material requisitions.
Material requisitions coincide with the approved production plan.
Disbursements from stockrooms are allowed only upon receipt of properly authorized requisition documents.
Management approval is required for stock issuance of amounts above the amount necessary to support scheduled production requirements.
Approved requisition documents and inventory movement forms are promptly used to update the inventory records.
Prenumbered requisition forms or sequential logs are used to record issuance of materials from stores and inventory movement between locations.
The warehouse/store is properly locked to prevent unauthorized access and usage.
Scrap and obsolete inventory are properly segregated.
Cycle Counts
Obtain, review and document policies and procedures surrounding cycle counts. Observe two cycle counts and document the following:
What was counted and how it was selected
Whether the cycle counter is aware of the quantity on hand prior to his
count
Agreed-upon test counts to perpetual inventory detail
Adjustments to the perpetual inventory detail/general ledger, if applicable
Historical accuracy rates
Based solely on the work performed, document observations regarding the physical security of inventory.
Based on the date and results of the most recent wall-to-wall physical count and the applicability of cycle counts, consider performing the following:
Agree upon 10 inventory items per the perpetual to the quantity on hand.
Agree upon 10 inventory items on hand to the perpetual.
Inventory Valuation
For facilities using a standard costing system, perform the following:
Document procedures for developing current-year standards (raw material, labor and overhead) and the date of the most recent development. Document compliance with corporate policy.
On a sample basis (a minimum of 30), test the accuracy of the standards by performing the following:
Examine recent invoices supporting the raw material component.
Examine payroll-related information supporting the labor component, if applicable.
Examine the overhead estimate. Recalculate based on available information.
On a sample basis, examine the method and accuracy of the recording standard to actual variances. Obtain explanations for the standard-to-actual variances greater than the budgeted amount as of the audit date. Examine the entries to record variances and document whether the variances were capitalized or expensed.
For facilities not using a standard costing system, perform the following:
Document procedures for developing current-year labor and overhead amounts.
Examine a minimum of 30 recent invoices supporting raw materials and the raw material component of work-in-progress (WIP) and finished goods. Document the results by quantifying the unit cost variances and extrapolating them to the population.
Recalculate the labor and overhead calculations and compare them to the amounts capitalized. Document limitations of the ability to recalculate.
Inventory Reserves
Document inventory greater than 180,270 and 360 days.
Document the method for estimating the reserve for excess and obsolete inventory. Document compliance with corporate policy.
Obtain a calculation of the estimate for the most recent quarter-end and enter it into the GL. Agree upon significant components to supporting documentation.
Document any inconsistencies between the calculation and aging analysis.
Ensure that authorized people adequately approve provisions or write-offs. Review for evidence of approval of inventory write-offs before they are recorded.
Consignment Inventory
Document policies and procedures for consigned inventory. At a minimum, address the following items:
The existence of perpetual detail
The process for reporting, recording and verifying changes
The process for accounting for scrap
The results of recent physical counts
Document compliance with the corporate policy on consigned inventories.
Scrap
Document the method for accounting for inventory scrap. At a minimum, address the following:
The method used to quantify
The method used to cost
The method used to dispose
Through inquiry and observation, ensure that scrap proceeds are collected from the scrap vendor promptly after the collection of scrap materials.
Through inquiry and observation, ensure that approval is granted before materials are sent to scrap.
Through inquiry and observation, ensure that accounting and the warehouse verify the weight of the scrap materials.
Through inquiry and observation, verify that scrap vendors are selected through a bidding process.
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