Introduction to Computer-Assisted Audit Techniques (CAATs)
In today’s world of e-transactions where hard copies are an exception rather than the rule, it becomes necessary to use computer-assisted audit techniques (CAATs) in various audits.
The selection of the audit sample and the substantive procedures that an auditor performs while conducting an audit of various types of account balances will be performed largely with the help of audit software.
The functioning of internal controls performed by the computer can be tested using the auditor’s test data. The auditor’s own office cannot be left behind in this e-race. Audit documentation, reports, analyses of financial data, results and all the other areas of the administration of an audit call for speed and efficiency. This can best be achieved using computers.
A case study of Computer-Assisted Audit Techniques (CAATs)
The auditors of a company had identified travel expenses as the area with weak controls. Employees were allowed a maximum rate per day of reimbursement of expenses incurred on traveling on company’s duty, subject to submission of supporting receipts to cover the actual expenses. Maximum amounts were determined for different items: breakfast $2, lunch $3, dinner $4 and hotel lodging $35. Software was configured to identify food expenses that were in the multiples of $2. These items were then compared to supporting documents to verify whether the amounts claimed as expenses were appropriate. It was discovered that many employees were claiming the highest possible amounts when the actual expenses as supported by receipts were much lower.
This case illustrates how a CAAT can help in achieving an audit objective with speed and efficiency.
Use of Computer-Assisted Audit Techniques (CAATs) in auditing
CAATs are used for performing various procedures as follows:
- Tests of details of transactions and balances. For example to prepare a sample for circularization of payables.
- Sampling programs which are used to extract data sampling such as to prepare a sample for circulation of payables.
- Compliance tests of general controls, testing the procedures for access to general libraries of computer files (that is, soft copies files.)
- Compliance test of application controls, such as testing the functioning of a control which signals that the credit limit of a customer would be exceeded if the given order is executed.
- Penetration testing, a method of evaluating the security of a computer system or network.
Why Are Computer-Assisted Audit Techniques (CAATs) Required?
The volume of data may be overwhelming making it impossible to apply a manual procedure.
Where aging analysis is to be made for receivables or inventory involving thousands of accounts and millions of transactions, it will be impossible to verify it manually
2. CAATs save time.
Where a manual procedure will take a few days, computer aided audit techniques (CAATs) may perhaps finish the work in just a few minutes.
For example, verification of the aging of inventory
3. CAATs can be used to highlight unusual transactions.
Computer-assisted audit techniques (CAATs) can be used for the analytical review which helps in detecting the unusual items.
Example: cash payment vouchers not properly authorized can quickly be found by having the software scan every payment transaction looking for the relevant ones.
4. The lack of hard copy evidence or an audit trail may make it impossible to carry out a manual audit.
Companies increasingly aim at having the minimum possible paperwork and paper printouts. Traditional verification of hard copies is not possible. Even when the verification is performed on a computer screen, there is no proof of working papers evidencing that an auditor has made the verification. On the other hand, the CAATs not only perform the task, but also generate reports. The reports can be kept as audit working papers.
Example: A computer may match suppliers’ invoices and delivery notes, before any invoices are passed for payment. In the earlier days, this process was carried out manually with hard copies of all the documents attached, physically checked and signed by the concerned officials. Now that the computer does the work, there is no audit trail of hard evidence that this was done. A computer-assisted audit technique using test data can help the auditor in verifying that the checking was carried out correctly.
5. Some audit processes may be too complex to be carried out manually.
Example: statistical analysis such as the standard deviation of a large set of data may be too difficult for a human being to perform. A computer can perform this task easily.
Relevant Examples of the Use of Test Data and Audit
1. Test data
Test data tests a client’s programs. It is data generated by the auditor in order to test processing logic, calculations and controls actually programmed in computer applications. Test data points out the potential for erroneous processing. However it does not evaluate actual production or live data.
‘Test data’ tests clients’ programs. It should ideally include data of both a valid and invalid nature. The auditor watches to ensure that invalid or erroneous items are rejected in the actual processing.
When preparing test data for purchases, some transactions of goods received without a valid purchase order should be included. The system should reject these transactions. If the system does, the auditor can rely on the controls. If not, then the auditor may have to take a substantive approach to testing.
It should test all the possible logical alternatives and calculations that the program can perform.
Example: when testing a program that calculates depreciation, it should be ensured that all the methods that the entity uses are tested. Similarly, additions, disposals and revaluations of the non-current assets should be included in the test data.
For testing reasonableness check, a few unreasonable items (those outside the predetermined range) should be included.
Example: in the payroll model for the field of age of employees, a system may have a check that it is below the minimum (18 years) or exceeds a certain age (100 years); the system should flash a signal and record an exception. The test data in this case should include the ages below 18 years and above 100 years.
Live or dead test data
Test data that is processed during a normal production run is called live test data while test data that is processed during a special run outside the normal production run is known as dead test data. Using test data means that special data is input and processed. The results of the processing are monitored by the auditor.
However, if live test data is being used, the test data will be altering the client’s records and may have to be removed afterwards by a journal. Clients do not welcome their carefully maintained data being ‘messed up’ with audit data, so most test data is ‘dead’ and run against copy files.
Control procedures related to test data
- Decide on the computer processes that are to be tested.
- Choose suitable data. As mentioned above, both valid and invalid.
- Test data should be run if it is possible. Programs are sometimes changed. The auditor must ensure that they use the current version. They should also test data. They should also test whether the programs used for the test are those actually used throughout the applicable audit period.
- Predict the result of the data and compare them with the actual test data output. For instance, for the sales transactions, when a sample is prepared, the effects of test data on sales account, receivables account and aging analysis can be predicted. All discrepancies between the predictable results and the actual results should be fully documented and investigated, irrespective of the amount.
- Remove any fictitious data included as test data from the files before the client uses those files for normal processing. Otherwise, the auditor may land himself into trouble, by generating errors, rather than detecting them.
Examples of how Test Data is Used in Specific Areas
CAATS test data may cover whether the system correctly:
- Identifies when a customer’s account balance exceeds the credit limits (his outstanding balance should be within this limit).
- Allows dispatch of goods only after it has been authorized by a specific person.
- Tracks when an invoice becomes overdue.
- Calculates interest on delayed payments.
- Records all the sales at correct dates (dates of dispatch).
- Records discounts only after approvals.
- Calculates balances.
- Carries out aging analysis.
The auditor may design the test data to check whether the system checks that:
- Goods inward are accepted only after the quality is approved.
- Goods are issued only on authorization by the specified officials.
- Goods received and issued are recorded on the dates of transactions.
- Balances are calculated correctly.
3. Payables and accruals
Computer-assisted audit techniques (CAATs) test data may be used in verifying that:
- Purchase orders are placed only by authorized persons.
- The amount of purchase invoice is credited to the supplier’s account only after verification of quantities with the goods received and approved and after checking the rates and quantities with the purchase order.
- Invoices are recorded on the date of approval of goods or services.
- All available discounts are recorded.
- Balances are calculated correctly.
4. Bank and cash
Test data may be useful in checking whether:
- Receipts are issued and recorded by authorized persons.
- Payments are made only on the authorization from specified persons
- Amounts are recorded on the dates of receipts or payments.
- Bank reconciliations (if computerized) are done correctly.
5. Tangible non-current assets and long-term liabilities
Test data may be used to check if:
- Additions to non-current assets are authorized by the designated person.
- Calculations of depreciation are correct.
- Calculations of interest on loans are correct.
Th e main kind of audit software is computer-assisted audit techniques (CAATS) that read and examine clients’ data. They may be of the following types:
Package programs are generalized computer programs which are designed to:
- Read data.
- Perform calculations.
- Select information.
- Create files.
- Print reports in specified formats.
The auditor uses software to select invoices above the specified amount, or to re-perform the aging analysis calculations made by the client’s software.
2. Purpose written programs
Programs may be developed by the auditor’s staff, the client’s staff or a third party programmer. The auditor may sometimes find that modifying the existing programs may be more efficient than writing new programs.
A computer-assisted audit techniques (CAATs) software is developed to find out the subsequent cash collections regarding the receivables at the reporting period. Subtract them and match them with the invoices outstanding as of the reporting period and then rework the aging analysis. This will give the aging analysis of the balances at the reporting period less subsequent collections. The usual packages software may not give this and hence the auditor may have to write a purpose written program.
3. Utility programs
These are general programs not specifically designed for the audit purpose. An auditor can sort, create and print files with the help of these tools. However, the auditor needs to confirm that these tools are suitable for his work.
Control Procedures for Audit Software
- Verify whether skilled employees with knowledge and experience in the use and control of the selected tools are available. Computer-assisted audit techniques (CAATs) require highly specialized knowledge. If the audit software operates in oracle, the user should have a basic knowledge of oracle to operate that software.
- Confirm whether the audit software is appropriate for the audit objective. For example, for the sugar industry, it may be necessary to design special audit programs for its unique business cycle.
- Ensure that the data files used for running the programs are complete, accurate and identical to (if not the same as) the files currently used by the client
- Ensure that the client’s files are not corrupted or damaged.
- Ensure that audit software is amended according to the changes in the client’s applications where required.
Use of computer assisted audit techniques (CAATs) in Receivables
The audit software may help in:
- Selecting a sample for circularization, or for sale procedure testing.
- Prepare letters for circularization.
- Recalculating aging analysis.
- Adding up the individual balances.
- Verifying subsequent collections.
- Selecting all receivables items over a certain amount.
- Reordering receivables ledger by size of balances.
- Comparing sales invoices, collections and other transactions with sales ledger to check whether all the items have been recorded in the ledgers.
- Calculating receivables days for each customer. For example, how many days’ equivalent of average sales is outstanding?
- Identifying ‘odd’ items such as credit balances for further investigations.
Use of Computer-assisted audit techniques (CAATS) in inventory
The audit software can be used for:
- Checking a cut-off, that is, whether the dates of goods receipts/issues and the dates of recording of the relevant invoices are synchronized.
- Recalculating aging analysis.
- Selecting a sample for inventory count or for testing procedures related to inventory.
- Selecting all inventory items over a certain amount.
- Reordering inventories by the size of balances.
- Finding out inventory turnover by product or identifying items issued after date, so as to help in listing slow – moving items.
- Identifying ‘odd’ items such as negative inventory for further investigation.
Use of computer-assisted audit techniques (CAATs) in payables and accruals
The audit software can be useful in:
- Selecting all payable items over a certain amount.
- Recalculating ageing analysis.
- Selecting a random sample for purchase procedure testing.
- Reordering payables ledger by size of balances.
- Comparing purchases invoices, payments and other transactions with purchases ledger to check whether all the invoices have been recorded in the ledgers.
- Identifying ‘odd’ items for further investigation.
Bank and cash
Mainly, computer aided audit techniques (CAATS) help in performing bank reconciliations.
Audit software is likely to assist in:
- Recalculating depreciation.
- Making location-wise summaries for physical verification.
- Selecting all assets or liabilities over a certain amount.
- Recalculating interest on loans.
The impact of Computer aided audit techniques (CAATs) in enhancing the efficiency and effectiveness of the audit process cannot be gainsaid. Considering that most organizations have computerized their operations and further noting the increase in number and complexity of transactions, auditors have no option but to embrace CAATs as part and parcel of the auditor’s process.
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