Every system can be broken into a series of
components which, when linked together form the entire system.
components which, when linked together form the entire system.
For example, in the case of the purchases system
the system can be subdivided into
the system can be subdivided into
·
Ordering;
Ordering;
·
Goods
received and invoice processing;
Goods
received and invoice processing;
·
Accounting;
Accounting;
Auditors need to test every part of the system.
They need to provide evidence that the Assertions (see chapter 11), which apply
to the purchases system, have been properly tested and that there is evidence
to justify the audit conclusions.
They need to provide evidence that the Assertions (see chapter 11), which apply
to the purchases system, have been properly tested and that there is evidence
to justify the audit conclusions.
However, you will be reassured to know that, in
order to do this, audit test can be combined so that one test will provide
evidence for more than one Assertion in more than one part of the system. This
means that auditors don’t have to create a single test for every Assertion for
every part of the system, thus repeating work unnecessarily.
order to do this, audit test can be combined so that one test will provide
evidence for more than one Assertion in more than one part of the system. This
means that auditors don’t have to create a single test for every Assertion for
every part of the system, thus repeating work unnecessarily.
You will need to be familiar with some of the
principles of auditing sampling when designing audit tests.
principles of auditing sampling when designing audit tests.
The reasons for this are:
·
You will
need to be able to justify the sizes of the samples and the method chosen for
selecting the sample in order to conclude that the work done meets the audit
objectives;
You will
need to be able to justify the sizes of the samples and the method chosen for
selecting the sample in order to conclude that the work done meets the audit
objectives;
·
By
selecting the direction of testing more than one Assertion can be tested at the
same time.
By
selecting the direction of testing more than one Assertion can be tested at the
same time.
Directional
testing
testing
It is important to understand, when carrying out
testing, that the direction in which the test is carried out can be provide
evidence – but only up to point.
testing, that the direction in which the test is carried out can be provide
evidence – but only up to point.
Consider a basic sales transaction, very much
simplified!
simplified!
Other form customer – goods dispatched – invoice
sent – sales day book – sales ledger. The auditors might be testing that
invoices have been properly checked for:
sent – sales day book – sales ledger. The auditors might be testing that
invoices have been properly checked for:
·
A valid
customer order;
A valid
customer order;
·
That the
goods have been sent; and
That the
goods have been sent; and
·
That they
have been properly entered into the sales day book with the right codes for the
right customer and norminal ledger account, and from there, logically, into the
sales ledger.
That they
have been properly entered into the sales day book with the right codes for the
right customer and norminal ledger account, and from there, logically, into the
sales ledger.
The obvious thing to do is to select a sample of
invoices from the sales day book and check them against the source documents –
a test known as vouching.
invoices from the sales day book and check them against the source documents –
a test known as vouching.
This is valid test and will confirm, or otherwise,
that the controls within the system are operating.
that the controls within the system are operating.
However, the test fails as a test of completeness.
How do we know that all the orders issued resulted in a supply of goods? How do
we know that goods haven’t be sent without an invoice? In other words how do
the auditors confirm that all the transactions are entered in the books?
How do we know that all the orders issued resulted in a supply of goods? How do
we know that goods haven’t be sent without an invoice? In other words how do
the auditors confirm that all the transactions are entered in the books?
The only way do we do this is to take a sample of
source documents – goods dispatched notes or sales orders and test them in the
other direction – i.e. towards the books of account. This will validate the
assertion for completeness and the other assertions tested.
source documents – goods dispatched notes or sales orders and test them in the
other direction – i.e. towards the books of account. This will validate the
assertion for completeness and the other assertions tested.
Case
Study 1
Study 1
Bobo
Ltd – directional testing
Ltd – directional testing
You are the audit senior of Bobo Ltd, a manufacturer
of electrical goods. You have been asked to design audit tests for part of the
purchase system.
of electrical goods. You have been asked to design audit tests for part of the
purchase system.
Key
aspects of the system you are reviewing are:
aspects of the system you are reviewing are:
·
All
purchases are ordered by means of an official order signed by the purchasing
manager.
All
purchases are ordered by means of an official order signed by the purchasing
manager.
·
All goods
received are evidenced by goods received note raised by the stores
All goods
received are evidenced by goods received note raised by the stores
·
Purchase
invoices are matched with purchase orders and goods received notes before being
entered in the purchase ledger.
Purchase
invoices are matched with purchase orders and goods received notes before being
entered in the purchase ledger.
Required:
Design audit tests to evidence the relevant
assertions in the most efficient way.
assertions in the most efficient way.
Solution:
There are two ways of carrying out this tests:
A.
Select a
sample of purchase invoices and test to the relevant purchase orders and goods
received notes.
Select a
sample of purchase invoices and test to the relevant purchase orders and goods
received notes.
This will help to validate the assertions of:
Occurrence – the fact Bobo ordered the goods mean
the purchases and the liability to pay for them belong to them.
the purchases and the liability to pay for them belong to them.
Accuracy (part) – the goods ordered have been
delivered and, combined with other audit tests on prices and a test to trace
them into the purchase ledger the auditors could use this to validate the
accuracy of the suppliers account. Or the auditors could do it the other way
round.
delivered and, combined with other audit tests on prices and a test to trace
them into the purchase ledger the auditors could use this to validate the
accuracy of the suppliers account. Or the auditors could do it the other way
round.
B.
Select a
sample of goods received notes including the goods received notes at the year
end and compare them with purchase orders and invoices.
Select a
sample of goods received notes including the goods received notes at the year
end and compare them with purchase orders and invoices.
By testing in this direction they can evidence:
Occurrence – they can evidence that Bobo both ordered and received the
goods so they and the liability to pay for them belong to Bobo.
goods so they and the liability to pay for them belong to Bobo.
Accuracy – as in test A).
Completeness – by selecting a sample of goods received notes the
auditors can evidence whether Bobo has received any goods which haven’t been
invoiced yet.
auditors can evidence whether Bobo has received any goods which haven’t been
invoiced yet.
Cut-off – including in this test the goods received notes around the
year end means the auditors can evidence that the transactions are included in
the correct accounting period.
year end means the auditors can evidence that the transactions are included in
the correct accounting period.
Obviously there are more tests to do to evidence
these assertions, for example, the auditors might want to support a test of
completeness by selecting a sample of purchase orders but this example shows
how a good deal of audit time can be saved by intelligent design of audit
tests.
these assertions, for example, the auditors might want to support a test of
completeness by selecting a sample of purchase orders but this example shows
how a good deal of audit time can be saved by intelligent design of audit
tests.
Purpose
of audit tests
of audit tests
Remember that you are testing two things:
·
The
functioning of the internal control procedures and activities;
The
functioning of the internal control procedures and activities;
·
That the
company’s financial procedures have been complied with.
That the
company’s financial procedures have been complied with.
Some of the tests which are carried out are not
simply about whether transactions have been accurately recorded in the books;
they are about discovering whether the staff involved are obeying company rules
and procedures.
simply about whether transactions have been accurately recorded in the books;
they are about discovering whether the staff involved are obeying company rules
and procedures.
For example, there may be a company rule that goods
can only be ordered from approved suppliers. This rule has got nothing to do
with the accuracy of the underlying records but has everything to do with the
business’s approach to risk and the operation of its control environment.
can only be ordered from approved suppliers. This rule has got nothing to do
with the accuracy of the underlying records but has everything to do with the
business’s approach to risk and the operation of its control environment.
Therefore, when designing an audit test or carrying
out the work auditors should be aware of the purpose for which the test has
been designed and the implications for the organizations if they discover
errors or misstatements.
out the work auditors should be aware of the purpose for which the test has
been designed and the implications for the organizations if they discover
errors or misstatements.
Bearing all these aspects of audit testing in mind,
let us look at specific approaches to the testing of the purchases, sales and
payroll systems.
let us look at specific approaches to the testing of the purchases, sales and
payroll systems.
