50 student accountant June/July 2006

technical

audit assertions This article explains how the wording of audit tests differs with regard

to manual and computerised systems. It also shows how – within a sales system – manual and computer-based audit tests are similar, but are explained differently.

THE SALES SYSTEMTo state the obvious, a company’s sales system is designed to record all of a company’s sales. The first few stages in such a system are normally as follows: 1 Customer orders are received and recorded in the system.2 The order is processed, eventually leading to goods being dispatched

to the customer (following credit checks – which are not considered in this article).

3 The dispatch of goods results in a sales invoice being raised, with a copy of the invoice being sent to the customer.

4 Sales invoices are recorded in the sales day book.

Within this system, as in any other system in a company, controls will be established to ensure that the system is working correctly. For example, sales invoices will almost certainly be pre-numbered, and this numbering will be shown in the sales day book. Pre-numbering and other accounting controls can then be used to test the completeness of the recording of sales invoices. For example, controls will include a review of the sales day book and a check that the numeric sequence of sales invoices in complete.

The auditor will record the accounting systems and controls within a company, and then devise tests to ensure that there are no errors in the company’s systems or financial records. In audit terminology, the auditor is checking that various audit assertions have been met. In the income statement, for example, there is an assertion that all sales are recorded – the ‘completeness’ assertion. To verify that this assertion is correct, the auditor can carry out:1 substantive tests – to re-perform the activity undertaken by the company2 compliance tests – to check the effectiveness of any internal controls

that the company has implemented.

When testing the completeness of recording of sales invoices, the auditor could:1 review the sales day book to ensure that the numeric sequence of

sales invoices is complete2 ensure that the sales day book has been signed by a responsible

officer at the end of each month, confirming that the numeric sequence has been checked.

auditing manual and computerised systemsrelevant to ACCA Qualification Paper F8

Similar compliance and substantive tests will be devised to check the rest of the sales system. From the point of view of auditing a system, audit tests will focus on satisfying the audit assertions. It makes no difference whether the system is manual or computerised because test objectives are the same for both systems. However, the explanation of the tests in an examination answer will be different depending on the system being audited.

The main testing differences for a computer-based system are as follows:

Substantive tests focus on the computer and on access to specific computer files.

Additional substantive tests use computer-assisted auditing techniques (CAATs).

Compliance tests almost certainly require the use of CAATs, as many of the controls are ‘inside’ the computer.

When making these points in an examination answer, candidates must clearly show that the system being audited is computerised. As usual, an example of a system under audit will be provided in the question. The candidate’s job is to identify and explain the audit tests required.

EXAMPLE TESTSThe remainder of this article provides example tests that aim to satisfy the completeness assertion in an order/dispatch system. Each of the following three sections initially explains what the system does, and is followed by examples of audit tests for both manual and computerised systems.

Recording customer ordersAll orders must be recorded. In this system, assume that customers either telephone the company with their order (manual system), or order using the website (computerised system).

Manual system Computerised systemCompliance test Compliance testPlace an order by telephone and Place an order using the website ensure that the order has been and ensure that it is recorded in recorded by obtaining the relevant the company’s system by viewing customer order document produced the orders on screen.within the company.

Compliance test Compliance test (using CAATs)Observe staff in the company Place orders on the website using to ensure that orders are recorded test data.on order documentation as customers phone in their orders.Compliance test Compliance test Review customer complaint files for Review customer complaint files examples of orders not being fulfilled. for examples of orders not being fulfilled. The completeness of the recording of orders is quite difficult to test. The substantive tests above all use ‘dummy’ orders, sent to the company and then deleted from the system after the test. However, the actual test performed is very similar for both manual and the computerised systems. The wording is obviously different, reflecting the use of the computer, but both manual and computer-based tests focus on the input of ‘dummy’ orders.

Goods dispatchedAll orders are dispatched, and in this system, the customer order has a goods dispatched note (GDN) number entered on it.

Manual system Computerised systemSubstantive test Substantive testObtain a sample of customer orders View a sample of customer ordersand record the GDN numbers. on screen and record the GDNObtain the relevant GDNs to confirm numbers. Open the GDN file and the GDN number on each order is view relevant GDNs to ensure each valid. order was raised.Compliance test Substantive test (using CAATs)Ensure that each order is signed by a Programme audit software to select responsible officer confirming goods a sample of customer orders, obtainhave been dispatched. the GDN number from each order, and verify that each GDN number exists in the GDN file.Compliance testEnsure that the GDN has been attached to the customer order.

Again, the manual and computerised system tests are very similar, as both focus on obtaining the customer order and ensuring that a GDN has been raised. The words used show the difference between the two

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systems. The manual test assumes a paper document while the computer test explicitly states using the computer.

Invoice raisedAn invoice is raised for each GDN and, in this system, the invoice number is entered on the GDN. Sales invoices are also pre-numbered, although the GDN and sales invoice number sequences are different.

Manual system Computerised systemSubstantive test Substantive testObtain a sample of GDNs and View a sample of GDNs on screenrecord the invoice numbers. Obtain and record the invoice numbers.the relevant invoices to confirm that Open the invoice file and view the GDN number on each invoice each invoice to ensure it was raised.is valid. Compliance test Substantive test (using CAATs)Ensure that each GDN is signed by Programme audit software to selecta responsible officer confirming the a sample of GDNs, obtain the invoice has been raised. invoice numbers from each order and verify that each invoice number exists in the invoice file.

Again, the tests are similar. It is the wording that clearly shows the type of system being audited. The list of tests provided above is not exhaustive, but instead illustrates the type of test that could be included in an audit programme. Therefore, if an auditing question includes a computer-based system, this is not a cause for panic or concern. The computer system will differ from a manual system, but that does not mean it cannot be audited, or that a candidate with limited auditing experience cannot obtain a pass standard. Focusing the answer on the computer system itself, and showing that the system has been understood by detailing computer-based tests, will help candidates gain marks and hopefully achieve a pass standard.

SUMMARY Manual and computer-based systems use the same audit assertions. The explanation of the audit test shows that the candidate has

understood that a computer system is being audited. Examination questions may ask for computer-based substantive

and/or compliance tests.

Alan Lewin is examiner for Paper F8

technical

Manual and computer-based systems use the same audit assertions. The explanation of the audit test shows that the candidate has understood that a computer system is being audited.