11.8 As an internal auditor for the state auditor’s office, you are assigned to review the
implementation of a new computer system in the state welfare agency. The agency is installing
an online computer system to maintain the state’s database of welfare recipients. Under the
old system, applicants for welfare assistance completed a form giving their name, address,
and other personal data, plus details about their income, assets, dependents, and other data
needed to establish eligibility. The data are checked by welfare examiners to verify their
authenticity, certify the applicant’s eligibility for assistance, and determine the form and
amount of aid.
Under the new system, welfare applicants enter data on the agency’s Web site or give their
data to clerks, who enter it using online terminals. Each applicant record has a “pending”
status until a welfare examiner can verify the authenticity of the data used to determine
eligibility. When the verification is completed, the examiner changes the status code to
“approved,” and the system calculates the aid amount.
Periodically, recipient circumstances (income, assets, dependents, etc.) change, and the
database is updated. Examiners enter these changes as soon as their accuracy is verified, and
the system recalculates the recipient’s new welfare benefit. At the end of each month,
payments are electronically deposited in the recipient’s bank accounts.
Welfare assistance amounts to several hundred million dollars annually. You are concerned
about the possibilities of fraud and abuse.
a. Describe how to employ concurrent audit techniques to reduce the risks of fraud and
abuse.
Audits should be concerned about a dishonest welfare examiner or unauthorized person
submitting fictitious transactions into the system. Fictitious transactions could cause
excessive welfare benefits to be paid to a valid welfare recipient, or payments made to an
ineligible or fictitious recipient.
b. Describe how to use computer audit software to review the work welfare examiners do to
verify applicant eligibility data. Assume that the state auditor’s office has access to other
state and local government agency databases.
Computer audit software can process the welfare recipient database against other databases that
contain data about welfare recipients, identify any discrepancies in the data items used to determine
eligibility for benefits and/or calculate the amount of benefits, and report these discrepancies to the
audit staff. Other possible databases that might be used for this purpose would include:
If a welfare recipient does not appear in any of the first four databases listed above, it would raise
the issue of whether the person exists at all (e.g., is the welfare recipient a fictitious person?). To
11.9 Melinda Robinson, the director of internal auditing at Sachem Manufacturing Company,
believes the company should purchase software to assist in the financial and procedural
audits her department conducts. Robinson is considering the following software packages:
• A generalized audit software package to assist in basic audit work, such as the retrieval of
live data from large computer files. The department would review this information using
conventional audit investigation techniques. The department could perform criteria
selection, sampling, basic computations for quantitative analysis, record handling,
graphical analysis, and print output (i.e., confirmations).
• An ITF package that uses, monitors, and controls dummy test data processed by existing
programs. It also checks the existence and adequacy of data entry and processing
controls.
• A flowcharting package that graphically presents the flow of information through a
system and pinpoints control strengths and weaknesses.
• A parallel simulation and modeling package that uses actual data to conduct the same
tests using a logic program developed by the auditor. The package can also be used to
seek answers to difficult audit problems (involving many comparisons) within statistically
acceptable confidence limits.
(CMA Examination, adapted)
a. Without regard to any specific computer audit software, identify the general advantages
of using computer audit software to assist with audits.
• Audits can be more efficient, saving labor time spent on routine calculations. The routine
operations of footing extensions, transcription between reports, report generation, etc., are
performed by the computer.
b. Describe the audit purpose facilitated and the procedural steps to be followed by the
internal auditor in using the following:
Generalized audit software package. The purpose of generalized audit software programs
is to perform a variety of auditing operations on the computer files used to store the
information. The steps to be followed by the internal auditor to use generalized computer
audit software would include things such as planning and designing the audit application.
11.10 The fixed-asset master file at Thermo-Bond includes the following data items:
Asset number
Date of retirement (99/99/2099 for assets still in service)
Description
Depreciation method code
Type code
Depreciation rate
Location code
Useful life (years)
Date of acquisition
Accumulated depreciation at beginning of year
Original cost
Year-to-date depreciation
Explain several ways auditors can use computer audit software in performing a financial
audit of Thermo-Bond’s fixed assets.
• Edit the file for obvious errors or inconsistencies such as:
o Retired assets that have a non-zero net value.
11.11 You are auditing the financial statements of a cosmetics distributor that sells thousands of
individual items. The distributor keeps its inventory in its distribution center and in two
public warehouses. At the end of each business day, it updates its inventory file, whose
records contain the following data:
Item number
Cost per item
Item description
Date of last purchase
Quantity-on-hand
Date of last sale
Item location
Quantity sold during year
You will use audit software to examine inventory data as of the date of the distributor’s
physical inventory count. You will perform the following audit procedures:
1. Observe the distributor’s physical inventory count at year-end and test a sample for
accuracy.
2. Compare the auditor’s test counts with the inventory records.
3. Compare the company’s physical count data with the inventory records.
4. Test the mathematical accuracy of the distributor’s final inventory valuation.
5. Test inventory pricing by obtaining item costs from buyers, vendors, or other sources.
6. Examine inventory purchase and sale transactions on or near the year-end date to
verify that all transactions were recorded in the proper accounting period.
7. Ascertain the propriety of inventory items located in public warehouses.
8. Analyze inventory for evidence of possible obsolescence.
9. Analyze inventory for evidence of possible overstocking or slow–moving items.
10. Test the accuracy of individual data items listed in the distributor’s inventory master
file.
Describe how the use of the audit software package and a copy of the inventory file data
might be helpful to the auditor in performing each of these auditing procedures.
(CPA Examination, adapted)
Audit Procedure
How Audit Software Can Help
1. Observe the distributor’s physical count
of inventories as of a given date, and
test a sample of the distributor’s
inventory counts for accuracy.
Determine which items are to be test counted by
taking a random sample of a representative
number of items from the inventory file as of the
date of the physical count.
2. Compare the auditor’s test counts to the
inventory records.
Arrange test counts in a format identical to the
inventory file, and then match the counts.
3. Compare physical count data to the
inventory records.
Compare the total of the extended values of all
inventory items counted, and the extended values
of each inventory item counted, to the inventory
records.
4. Test the mathematical accuracy of the
distributors’ final inventory valuation.
Calculate the dollar value of each inventory item
counted by multiplying the quantity on hand by
the cost per unit, and then verify the addition of
the extended dollar values.
5. Test the pricing of the inventory by
obtaining a list of costs per item from
buyers, vendors, or other sources.
Compare the unit costs on the auditor’s price test
to those on the inventory file.
6. Examine inventory purchase and sale
transactions on or near the year-end date
to verify that all such transactions were
recorded in the proper accounting period.
Take a sample of inventory file items for which
the date of last purchase and date of the last sale
are on or immediately prior to the date of the
physical count, which is usually at fiscal year
end.
7. Ascertain the propriety of items of
inventory located in public warehouses.
Prepare a list of items located in public
warehouses.
8. Analyze inventory for evidence of
possible obsolescence.
Prepare a list of items on the inventory file for
which the date of last sale indicates a lack of
recent transactions.
9. Analyze inventory for evidence of
possible overstocking or slow-moving
items.
Prepare a list of items on the inventory file for
which the quantity on hand is excessive in
relation to the quantity sold during the year.
10.Test the accuracy of individual data
items listed in distributor’s inventory
master file.
Prepare a list of items, if any, with negative
quantities or costs.
11.12 Which of the following should have the primary responsibility to detect and correct data
processing errors? Explain why that function should have primary responsibility and why
the others should not. (CPA Examination, adapted)
SUGGESTED SOLUTION TO THE CASE
11.1 You are performing a financial audit of the general ledger accounts of Preston
Manufacturing. As transactions are processed, summary journal entries are added to the
general ledger file at the end of the day. At the end of each day, the general journal file is
processed against the general ledger control file to compute a new current balance for each
account and to print a trial balance.
The following resources are available as you complete the audit:
• Your firm’s generalized computer audit software
• A copy of the general journal file for the entire year
• A copy of the general ledger file as of fiscal year-end
(current balance = year-end balance)
• A printout of Preston’s year-end trial balance listing the account number, account
name, and balance of each account on the general ledger control file
Create an audit program for Preston Manufacturing. For each audit step, list the audit
objectives and the procedures you would use to accomplish the audit program step.
Field Name
Field Type
Account number
Numeric
Amount
Monetary
Debit/credit code
Alphanumeric
Date (MM/DD/YY)
Date
Reference document type
Alphanumeric
Reference document number
Numeric
General Ledger
Control
Field Name
Field Type
Account number
Numeric
Account name
Alphanumeric
Beginning balance/year
Monetary
Beg-bal–debit/credit code
Alphanumeric
Current balance
Monetary
Cur-bal-debit/credit code
Alphanumeric
AUDIT PROGRAM
AUDIT OBJECTIVES AND PROCEDURES
a. Edit the general journal file for errors and
inconsistencies such as:
• Invalid debit/credit code or document type.
• Date not within current fiscal year.
• Missing data values.
• Non-numeric data in account number,
amount, or document number fields.
Objective: Evaluate the quality of the file data.
Procedures: Review error listing for common
error patterns; initiate correction of the errors;
trace cause of errors if possible.
b. Edit the general ledger file for errors and
exceptions such as:
• Invalid debit/credit codes.
• Missing data values.
• Non-numeric data in account number or
balance fields.
Objective: Evaluate the quality of the file data
Procedures: Review errors listing for common
error patterns; initiate error correction; trace
cause of errors.
c. Select a sample of general journal
transactions, stratified by dollar value. Sort
and list by document type.
Objective: Test the transaction data entry
accuracy.
Procedures: Compare transaction data values to
source documents and identify discrepancies.
Initiate correction of all errors discovered.
d. Merge the general journal and general ledger
files by account number, and list all
unmatched general journal entries. (or look
them up in the appropriate tables)
Objective: Test transaction data entry accuracy.
Procedures: Compare unmatched transaction
data values to source documents; initiate errors
correction.
e. Recalculate each ledger account’s current
balance from the beginning balance and the
general journal amounts, and list any
discrepancies between the recalculated
balance and the file balance.
Objective: Test current ledger balance
accuracy.
Procedures: Review discrepancies to see if the
transaction amounts or ledger balances are
f. Prepare comparative financial statements for
the current and prior year, including
selected liquidity, profitability, and capital
structure ratios.
Objective: Identify accounts to be investigated
in detail.
Procedures: Analytical review of ratios and
trends to search for unusual account balances.
g. Analyze selected accounts, listing the
beginning balance, all transaction, and the
current balance for the allowance for bad
debts, notes receivable from officers, capital
stock, etc.
Objective: Provide reference data for accounts
the auditor wishes to investigate in detail.
Procedures: Review, analysis and investigation
of specific account as appropriate.