Certificación

1. Vouching/Substantive Approach: This approach is often adopted for the audit of small organizations where the internal control system is weak, there is limited number of staff and therefore there is great need to test a large number of transactions. This audit approach involves complete examination of the transactions of the business together with the documentary evidence of sufficient validity to satisfy the auditor that the transactions are in order, properly authorized and accurately recorded. The auditor traces the transactions to their sources in order to ascertain their full origins and meanings.

Generally, vouching audit is useful in:

(i) Very small organizations with few transactions.

(ii) Organisations where the systems of internal control is weak or nonexistent

(iii) Specialised audits which require investigations such as those of trust, estate, church, mosque, charity etc.

(iv) Checking of non-recurring, material, unusual and extraordinary items.

(v) When the auditor is put on enquiry

2. Systems-based Approach: This approach relies on the controls contained in the client’s financial system to validate accounting records. It is a system to determine what reliance can be placed on the established controls to ensure that resources are being managed effectively and financial information provided accurately especially for reporting purposes. Additionally, a system based audit is an audit of the internal controls in a system. The auditor tests the controls by means of testing a sample of transactions taken to be representative of the types of transactions checked by the particular control or set of controls the auditor is testing.

Two procedures may be adopted in a system audit:

 Compliance tests which seek evidence that a good and reliable system of control as established in the organization is being maintained.

 Substantive tests are designed to ensure that the system of controls that have been established continue to operate at all times confirming the validity, completeness and accuracy of recorded transactions. The essence is to determine whether especially, because of the volume of transactions, the sample of the population selected for testing is representative of the whole population for the purpose of expression of opinion thereof.

113 Moreover, any balance sheet items or unusual transactions which have not gone through normal accounting system are subjected to detailed testing (substantive testing).

Generally, Systems Audit is useful in the following areas:

(i) Tests seeking evidence that the internal controls are being applied as prescribed. These are called compliance tests.

(ii) Once the compliance tests have been completed, further tests may be required to substantiate the entries in the figures in accounts and the evaluation of financial information by a study of plausible relationship among both financial and non-financial data.

(iii)When an auditor investigates a system by identifying the control objectives of the system and evaluating the system’s internal control on paper, the auditor should determine whether the internal controls that currently exist appear to be adequate.

3. Risk-based Auditing/approach: This approach is adopted for very large organizations or organizations with excellent internal control system. It is an efficient way of auditing large organizations where errors or misstatements have to be fairly large to have any impact on the financial statements. The logic is that errors or misstatements will not arise from wrong recording of transactions but will have their source in identified areas of risk – either operational risks arising from the nature of the business or from the complexity of the accounting system.

Thus, the auditor in this strategy carries out a limited amount of testing of transactions and balances and concentrates efforts on analyzing the business risks faced by the organization. The auditor determines, by applying judgment, what levels of risks pertain to different areas of the client systems and designs appropriate audit tests. Emphasis of the audit work is directed at areas in which the financial statements are mostly likely to be misstated materially. In effect, audit costs are likely reduced. The risk that the auditor will give inappropriate opinion is also reduced.

4.0 Conclusion

Planning is essential in the execution and control of every audit. It helps in the determination of the overall audit strategy and in developing an audit plan. Planning follows a defined procedure namely:performing procedures to understand the entity and its environment, including its internal control system; assessing the risk of material misstatement of the accounts; preliminary

determination of materiality and preparing the planning memorandum, the audit plan and audit program containing the auditor’s response to identified risks.

5.0 Summary

This Unit dwelt on the planning and control of an audit. The four-step planning procedure is discussed in detail. In the process, risk assessment procedures are described and the elements of audit risk highlighted. The relationship between business risk, financial statement risk and audit risk is x-rayed. We also examined the audit plan process and the benefits of audit planning. The unit also discussed the 3 common types of audit strategy.

114 6.0 Tutor-marked assignment

1. The audit process has evolved from vouching and systems based audits to risk-based auditing.

Required:

1(a). Give brief descriptions of each of the three types of audit approaches stated above.

(b) State the instances where vouching and systems audits are still applicable.

(ICAN adapted)

2. Planning an audit of financial statements involves establishing the overall audit strategy for the engagement and developing an audit plan.

Required:

i). State six reasons for audit planning.

ii). Discuss four factors to consider in determining audit strategy.

3. Explain the term “audit risk” and discuss the elements of audit risk.

7.0 References/further reading

1. Millichamp, A.H & Taylor, J.R (2011). Auditing, 11^th Edition, London: BookPower/ELST 2. ICAN(2014): Advanced Audit and Assurance Study text. UK: Emile Woolf International 3. ACCA Study Text on Advanced Audit and Assurance. UK: BPP Learning Media.

4. International standards on Auditing 200, 300 and 315.

115 UNIT 9: THE USE OF COMPUTERS IN AUDITING

Content

1.0 Introduction 2.0 Objectives 3.0 Main Content

3.1 Auditor’s use of computers to perform an audit 3.2 Controls over the auditors’ computer systems 3.3 Controls in computer-based information

3.4 Microcomputers, On-line systems and Electronic data interchange (EDI)