AA Topic Explainer: Automated tools & techniques

Automated Tools and Techniques in Audit: A Detailed Summary

Key Concepts: Audit Software, Test Data, Data Analytics, Automated Internal Controls, Substantive Procedures, Completeness Testing, Analytical Procedures, Cut-off Testing, Fraud Risk Identification, Segregation of Duties.

1. Introduction

The video focuses on automated tools and techniques in audit, specifically audit software, test data, and data analytics. It emphasizes the importance of understanding these concepts for success in the Audit and Assurance (AA) exam. The speaker, Aaf, guarantees increased confidence in this topic by the end of the video.

2. Syllabus Guide and Preparation

• The syllabus requires explaining, with examples, the use of audit software, test data, and data analytics in audit.
• Preparation involves understanding the tools and techniques, their advantages, and disadvantages.
• Chapter 21 of the ACCA Study Hub is recommended for comprehensive coverage.
• Lack of knowledge and understanding is the primary reason for poor performance in this area.

3. Exam Testing

• This topic is tested in Section A (objective test questions) and Section B (often combined with substantive procedures).
• It can also be relevant in questions on internal control deficiencies and tests of control, especially when systems are automated.

4. Automated Tools and Techniques: Overview

• Definition: Auditors using computers for audit procedures at all stages (planning, substantive testing, control testing, review).

5. Test Data

• Definition: Fake data run through the client's system to confirm that automated systems are operating as intended.
• Process:
  1. Identify automated controls.
  2. Input valid and invalid data.
  3. Verify that valid data is processed correctly and invalid data is rejected.
  4. Delete the test data after use.
• Example 1 (Range Check):
  • Client: Luxury clothing retailer with a range check of 1-3 on website orders.
  • Test: Attempt to place an order for four items to ensure the system rejects it.
• Example 2 (Automated Email):
  • Client: Retailer who sends automated email to warehouse upon order placement.
  • Test: Place a fake order for two shirts and verify that an email is sent to the warehouse.
• Past Exam Example:
  • Scenario: Employees use clock cards; hours worked are automatically transferred to the payroll system.
  • Test: Enter fake information through a clock card to ensure the hours work report is updated automatically.

6. Audit Software

• Definition: Programs or software used by auditors to process and analyze client data.
• Types:
  • Off-the-shelf (readily available).
  • Customized (developed for specific client accounting systems).
• Uses:
  • Analytical Procedures: Calculate ratios, compare to prior years, and investigate significant differences.
  • Aging Reports: Produce aging reports for receivables to identify potentially irrecoverable debts.
  • Inventory Analysis: Identify slow-moving inventory that may need to be written down.
  • Costing/Recalculations: Recalculate net pay of employees to ensure accuracy and completeness.
  • Statistical Sample Selection: Select a representative sample from the population.
  • Population Testing: In some cases, automated tools allow testing of the entire population, eliminating the need for sampling.
  • Cut-off Testing: Verify that the last GRN (Goods Received Note) and GDN (Goods Dispatch Note) are recorded in the correct accounting period.
• Past Exam Example:
  • Scenario: Listed company manufacturing stationary products; risk of understatement of payables and accruals.
  • Requirement: Describe audit software procedures for auditing trade payables.
  • Procedures:
    • Calculate payable days and compare to last year to identify potential understatement.
    • Cost (add) the payables and accruals listing to confirm completeness and accuracy.
    • Recalculate accruals for goods received but not yet invoiced.
    • Undertake cut-off testing by assessing the date of the last GRN.

7. Objective Test Questions (Test Data)

• Question 1: Identify the correct example of test data.
  • Correct Answer: D (Fake invoices are input in the client system to see if they're processed correctly).
• Question 2: Identify the correct example of test data.
  • Correct Answer: D (Entering invalid data to ensure the system rejects it).

8. Data Analytics

• Definition: Examining large sets of data to identify patterns, trends, or correlations for further investigation.
• Tools: Visual aids like graphs, plots, and pie charts.
• Benefits:
  • Improved efficiency of audit procedures.
  • Analysis of larger populations of data.
• Uses at Various Audit Stages:
  • Planning Stage:
    • Identify areas of risk (e.g., analyzing revenue product-wise or region-wise).
    • Aging of receivables to identify long-outstanding debts.
  • Control Testing:
    • Examine 100% of client's transactions.
    • Analyze journals to identify who is raising them and when.
    • Identify fraud risk (e.g., transactions of round sum amounts).
    • Test user codes to ensure appropriate segregation of duties.
    • Perform three-way matches between sales orders, GDN, and invoices.
  • Substantive Testing Stage:
    • Detailed calculations of depreciation on non-current assets.
    • Classification of items of capital expenditure to identify incorrectly capitalized revenue expenditure.

9. Conclusion

The video emphasizes the importance of understanding the uses of automated audit techniques (audit software, test data, and data analytics) for success in the AA exam. Focus on learning and understanding the applications of these tools in different audit scenarios.