Auditing 2

UNAM Assignment 1
Question 1
1. Audit Independence
Audit independence refers to an audit carried out by an internal auditor or external auditor has no
financial interest or otherwise in the business being audited. Independence requires integrity and
an objective approach to the audit process. The concept requires the auditor to carry out his or
her work freely and in an objective manner.
2. Professional skepticism
An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to fraud or error, and a critical assessment of audit evidence, (ISA
200). Auditors are required to perform audits with an attitude of professional scepticism. There
has been much criticism recently that auditors are failing in this requirement and there are plans
to try and improve scepticism within the profession.
3. Scope of the Audit
The scope of an audit is a statement that specifies the focus, extent, and boundary of a particular
audit. The scope can be specified by defining the physical location of the audit, the
organizational units that will be examined, the processes and activities that will be included, and
the time period that will be covered.
4. Internal Auditor
An auditor is a person who carries out audits. Auditors collect evidence in order to evaluate how
well audit criteria are being met. They must be objective, impartial, independent, and competent.
Internal auditors perform first party audits within the company to ensure that internal control is
effective. Internal auditors also provide evaluations of operational efficiencies and will usually
report to the highest levels of management on how to improve the overall structure and practices
of the company.

5. Audit Committee
The audit committee is a committee of the board of directors consisting entirely of independent
non-executive directors (NEDs) (at least three in larger companies), of whom at least one has had
recent and relevant financial experience. The key roles of the audit committee are 'oversight',
'assessment' and 'review' of other functions and systems in the company. Most of the board
objectives relating to internal controls will be delegated to the audit committee.
Question 2
Ethical concerns
Resolving the concerns

Question 3
a) Advantages of CAATs

Enable the auditor to test program controls if CAATs were not used then those

controls would not be testable.

Enable the auditor to test a greater number of items quickly and accurately. This will also

increase the overall confidence for the audit opinion.

Allow the auditor to test the actual accounting system and records rather than printouts

which are only a copy of those records and could be incorrect.

Are cost effective after they have been set up as long as the company does not change its
systems

b)
Test Data
Input of an order for a negative number of tennis racquets.
Reason for test
Ensures that only positive quantities are accepted although the company cannot dispatch
negative quantities anyway

Test Data
Input of an order for ten tennis racquets
Reason for test
There are reasonableness checks in the system to identify possible input errors. A warning
message should appear on screen asking the customer to confirm any order for more than say
two racquets.

Test Data
Input of an order without payment.

Reason for test

Ensures that orders are paid for prior to dispatch this also limits the number of bad debts.

Test Data
Input of invalid inventory code
Reason for test
Ensures that the computer detects the invalid code and presents an error message rather than
taking the nearest code and accepting that
c)
i) Difficulties of using audit software

Substantial setup costs because the client's procedures and files must be understood in

detail before the audit software can be used to access and interrogate those files.
Audit software may not be available for the specific systems set up by the client,
especially if those systems are bespoke. The cost of writing audit software to test those

systems may be difficult to justify against the possible benefits on the audit.
The software may produce too much output either due to poor design of the software or
using inappropriate parameters on a test. The auditor may waste considerable time
checking what appear to be transactions with errors in them when the fault is actually in

the audit software.

Checking the client's files in a live situation. There is the danger that the client's systems
are disrupted by the audit program. The data files can be used offline, but this will mean
ensuring that the files are true copies of the live files

ii)
1. Analysis of the ageing of items in the inventory ledger.
Reason for test
Detect old items that need to be written down to net realisable value rather than cost.
2. Selecting a sample of inventory at year end as part of the physical verification.

Reason for test

Removes bias from sample selection enable user to select items rapidly compared to manual
selection.
3. Selecting a sample of sales invoices for checking to dispatch documentation.
Reason for test
Removes bias from sample selection enable user to select items rapidly compared to manual
selection.
4. List large credit notes for investigation by the auditor.
Reason for test
Need to find reason for which there has been returns. This may also be a check on ordering
system. As returns may be caused by errors in ordering with the result that customers have to
return goods later