(15Marks)

NAC
Acc 2 3
a Ainagement Audit
Management Audit otherwise called Performance Audit is an
effectiveness of management in the objective and indeperdent appraisal of the
application
policies. It's aim is to identify existing and
of its resources to achieve
company's objectlves and
and to recommend potential management weaknesses within an organization
ways to rectify those weaknesses in order.
to optimize the company's performance.
(b) Weaknesses to be revealed
The weaknesses that management audit might reveal are as follows:
(i) Likely existence of insufficient attention to future planning such as lack of strategic planning,
research and development.
(ii) Poor corporate governance and social responsibilities on the part of the Board and Top
Management.
(ii) Weakness relating to production method.
(iv) Poor recruitment and training policies and
(v) Poor attitude to delegation of developmental programmes.
(vi) Lack of clear and identifiable responsibilities on the part of
management.
management culture.
(vii) Weakness as to maintenance of customers.
(vii) Weak management information
(ix) Inadequate managernent structures
system.
and implementation procedures.
(x) Weakness relating to treasury management.
(xi) Lack of good marketing and sales
policy.
(xii) Lack of compliance with
regulatory and statutory requirements.
(xii) Lack of compliance with trade associates' rules and
(xiv) Poor assets maintenance regulations.
(XV)
culture
Poor attention to moral and ethical issues
by to'p management.
(xvi) Poor attention to established
accounting policies and procedures.
(xvi) Absence of or poor attention to internal audit
reports and recommendations.
 auditing & assurance
chapter 8: audit repo1

Chapter Eight
AUDIT REPORT
SECTION A

E
D
6.
E
B
9. D
10. E

SECTION B
**

. False

2. Communication gapP
3. The Primary.Auditor-

4 False

5. True

6. Uncertainty and Digagreement

7. isclaimer

8 True Ate 2a3

9 Falxe
10/True Audlt Paptr «Q.Ain
MnS.
SECTION C on Cgy 'vf lug anel air Vigs
ihe expression "true fair view" is central to
should be considered from auditing. The còncept
legal, accounting and auditing points of view.
LEGAL POINT OF VIEW: The Companies and Allied Matters
amended states that every Acty1990 as
company's balance sheet and
profit and loss account must
give a true and fair view of the state of
affairs ard of the profit or loss
(Section 335 (2). respectively
The Act also
stipulates that the auditor must
repör: to
financiàl statements show a true and fair view
the members on whether the
as stipulated in Seçtion 359.

159
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Questions
 auditing & assurance
*"

chapter 8: audit report

VI. Check that all

relevant statement of
Accounting Standards Board have been accountingwith.
standard issued by the NigeHa.
complied
vii. The financial reports agree with the
underlying books and records
viii. Reviey the
financial statement
the against the checklist of statutory
schedules of the
that all disclosure Companies
and Allied Matters Act requirements as per
1990 a_ amended to ensure
requirements and legal stipulations for
express opinion. provision off financial
ix That the accounts
comply with the
requirement of the Companies and Allied
Matters Act 1990 as
amended. Other statutes
other requirements bordering governing the reporting entity, and
to express opinion.
on
binding obligation on which auditors are
required
X. The auditor should
ensure that all relevant
return from the different
enterprisehave been received and
they truly and reasonably reflect the the branches of
liabilities and the transac:ion of assets,
the different
duly incorporated in the branches, such returns must also be
entity's financial staement.
2. The points, which the auditor will consider in
statements, include the following: - carrying out an overall review of the financial
Whether the financial
statements have been
accounting policies which have been prepared using acceptable and
consistently applied. appropriate
b. Whether the financial
other regulations.
statements comply with statutory and other
reporting requirements and
Whether the
knowledge view.presented
of the
business.
by the financial statements is ccnsistent with
the auditor's own
Whether the financial statements present information
those reading them. in a form readily understandable by
In
considering the above points the auditorrwill
review
procedures that he carries out. These pay particular attention to the results of the
procedures involve in particular the analytical
The computation and analysis of following:
significant ratios and trends.
b. The comparison of figures in the financial statements with
data.
previous year and other available
The
investigation of any material variations that
arise.
Throughout..the re view the
Consideration "and the resultsauditor needs to take
of other audit work account of the
materiality of the matters nder
sufficient basis for the he has carried out.
expression of an audit opinion. A review is
hot, of itself, a
A
a.
qualified audit
report. A qualified auditopinion
has been described as
has audited show a opinion is
one in which the
any opinion of the auditor other than
true and fair view. auditor is clean
unabl: to say that the accounts he

WySE Publishing 161

Questions
 chapter,8: audit report
auditing & assurance

state of affairs and

shall give true and fair view of. the
statements
Group financial those statements as a
profit orloss of the company and the subsidiaries dealt wih by
whole (Section 337 (2)).
to show a "true and
ACOUNTING POINT OF VIEW: For a financial statement
principle
fair view" it must be in accordance with generally accepted accQunting amended
and Allied Matters Act as
(GAAP) and must comply with the companies
and Accounting Standards issued by the Phgerin-Aeveexting
SLaadacds-Boars-amd
Standards Board. The financial
other acceptable International Accounting the
relevant to meet the information needs of the users,
statements must be
financial information. Materiality and
objective, and the quality characteristics of make it
in a set of financial statements, to
appropriate disçlosures must be made
view point: The fundmental point in
meaningfthl and,junderstandable from auditing the financial
an auditor's report is the statements
whether in the auditor's opinion
statement show a true' and fair view of the profit
and state of affairs of, the.business.
not certify the accoracy cf the figures.
It is important to realize that the auditor does
transactions or records as a result or which his or
He tests a representati ve sample of records is built up. An auditor may be
held
her confidence in the accuräcy of the
in çarrying out an audit. The
liable for damage suffered as a result of negligence
of an audit may still lead
detection of errors or fraud, though not the main objective
detected and which a reasonable
tò a form of liability if such erors or fraud are not
competent audit would have detected. Thê auditors are at liberty to qualify their
also include a statement that
report on matters they are. not satistied with; they imay
the accounts do not show a true and fair view, if this is the case. Accounts could
if latent frauds and errors are undetected.
still show a true and fair view even

derived from British Legislation after having

The concept of true and fair view is of an, audit for
being tested, mature and adequate as the principal objectiv
worldwide application.
facms auditor should consider before giving an opinion of "true and fair view"
Major issues that an
in respect of the accounts of a limited company were as stated below:

The auditor would need to pay attention to the following matters:

Ensure that proper books of accounts have been kept as required by Companies and
Allied Matters Act 1990.as amended,

Confiming that generally acceptable eccounting principle in bookkeeping and

accounting are adhered to.

Ensure that the accounting policies are in accordance with the generally accepted
accounting practices and are appropriate in the circumstances given the nature of the
enterprise/business.

iv Ensure that the company's system of inter'nal control is evaluated and checked to be
effective throughout the period.

Check that all requirements of the auditing standards have been complied with.

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 Acc 223 Auetkin

COMPUTERAUDIT
.*

23.1 Introduction :K.: : . fi

A computer can be defined as a device capable ofaccepting data in'the form of
facts and figures, applying prescibed processes to the data and supplying the results of
these processes as maningful införmation
The audit objective of computerised systenmis the sam S'witlh non-computerised
system. To effectively cary out an audit in a computer based environment therefore, it
is required thàt the auditor müst obtain a sound undeistanc ing of these sy'stems as a
basis for assessing their risks and control implications. In addi ion,the auditor must also
possess a good grasp of the ways in which the computer cou.dimpede or enhance the
' .
effectiveness and efficiency of the audit and conseqúently p.oper audit próocèdures to
apply underthe circumstances.

23.2 Methods of Data Processing

(1) Baeh Processing:
:
This is a data processing method in whichthere is a delay between the events
giving riseto the input of data and updating ofthe relevant mster files and records after
the ransactions.
Data is collected in batches of similar size and are input and processed together,
each batch being ajob for a particular application. Generally, the result ofprocessinga
particular item of data will not be known until the results ofthe batch are known.

( 2 ) On-line Systemi:
This is a computer processing system, whereby the pe ipherals e.g. input
equipment, output equipment and extemal storage equipment are all connected direculy
to the central processing unit via communication channels uch as cables, telephone
lines and satëllite network. The system is off-line if the peripherals are not so
Connected.

i r e e real-time system
A real-time system is the onein which data is received and processed and results
transmitted quickly to influence a decision to be made or a course of action to be
followed.
Present day àirline reservation processing system is.e:kample of OLRT system.
Using a special point-of-origin device of input and output, the ticket clerk checks a
central comaputer data file for seat availability ona desired fight. Ifa seat is available
and the customer wishes to take the seat, the clerk touches a"preserve" button and
supplies the passenger's name, causing the computer to red. ze the available seat
UUU"
T T T T T T T T 7

268
 33 00MPUTERAUDI
nventory by one and add the name of the passenger list for the flight.

(4) Time Sharing:

This is an on-line processing technique which enables many users to gain access to a
centrally located, processor by means ofterminals, Users are geographically remote from
the processor and îrom each other and equally unaware that the procesSor is being accessed
by someone else which creates the impression of having a computer for ones sole use.
Simultaneous açcèss by users is achieved by storing processor time and other resources
among many users.

Problemsof On-line and Real-time Processing:

.

Unlimited Açcess
Loss of data
Unauthorised access
Loss of audit trail
Distortion of data
Cormuption offiles
Invasion ofprivacy
Inadequate back-up
Soiutions:
Use ofpassword
Use of CAATS
Use oflogbook or register
Database Management System Control
Restriction of Access to unauthorisedperson_.

(5) Centralised Processing: This is a method of data processing in which all EDP
works are performed bya central unit. The user departmens send their data to the EDDP
department where the datais processed and output given baçk to them.

(6) Decentralised Procéssing: This is a situation whereby each departments has its
owp data processing equipment and staff. Itmeans that each unit within the organisation
maintains an independent Electronic Data P:ocessing (EDP) function.

7) Distributed Data Processing: Under this method, each unit within the
organisation maintains an EDP function. This EDP functions are generally linked to one
anotherandto a central coniputer in the fom ofa ntwork.
It offers flexibility to each unit of the organisation and also encourages a measure of
Centralised control over data processing

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 23-COMPUTER AUDIT
23.3 Relevance of Computers to Auditors
A computer as a means of data processing and storage has tremendous
advantags over conventional manual and
mechanical data processing systems. Sorme of
the advantages offered by
computer system are:
High speed of data processing: Computers are capable of executing several
millions ofprocessing instructions within a fraction
of a second. Consequently, a
computer can process transaction data in few seconds that ordinarily
several weeks to process under conventional
will require
accounting systems.
2) Computers unlike conventional accounting systems are less prone to processing
A erTOTs. naddition, computer processing is consistent and unlike processing
under conventional systems, is not characterised by random érrors.

(3) Unlike conventional accounting systems computers have grate apability for
perfomirg complex manipulations on data.
(4) Computers have high capacity and compact storage. Unlike manual storage that
consumes a lot of storage space, computer storage Save storage
space.
(5) Computers provide facilities foreasy retrieval of data and information from
storage. This is unlike conventional accounting systems where tedious and tinme
consuming search may be required before previously stored data or information
can be retrieved.

(6) By using telecommunication facilities. Computer processing systems located in

different geographical areas can be linked to one
as a single
another such that they operate
systems. This capability is especially helpfil to businésses with branches
that are dispersed across the world. Such busine[ses are able to link the
accounting systems in the various unit with effect that a single record is
maintained by the business.

Because of the above advantages, most business entities are

now Computerising
their accounting systems. Consequently, auditors are increasingly faced with the
challenge of auditing in an environment where transactions data are processed by
computers, accounting records are maintained using electronic files, controls are
perforrned by computers and the financial information to be audited are computer-
generated.

E Effects of the use of Computer

On the Audit Objectives: The use of
computer has no effect on the overall
objective of the audit which is to express an opinion
on the true and fair view
shown by the financial statement.

270
 23 COMPUTER AUDIT

On the Audit Procedure:

overall audit objective. TheAlthough
the use
of computer does not affect the
features electronic data processing system will
generally affect the procedures adoptedof by the auditor in achieving
objective. this
23.4 Problems ofAuditor in a
The auditor may encounter aComputerised Environment
number of problems while
environment. Examples of these are: auditing in a computerised
(1)
'

There is no visible
"audit trial) as in the manual system
could be trailed
'

whereby a transaction
through the records from origin to the end.
system, this information is held in invisible form. Ina computerised
(2) The programme of instructions is in machine
**

sensible form.
(3) All operations within the
evidence of processing.
cormputer is done electronically and there is no visible

Technical Expertise: To audit a computer based

skill may be required of the auditor. As a
accounting system, additional
minimum,
understanding of data processing and the client's he will require a basic
Depending on the complexity ofthe applications andcomputer application.
the auditor may need to have the audit
a
sound techniques used,
systems and probably some appreciation system analysis, operating
of
experience of the relevant
(5) The auditor can
programminglanguage.
acquire technical
computer audit. Ifthe necessary expertiseis by obtaining necessary training in
ajoint audit with another firm expertisethe notavailable to the cumrent auditor,
possessing expertise will address the problem.
23.5 Audit Trail
he oginal concepeofan
prodessingso that ap auditorcouiauditteiLWas to-print out data at al stages of
follow transactions
to
ensure that theyhad been
cut out processed correctly-¬omputerstase-by-stage through a system
muchof ths laborious, tirbe-eonsuming atditing methods have now
of
stage-by-stage workingl and make use
a)amore liritcd audit trail;,
(b) efiercnycontrol totals;
c)use of gnquiry
(d) auditpackages;facilities:/
(c) fileumps.
Ah audit trail shouä ideally be
provided so thay/every
tran_action on a file contains
271
 23- COMPUTER AUDIT

a
unique reference back to the phginal source of
Tecord the japutfeg. a sales system transaction
should hold areferençe to th
customer ordet delivery nate and invoice). Where
master lerecords are updated sevetal times, orfromseveral souades, the provision of a
sausiactory audit trailis more dificat, but some atterppt should nevertheleas be made to
provide one.

pical audit problemsfhat arise as audit tyails move fuyheraway from the hard
corytral irckude: .
atesting comltergeperated totalswhen fo detailed analysis is available;
(6)testing theeompleeress of output in tye absence of/control totals,
In
thesesituations it will often be necessary to employ computer assisted audit
techniques.
Use of computers within the audit
A
microcomputer may be used by auditors in the following ways to assist in audit
Work.
Flowcharting client's systems
Specialist flowcharting packages can assist the auditor in the
well preseted production of clear,
flowcharts. Although the package cannot review the system for the
auditor, it does produce legible output and can be easily updated when systems
unlike manualy change,
producedflowcharts.

Evaluation of audit risk

The auditor can
input into the computer an assessment of audit risk for the various
transactions and balances in the client's
systems. The computer can record these
assessments in a word processing package, and may also provide
oftestingTquired via an expert systems shell. guidance to the level

Preparation of audit programnes

Audit programmes can be
typed into a word
easy updating in the following yeaYs. Some firms processor, which again will allow for
on adatabaae within the
may also have standard audit tests
word processor. When the tst is kept
out of the database into the audit required, it is simply copied
test ínto a programme. This is far quicker than typing the
compüter. whole

Axalytical procedures
A standard
template can be set
the auditor inputs key upon a
spreadsheet package. Onto this template,
detail_
The spreadsheet then calculates
such as balance sheet
totals from the
key accounting ratics to assist the financial statements.
analytical procedures. auditor
with the

272
 *******
*****

23-COMPUTERAUDIT
Preparation of audit working papers
Where a computer is available to
audit staff at the client's
totype up audit working premises, it can be used
papers. Audit documents with a lot of
and summaries of tests, will benefit from being writing, such as memos
and to a higher standard of produced more quickly on the computer
legibility.
Software
Commercialy available packages
Most audit firms
will purchase at least one word processor
spreadsheet package. These package and
programs will then be used as outlined
one

auditors in'their audit work. to above assist

Specialist programs written in-house

Larger audit firms will
employ computer programmers in-house to write
software for use only by specialist
that audit fim. Examples of this
type of
of standard audit tests that
can be
software include databases
that will assist the auditor in copied into audie programmes, and expert
determining audit risk and systems
setting testing levels.
Computer-assisted
Audit evidence
audit techniques
(CAATs)
Audit evidence ws
considered in detail in an
earlier chapter, however, it is worth
consideringagain here as it is relevant to the use
of CAATs
ISA 500 Audit Evidence
audit evidence to be able requires that auditors 'obtain
to draw reasonable sufficient appropriate
opinion'. However, the form and method conclusions on'which to base the audit
of obtaining the evidence in
accounting systems is likely to differ from that in computer-based
the absence of
input documents, or audit trail, ormanually-based systems. For example,
output,
eficient audittoof. might necessitate the use of
CAATS. They may in any case be an
are. The two most
important CAATs
audit software
of audit
computer programs used for audit
significance fiom the entity's purpo[es to process data
test data data used
-

by the
accounting system
auditor
operation of the enterprise's computerfor computer processing to test the
There are other more
complex techniques, whichprograms.
will be considered later in this
The advantages of CAATs section.
to the auditor
In a
computer-based system the large volume of
the auditor to rely upon
programmed controls. CAATs are transactions is likely to
force
effective way of testing programmed controls. likely to be only
the
The use ofCAATs will enable
auditórs to.test a much
quickly and accurately, and therefore larger number of items
opinion. increase the confidence they have in
their

273
 S
23- COMPUTER AUDIT

CAAlS enable auditors to test the' accounting system and its records (1.e. the
tapes and disk files) rather than relying on testing printouts ofwhat they believe to
be a copy of those
records.
Once set up, CAATs are.likely to be a cost effective
way of obtaining audit
eVidence provided that the enterprise does not regularly change its systems.
Careful planning by auditors should enable the results oftheir work using CAAIS
to be
compared with results from the traditional clerical audit work to increase
confidence.

Audit soitware
Types of audit software
Auditsoftware comprises computer programs used by auditors to examine
an
enterprise's computer files. It may consist of generalised package programs,
purpose- written programs or utility programs used by the client.
a.
Generalised package programs ' ^

These are programs already written either by the auditor or a specialist software
company, designed to be used on different types of machine. They need to be tailored to
each specific case by defining the format
of the files to be interrogated and by specifying
the parameters of output data required and the form of that output. In some cases
supplementary program coding'is required.
b. Specially written programs
Ih some cases it is not
possible to adapt a package program because of the type of
machine, processing or file organisation used. In such cases
apurpose-written program is
required. It could be written by the auditor, by a software specialist or by the client
on the instructions of the auditor. In all acting
cases it should be fully tested before
live' being used
C.
Utility programs
These are used by the entity to perform common data
sortingand printing files. For example, when using a terminal, processing functions such as
it
existing'enquiry programs to refer to data held on files, or to obtainisa necessary to use the
a
file.anary cases, however, the client's own print-out of parts of
needed by the auditor. It is likely that team programs 'will not provide all the facilities
the
programs produced the rest of the system andresponsible
for
writing enquiry the
there is therefore a
defects apply to all such
programs in the system.
danger that the same
Use of àudit softwure
Audit software may be used
during audit testing
particularly appropriate during substantivemany
testing
procedures. Its use is
scrutinise large volumes of data and of transactions and balances, as it can
to concentrate extract information, leaving skilled manual resources
upon the investigation of
Typical uses of such programs include: the results.
calculation checks e.g. the
-

program adds the value of

ensure that they agree with control open items on a file to
records which re maintained
274
 23 COMPUTER AUDIT

detecting violation of systems rules-e.g, the

Sales ledger to ensure that no customer has aprogram
**** checks all accounts on the
balance above a specified credit
limit
detecting unreasonable items- e.g. a check that no customer is allowed trade
discount of more than 50%, or that no sales
sales made to that customer ledger balance is more than total
conducting new caleulations and analyses -

e.g. obtaining a statistical analysis of

inventory movements to identify slow-moving items
selecting items for audit testing -

e.g. obtaining a
stratified sample ledger of sales
balances to be used as a basis for a
circularisation of accoúis receivable
completeness checks- e.g. checking continuity of sales invoices
to ensure they
are all accounted for.

Difficulties in using computer audit programs

Costs
There will be substantial
set-up costs even in using a generalised package. This is
because the client's procedures and files need to be
investigated thoroughly prior to
identifying audit tests. The use ofspecially written programs will be even more
expensive.

Changes to client's systems

These can mean costly alterations to the
to be run regularly during the
programs or at last require the programs
year to test the system at different dates.
Small installations
There may be no suitable audit software
package for use on
micro-computer installations. Software documentation may be mini-computeror
very difficult to identify all procedures. It may be incomplete so that it is
the cost of specially impossible to justify and hence recover
written audit software.
Over-elaboration
There may be a tendency to produce over-elaborate
expensive to develop, take up considerable computer enquiry programs which are
reviewing time. Auditors should be able to running time and extensive
benefit in audit terms ofits use. justify costs of using the program to the
the
Quantities of output
An enquiry program may
the system is wrong or the
produce huge quartities of output. This be because
enquiry program was badly designed. To avoidmaythis
some
packages can be set to terminate after a given number of items have problem,
in the count. Auditors must been included
distinguish between cases where they have merely
the parameters and obtained too large a misjudged
because lots of items are sample, and cases where the print-out is long
wrong. In the latter they must follow the audit work
case,
through and consider the implications of the
proble.ns encountered,

275
 7241
DnpgA

façilitieS and
to describe thos
Aucdit Trail is a tern used
accounting system to be traced tnroug
a computer-based individu:l transactions to
r a i l in system, which enable evidence may not be,
available
within the vjsible by.foloWig ne
evIdence generated conclusion. In such a system,
time. However,
trom"origination to available for a short ne
ystem evidence may þe t r a n s a c t i o n s proçessea,
Some transactions or the documents re'sed for the
support auditor is able to
ascertain the
e activities.
auat
trall, the controls executed,
and the sequence
of il sales order torms,
records updated, the
systm will,
comprise the the
sales acçounting Cash Books and
the audit trail within the
Book, Sales Ledger,
Day
or example, Notes, Sales invoices, Credit Notes/Sales
00ds Delivgry others.
Bank Statements among
of
Facturs Casingless loss
Audit Trai
include the follow ng
of audit trial
caLuse befure input into the computer.
aciors tnat may evidence of data
oi documentary
() Noi-preparation after processing proce_sed,
Non-retention of s o u r c e documents
order different fror that in which they were procedures
ii) of source
documents in an
ution of pragram processing
(iii) Filling evidence for the ex:
of documentary
Non-production
(IV e x : : u t i o n of program
controls.
by the computer. evidence for the
documentary
Non-production of and records during updating.
non-production of
printed
(V) computerfiles in the
The overwriing of device, which results
(vi). of moriitor as
the only output
The use restricted to
(vii) computar output.. which a r e
ften
are
i1ot detailed but

computer output,
Inacequate printed
(vii) and summaries. M nagament.
exception reports output after
use oy
to printed computer terminals in real time systems.
Non-jetention
(ix) data with remote
Capturing of input
(X)
Procedures'tuovercome problerns trajl'are:
problems
caused by loss of audit stage.
the systens developmen
overcome
Steps ta take to be involved during retain
The auditoi needs to financial year, to
() date during the
Management, at an, caly that have audit
should request the audit, whwe reports
The 2uditor reports for the
purpose oi
computer-generated
the client's Sjitem. the output
routinely produced by iually calculate
compuier input data,
ma
clevance are
reconstruct the
i) The'auditor may clerically computergeneraterl utput, where prat cable. third party
thes with the 'alteriative audit
procedes, such as
and compare
p!ace gre åter emphesis on balances s a m e a n s of obtaining
The auditor may generated
(iv) verifiçation of computer
confimation and ph /sical
such
audit evidence. A.ssisted Auditing
Tec iniques (CAATs)
need to mäke use of Computer
The auditor may data packsS.
programs and test
(V e n s u i e that audit
tests are
as computer aydjt au:lit visits so as to
increase the frequency of his
The auditor may are proc:ssed.
(vi) the time transactions d so as to obtain
performed closa to review procedures perfori
increase thhe level of analytical
(vi) The auditor may generated balances
are r 2 a s o n a b l e .
a s s u r a n c e that computer

* -hasc i g SysGN
udii Fai!

G aCcouii SyStems.

295