AUDIT OF ACCOUNTING

SYSTEMS

1
 OBJECTIVES
• Auditors duty
• Requirements of ISA 315
• Recording the accounting system
• Evaluating the system
• Advantages and disadvantages of the
approach

2
 AUDITORS DUTY
• Companies Act
• Specific legislation
• ISA 315
• Management requirements
• Corporate Governance code.
• Sarbanes Oxley
• Audit approach

3
 ISA 315 REQUIREMENTS
• Understand the control environment
• Understand the risk assessment process
• Understand the information system
• Determine which controls are relevant
• Evaluate relevant controls
• Consider monitoring

4
 RELEVANT CONTROLS
Controls that pertain to:
• The preparation of the financial statements
for external purposes.

• Data the auditor evaluates or uses in

applying audit procedures

• The detection of illegal acts

5
 RELEVANT CONTROLS
In assessing relevance consider:
• Materiality
• Size of the entity
• Nature of the business.
• Diversity and complexity of operations
• Legal and regulatory requirements
• Nature and complexity of the systems

6
 EVALUATING CONTROLS

• Evaluating the design

• Has the control been applied?

7
 RECORDING THE SYSTEM
• Narrative notes
• Internal control questionnaires
• Flowcharts

8
 SYTEMS NOTES
• Narrative description
• Easy to compile
• Easy to read
• No set format.
• Often badly compiled.
• Not easy to detect omissions

9
 INTERNAL CONTROL
QUESTONNAIRE
• Check list designed to identify the presence or absence of internal
control
• Standardises notes
• Directs questions
• Reminder
• Easy to review
• May not be appropriate.
• May be long.
• Encourages mechanical approach
• Auditor may not fully understand questions.
• Control may be missed because it is not on questionnaire.
• Does not evaluate system.

Internal control questionnaires have tended to be replaced by ICEQs.

10
 FLOWCHART
• Method of representing the system
graphically.

• Types:
– Document flow chart
– Information flow chart

Exam note: You would not be asked to draw a flow chart in the exam

11
 ADVANTAGES SOF
FLOWCHARTS
• Standardises recording
• Ensures completeness
• Easy to identify omissions
• Easy to identify controls
• Provides concise record
• Presents information in logical sequence.
• Easy to read with understanding of flowcharting
• Instils a disciplined and methodical approach.

12
 DISADVANTAGES OF
FLOWCHARTS
• Difficult to prepare, and time consuming.
• Difficult to read without understanding
flowcharting
• May include irrelevant information
• May be difficult to record non‑standard
systems or sub‑routines.

13
 TEST UNDERSTANDING

• Discuss with client

• Walk through test

14
 EVALUATE SYSTEM
• Control environment
– Organisational structure
– Management supervision
– Management attitude
– Staff competence
– Ethical values
– Approach to financial reporting
• Is each process controlled?
• Are controls effective?
15
DOCUMENTING EVALUATION
• Use an internal control evaluation
questionnaire.
• Key questions covering principal
objectives
• Subsidiary questions to assist in
answering key questions

16
 ADVANTAGES OF SYSTEMS
APPROACH
• May be cost effective
• Good knowledge of company obtained
• Prevents errors by identifying weaknesses
• Able to give management advice
• Approach can be used for non‑financial systems
• Documentation useful for other purposes
• Compensate for lack of audit trail or difficult
substantive testing.
• Evidence of proper books and records
• Greater variety of techniques may increase reliability of
audit evidence.

17
 DISADVANTAGES OF SYSTEMS
APPROACH
• Relatively expensive in the first year
• Compliance testing may prove system
unreliable and therefore work has been
wasted.
• Only appropriate if company has internal
controls
• Testing controls may require specialist
knowledge in computer system.
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