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Audit Expert Systems

Audit Expert Systems . Audit planning, risk assessments, materiality, and controls evaluation If/then rules Returns answer based on inputs Advantages Unbiased, captures expertise, always available Disadvantages Difficult to develop. Computer Assisted Audit Techniques.

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Audit Expert Systems

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  1. Audit Expert Systems • Audit planning, risk assessments, materiality, and controls evaluation • If/then rules • Returns answer based on inputs • Advantages • Unbiased, captures expertise, always available • Disadvantages • Difficult to develop

  2. Computer Assisted Audit Techniques • Testing client’s controls (Assess control risk) • Test data (or test decks) • Parallel simulation • Integrated test facility • Testing client’s data (Substantive testing) • Data extraction and analysis (e.g., ACL) • Fraud detection (e.g., ACL) • Continuous auditing techniques

  3. CAATs to Detect Fraud • Digital analysis • Benford’s Law for a series of naturally occurring numbers • Deals with expected frequency of first digits • Exponential distribution • Requires large sample size

  4. Computer-Assisted Audit Techniques • CAATs - the use of software to perform audit procedures • Topics • Benefits of CAATs • Examples and success stories • Tools available • Implementation issues

  5. Benefits of using CAATs • Increases Audit Economy and Efficiency • Improves Audit Effectiveness • Enhances Image of Auditing

  6. Using CAATs Increases Audit Economy and Efficiency • Example • Auditing an employee savings plan allowed the audit team to recalculate benefits for all 2,000 employees and test more items than prior year in 26% less time • Results • Planning investment recovered that year • Better coverage and assurance obtained

  7. Using CAATs Increases Audit Economy and Efficiency • Example • Audit of healthcare payments enabled the identification of over-billing by matching mutually exclusive services performed by doctors or laboratories for the same patient • Benefits • The volume of transactions would have made this task impossible to perform manually

  8. Using CAATs Improves Audit Effectiveness • Join, concantenate and compare different files to quantify findings • Calculate field statistics (totals, high, low and average value) • Use multiple indexes to create summary information and highlight possible errors • Perform detailed analysis • Total file recalculations • Stratification • Gap and duplicate key detection • Document work performed

  9. Using CAATs Improves Audit Effectiveness • Example • Comparing inventory on hand with subsequent sales enabled auditors to identify slow-moving and obsolete inventory • Results • Better findings/recommendations • Higher assurance on inventory valuations

  10. Using CAATs Improves Audit Effectiveness • Example • Analyzing freight charges in a distribution operation identified opportunities for cost savings through relocation of warehouses • Results • Better findings/recommendations • Sales management now requests quarterly analysis of this area

  11. Using CAATs Enhances Image for Auditing • Example • Auditors prepared a summary report in two hours that IS had said would take six months to create an application to produce • Results • IS department obtained the software to better serve end users • Auditors became creative problem solvers rather than policemen

  12. Using CAATs Enhances Image for Auditing • Example • Auditors performed analysis on data from remote divisions at Corporate, prior to commencement of the audit. • Results • Focus moved to areas where risks noted • Questions were specific rather than general • Findings backed up with detail • Time in field reduced

  13. An Overview of the Process for Using CAATs • Caats Planning Considerations • Caats Development • More Examples

  14. CAATs Planning Considerations • Understand system and environment • Define the problem or need • Set objectives • Identify files (format and content) • Determine method for obtaining files • Outline processing and output specs. • Estimate cost/benefit of CAATs

  15. CAATs Development • Design the report format • Set automated procedures to be performed on the data files • Code the application • Test results • Document the application and control procedures

  16. More Examples of CAATs • Identification of potentially fraudulent payments using accounts payable files • Calculate effects of recommended changes in company policies (credit limits, interest rates/service charges, commissions, payroll, payment terms, quantity discounts, etc.) • Continuous monitoring applications

  17. Tools Available for CAATs • Mainframe/Minicomputers • Report writers • Utilities and Query tools • Conventional programming languages • 4th generation languages • Hardware specific software • Generalized audit software (CA-Panaudit, FOCAudit, Dyl, SAS, etc.)

  18. Tools Available for CAATs • Microcomputers • ACL • Applaud • CA-Panaudit Plus • IDEA • PC/FOCAudit • Print report converters (DataImport, Monarch, Link & Load for use with PC database & spreadsheet packages)

  19. Using a Mainframe for CAATs Potential Advantages • Direct data access • Speed of processing • Ability to deal with very large files

  20. Using a Mainframe for CAATs Potential Disadvantages • Reliance on technical specialists • Lack of independence and control • Platform specific software required • Slow turnaround time • Cost of resources and software is high

  21. Using a PC for CAATs Potential Advantages • Ease of learning and use • Interactive processing for immediate results (auditors have control) • Software functionality reduces need to design reports or code/test processes • Can use data transferred from any platform • Low cost

  22. Using a PC for CAATs Potential Disadvantages • Access to data • Storing and processing very large files • Dealing with complex data and file structures (variable length and relational database files)

  23. Technology Aids Trend Toward Use of PC-based CAATs • Speed and storage capacity improvements in PCs • PC prices are not increasing • Migrations to Client/Server technology will eliminate data access concerns • Many gateways and file transfer utilities are available

  24. CAATs: Implementation Issues • Senior management commitment and support • Hardware and environment being audited • Data access • Selecting tools • Use of technical specialists • Training staff

  25. Implementation Issues: Senior Management Support • Commitment statement • Use of CAATs: target areas and timeframe • Cooperation from other departments • Provision for hardware and software needs • Provision for training • Cost/benefit measurement based on periods after learning curve • Promotion decisions acknowledge creative and efficient use of CAATs

  26. Implementation Issues: Understand Environment • What is the status of environments to be audited? • Single platform - mainframe or mini • Multiple platforms - networked or not networked • Migrating to Client/server • Is data easily accessible? • Are systems understood?

  27. Implementation Issues: Data Access Methods • Using client’s computer and query facility • Using file transfer and communications software • Obtaining report print files on diskette • Obtaining files downloaded to magnetic tape, diskette or cartridge • Connecting to client’s LAN

  28. Implementation Issues: Data Access Problems • Inaccurate record layouts • Data elements residing in different files • Relational databases - possible need to flatten files • Security issues • Limited technical assistance from client

  29. Implementation Issues: Use of Technical Specialists • More specialists are required for mainframe CAATs tools • Fewer specialists are required for PC-based CAAT tools • Reassign them to data security, new systems and downloading files projects • They can become consultants to the financial auditors by training/helping them to use software, client files and PCs

  30. Implementation Issues: Training Staff • Training program should try to integrate auditing with use of the software where appropriate • Consider concentrated “just-in-time” training on CAATs tools • For PC-based CAATs tools, provide general training for financial auditors and advanced training for technical specialists

  31. Implementation Issues: Selecting New Tools • Define the purpose/use • Network - what are others using? • Identify available tools • Compare features and prices • Analyze cost/benefit of options: what’s the payback?

  32. Implementation Issues: Traps to Avoid • The “Expectation Gap” • Spending more on the search and evaluation than the cost of the tool warrants • Waiting for the perfect solution • Ignoring staff ideas and concerns • Underestimating the hardware and additional software costs • Underestimating the training time and expense

  33. CAATs Can Help Auditors Add Value - The Key is Planning • Obtain senior management support • Understand the environment • Address data access • Select a good tool • Plan implementation and training • Start slow and build up your CAATs successes

  34. Generalized Audit Software Tools • Include: • ACL and Idea • Audit expert systems • Utility and statistical software

  35. ACL • Widely used for data extraction and analysis • Allows for virtual 100% testing of client data

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