Kudler_Fine_Foods__System_Integrity_and_Validation

Kudler Fine Foods: System Integrity and Validation Jessica Goulet ACC/542 March 14, 2010 Michael Wells Kudler Recommendation Kudler Fine Foods recently implemented new accounting software to handle the daily sales, inventory, accounts payable, accounts receivable, payroll, and general ledger functions. In conjunction with the new software, Kudler must consider the proper course of action for auditing the transactions to ensure data the accuracy and reliability of the data and for the preparation of the organizations financial statements. The use of audit software will assist management and provide the means to test 100% of the organizations transactions, rather than relying on manual auditing techniques alone. CAAT software provides the auditors for Kudler Fine Foods the ability to examine application controls, identify data inconsistencies, and the compliance testing of general controls. The implementation of embedded audit modules provides “real-time” auditing techniques, thereby ensuring the reliability and timeliness of Kudler’s financial information. The modules are designed to run in the background detecting abnormal data as it occurs rather than several months after the transaction occurs in the system. With the use of CAATs, Kudler can detect errors or miscalculations in the system providing for timely corrections and preventing fraudulent transactions from occurring. Kudler Fine Foods System Integrity and Validation With the recent implementation of automated software at Kudler Fine Foods, there is the need to address system integrity and the use of computer assisted auditing techniques (CAATs). This brief examines the following topics (1) how CAATs will be used to validate data and system integrity, (2) explain the functions of audit productivity software, and (3) provide details on how audit productivity software may be used in the system. CAATs used to Validate Data and System Integrity Auditors prefer to use computer assisted auditing techniques (CAAT) for many reasons. They enable auditors to use software applications, extract data for analyzing, look for trends within the data, and identify potential areas for fraud or even detect fraudulent data. CAATs are a valuable tool for auditors to test and validate computer applications and they can determine whether or not the source code has been compromised. The implementation of CAATs will increase efficiency and the effectiveness of both internal and external audits allowing auditors to analyze all of the financial data, which would not be possible if the audit were conducted manually. SAS 94, The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit, provides guidance to auditors regarding the need for the auditor to address internal controls activities during the course of an IT audit (Cerullo & Cerullo, 2003). Auditors must have a working knowledge of the client’s software program and the relationship with the company’s financial statements. Auditors must also comprehend the processing of transactions into the general ledger, the recording of both regular and special journal entries, recurring and nonrecurring adjusting entries, and the types of material misstatements that may occur. To verify system integrity, auditor’s can validate applications through test data, an integrated test facility, or through a parallel simulation. Test data is the use of fabricated data entered in the system as a means to verify that the expected outcomes will be as intended and exceptions, or variations are tested. Disadvantages of this method include the lack of “live” data and that auditors may overlook possible testing scenarios, which would result in an incomplete look at the system. Integrated test facility (ITF), tests applications and financial data through the use of fabricated data entered in the client’s system applications. Parallel simulation involves using software to replicate a module of an application or the entire application. Auditors can input client transactions in a program written by the auditor to test the data integrity and check for errors or discrepancies. CAATs can be used to verify the integrity of the data by extracting the information and conducting further analysis. Rather than relying on sampling techniques, auditors can test all of their client’s data and can focus on identifying and investigating abnormalities in the data set. Rather than relying on administrative tasks, auditing software will allow auditors to concentrate more on the transactions and processes resulting in a greater capacity for analytical thinking. Audit Productivity Software. Audit productivity software are tools used by auditors that facilitate their productivity by automating the auditing function, and reduce the amount of time they spend on other administrative tasks. These tools include electronic working papers, groupware, engagement management, reference libraries, and document management (Hunton, Bryant, & Bagranoff, 2004). A brief overview of the audit productivity tools are provided below. Electronic Working Papers Electronic working papers automate the auditing process, and allow auditors to import their client’s financial information, such as the trial balance, allowing them to make the audit adjustments electronically. Some common features of electronic working paper software includes the ability to import information from the clients legacy system, export data to excel for quick analysis and to facilitate information sharing, entering adjusting journal entries, the ability to “drill-down” and see the transactions from financial statements, and the ability to create consolidated financial statements (Hunton, Bryant, & Bagranoff, 2004). Electronic working papers are compatible with Windows-based programs like Word, Excel, and PowerPoint, which allow audit supervisors to review the client’s financial data, provide detailed notes or adjustments, and the ability to provide compatible reports to his or her clients. Groupware Groupware is a specialized tool that allows the audit team to increase their productivity through the use of files sharing between the auditor and the client. Groupware programs assist the IT auditor in the planning and preparation stages of the audit through the use of programs that provide a multi-user calendar, scheduling and file sharing such as Lotus Notes, Novell GroupWise, and Microsoft Exchange (Hunton, Bryant, & Bagranoff, 2004). Document Management Electronic data information has allowed greater access to information for both company personnel and auditors. Online document storage ensures that the data is readily available and provides for a more efficient use of time, and storage space. Time and Billing Software Through the use of time and billing software, auditors can track the time spent working on a client account and can prepare the billings. Prior to the use of engagement management software, auditors manually account for the billable hours spent for each client and without accurate timekeeping, the firm cannot bill for the work performed. Audit Productivity Software and Systems designed. Audit productivity software assists auditors with the analyzing, verifying, calculating data during the audit process and to determine if the source data has been compromised. The software can be used to test the data contained in the system. This test is performed by the auditor entering data into the system and running it through the applicable program to verify that the same results are achieved. As businesses become increasingly electronic, several key tools can be used for “real-time” auditing thereby increasing the reliability and timeliness of the information. Embedded audit modules are designed to screen data and run batch programs, which detect abnormal data as it occurs rather than several months after the transaction occurs in the system. According to Hunton, Bryant, and Bagranoff (2004), “embedded audits run in the background searching for unusual or high risk transactions based on models the auditor has provided.” Extensible markup language (XML) is a tool used to standardize continuous auditing techniques. XML provides a standard for Web-based by encoding documents electronically, which companies can use as a continuous auditing technique providing for timely reporting and ensuring accuracy of the data. Conclusion This brief has provided an overview on how CAAT software can provide the organization a higher level of data validation, audit productivity, and increased audit engagement and the ability to gather critical information regarding the audit objectives. References Cerullo, M.V., & Cerullo, M. (2003). Impact of SAS No. 94 on computer audit techniques. Information Systems Audit and Control Association, 1, 1. Hunton, J.A., Bryant, S.M., & Bagranoff, N.A. (2004). Core concepts of information technology auditing. Hoboken, NJ: Wiley.