Documenting Systems: Procedures used to document systems include speaking to relevant client staff, observing application of controls, walk through test - tracing a transaction through the system, inspecting documents, prior year files
ISA265 Communicating Deficiencies in internal control to those charged with governance and management - requires auditors to report deficiencies to management
Primrose Co has recently upgraded its computer system to enable greater automation of transaction processing. The new system has integrated the sales, inventory and purchasing systems.
Sales orders are entered into the system manually. The inventory system is automatically updated to reflect that inventory has been allocated to an order. The system will flag if there is insufficient inventory to fulfil the order.
The inventory system is linked to the purchasing system so that when inventory falls to a minimum level a purchase order is automatically created and sent to the purchasing manager for authorisation. Once the manager clicks 'authorised' the order is automatically sent electronically to the approved supplier for that item.
Primrose Co's internal auditors were present during the implementation of the new system and performed tests during the process to ensure the information transferred into the new system was free from error. The internal audit plan of work has been updated to include regular tests of the system throughout the year to ensure it is working effectively.
The external auditor of Primrose Co is planning to use automated tools and techniques during the audit for the first time this year as a result of the new system and is also planning to use the work of Primrose Co's internal audit department if possible.
An internal control team is expensive to set up and run, the need for one will depend on the scale and diversity of activities, the desire of management to have assurance and advice on risk and controls and the current control environment
External Audit: Objective - Express an opinion on the truth and fairness of the financial statements, Reporting - To shareholders and available publically, Appointment - By the shareholders and must be independent, Scope of work - Verifying the truth and fairness of the financial statements
An audit procedure should be a clear instruction of how audit evidence is to be gathered. It should contain an ACTION applied to a SOURCE to achieve an OBJECTIVE
To test for understatement an auditor must select a sample from outside the financial statements/accounting records and traces them to the financial statements/accounting records