Question

LO 3-5 3.62 Using the Computer to Discover Intentional Financial Misstatements in Transactions and Account Balances. AMI International is a large office products company. Headquarters management imposed pressure on operating division managers to meet profit forecasts. The division managers met these profit goals using several accounting manipulations involving the record-keeping system that maintained all transactions and account balances on computer files. Employees who operated the computer accounting system were aware of the modifications of policy the managers ordered to accomplish the financial statement manipulations. The management and employees carried out these activities: 1. Deferred inventory write-downs for obsolete and damaged goods. 2. Kept open the sales entry system after the quarterly and annual cutoff dates, recording sales of goods shipped after the cutoff dates. 3. Recorded as sales transactions that had been coded as leases of office equipment. 4. Recorded shipments to branch offices as sales. 5. Postponed recording vendors' invoices for parts and services until later, but the actual invoice date was faithfully entered according to accounting policy. Required: Describe one or more procedures that could be performed with CAATs to detect signs of each of these transaction manipulations. Limit your answer to the actual work accomplished by the computer software.

Answer 1

COMPUTER ASSISTED AUDIT TECHNIQUES (CAAT): These are computer programs used by the auditor to process data from the entity's accounting system. However Auditor should use such programs only after he proves their validity for audit purposes. Audit software may be of three types. a. Package programs :- These are generalized computer programs ,the perform data processing like selecting information and performing calculations. They may be used at many clients site. b. Purpose written programs :- These are computer programs to perform audit tasks in specific circumstances. It may not be used at many clients site, thus cost effectiveness should be considered c. Utility programs :- These are programs for performing common data processing functions like sorting, creating and printing files. These are not designer specifically for audit purpose. TEST DATA:- The auditor enters a set of test data in to entity's computer system and compares the results with predetermined results. Test data are used to test specific characteristics in computer programs. The test data are chosen by the auditor. separately from the normal processing procedure b. Integrated test facility - Here auditor establishes a dummy unit to which test transactions are posted during the normal processing cycle of the entity. However ,later on the dummy entries should be eliminated from the entity's accounting records. These are used mainly in case of on line real time systems.