THE IIA’S CIA LEARNING SYSTEMTM
Section Topics
1. Sampling
2. Statistical analyses
3. Data gathering
tools
4. Analytical review
techniques
5. Observation
www.LearnCia.com
6. Problem solving
7. Risk and control selfassessment
8. Computerized audit
tools and techniques
9. Process mapping,
including
flowcharting
Part 2, Section E
Part 2 E – 1
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THE IIA’S CIA LEARNING SYSTEMTM
Attributes Sampling
When to use
To estimate the number of times a certain
characteristic may occur in a population
Size of sample
Based on judgment about probability that
errors (or other characteristics) will occur
or based on statistical tables
Statistical table • Population size
• Confidence level
specifications
• Precision
• Expected error rate
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 2
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THE IIA’S CIA LEARNING SYSTEMTM
Variables Sampling
When to use
variables sampling
Specifications for
statistical tables
When size matters;
e.g., amount of a
discrepancy
•
•
•
•
Reminder: Use attributes
sampling when number
matters, not size.
www.LearnCia.com
Population size
Confidence level
Precision
Standard deviation
Reminder: For attributes
sampling, error rate is a
specification, not standard
deviation.
Part 2, Section E, Topic 1
Part 2 E – 3
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THE IIA’S CIA LEARNING SYSTEMTM
Variables Sampling:
Mean-per-Unit Estimation
Case example
Population:
1,500 accounts
Total book value:
US $1 million
Sample size:
100 accounts
Sample book value:
US $66,666.67
Sample audit value:
US $69,350.00
www.LearnCia.com
Step 1: Calculate average audit value (i.e.,
mean-per-unit value for audited samples).
$69,350.00 / 100 = $693.50 / acct.
Step 2: Multiply mean/unit value by number of
accounts in the population.
$693.50  1,500 accounts = $1,040,250.00
Undercount = $40,250.00
($1,040,250.00 – $1,000,000.00)
Part 2, Section E, Topic 1
Part 2 E – 4
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THE IIA’S CIA LEARNING SYSTEMTM
Variables Sampling:
Difference Estimation
Case example
Population:
1,500 accounts
Total book value:
US $1 million
Sample size:
100 accounts
Sample book value:
US $66,666.67
Sample audit value:
US $69,350.00
Step 1: Calculate average difference between audit
value and book value for the sample.
$69,350.00 – $66,666.67 / 100 accounts = $26.83
Step 2: Determine the difference estimate for the
population.
$26.83  1,500 accounts = $40,245.00
Step 3: Estimate actual value by adding the
difference estimate and book value for the
population.
$40,245.00 + $1,000,000 = $1,040,245.00
Book value is understated by $40,245.00.
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 5
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THE IIA’S CIA LEARNING SYSTEMTM
Variables Sampling:
Ratio Estimation
Case example
Population:
1,500 accounts
Total book value:
US $1 million
Sample size:
100 accounts
Sample book value:
US $66,666.67
Sample audit value:
US $69,350.00
Step 1: Audit value for sample = $69,350.00
Step 2: Book value for sample = $66,666.67
Step 3: Find ratio of sample audit value/book value:
$69,350.00 / $66,666.67 = 1.04
Step 4: To estimate actual population value,
multiply ratio by population book value:
1.04  $1,000,000 = $1,040,000.00
Book value is understated by $40,000.
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 6
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
When an internal auditor reports the results of
statistical sampling in the form “We are 95% confident
that the error rate in the population is 6%, plus or minus
3%,” what exactly does that mean?
Answer: This means that a randomly selected sample
from an entire population (e.g., a group of
transactions) contained a number of errors
indicating that there is a 95% chance that the
error rate in the total population is between 3%
and 9%.
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 7
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
Which of the following considerations would
necessitate an increase in sample size? Which
would allow for a smaller sample?
Answer:
Larger
1. Increase confidence level from 90%
to 95%.
X
2. Increase range of error from  2.5%
to  5%.
3. Increase population size from
150,000 to 500,000.
www.LearnCia.com
Smaller
X
X
Part 2, Section E, Topic 1
Part 2 E – 8
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some of the advantages and
disadvantages of statistical sampling?
Sample answer:
Advantages
Disadvantages
• May yield desired results from the
minimum sample size
• Yields quantified data
• Includes measures of sampling risk,
confidence level, and precision
• Is adaptable to computer testing
• Lends credibility to audit
conclusions
• Requires cost and time to
perform
• Requires training and
software costs
• May preclude experienced
auditors’ insights
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 9
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are the differences, if any, between
unsystematic (haphazard) sampling and
judgmental sampling?
Sample answer: Some, but not all, judgmental
sampling is unsystematic. Unsystematic sampling
makes no attempt either to randomize samples (such
as picking every tenth item from the population)
or to select samples according to the auditor’s
best judgment (such as excluding certain items
as obviously unrepresentative).
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 10
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some advantages and
disadvantages of nonstatistical sampling?
Sample answer:
Advantages
• Flexibility
• Use of internal auditor’s
judgment
• Allows reasonable reliability
at reasonable cost
www.LearnCia.com
Disadvantages
• Results not statistically valid
• No objective measure of
sampling risk provided
• Chance of wrong sample size
• Effectiveness depends upon
the auditor’s skill
Part 2, Section E, Topic 1
Part 2 E – 11
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
Which random number matches a population
number?
Answer:
Population Numbers
Random Numbers
www.LearnCia.com
85
86
87
88
89
90
92
93
93
94
95
Part 2, Section E, Topic 1
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
Part 2 E – 12
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THE IIA’S CIA LEARNING SYSTEMTM
Stratified Random Sampling
Widely varied populations can
be grouped into like strata
with random sampling of each
to reduce the chances of
missing a significant item in a
small but important segment.
www.LearnCia.com
Part 2, Section E, Topic 1
Stratum 2
Billionaires
Stratum 1
Ordinary accounts
Part 2 E – 13
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
Interval sampling selects items a set distance
apart, such as every third item. What is a
potential problem and a safeguard?
Sampling interval = 3; Starting point = 2
Sample answer: The population may use the same
interval for identical items. Run the selection more
than once from different random starting points.
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 14
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THE IIA’S CIA LEARNING SYSTEMTM
Cluster Sampling
Samples made up of pre-existing clusters
such as file drawers, boxes, rooms, etc.
A–Z
A–Z
A–Z
taxes
A–Z
A–Z
Size 9
A–Z
A–Z
taxes
A–Z
www.LearnCia.com
A–Z
Part 2, Section E, Topic 1
Part 2 E – 15
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
When is it appropriate to use the two types of
attribute sampling below?
Answer:
Use stop-and-go
sampling when:
Use discovery
sampling when:
You think you may
get reasonable
results from a
small sample.
You need to find
only one instance;
e.g., suspected
fraud.
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 16
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THE IIA’S CIA LEARNING SYSTEMTM
Dollar-Unit Discovery Sampling (DUDS)
All confirmations
#1 = $1,000
#2 = $876
#3 = $58
***
#28 = $9,999
***
#1012 = $1,350
Dollars 1–500,000
Dollar #824
Dollar #221, #422
Dollar #1173
Dollar #23
Dollar #500,000
Click again
to show
random
selections.
$500,000 total
www.LearnCia.com
Part 2, Section E, Topic 1
Part 2 E – 17
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THE IIA’S CIA LEARNING SYSTEMTM
Dollar-Unit Sampling: A Hybrid
Population
Dollar units
Sample
Outcome
$1
Account 1 = $2
Account 2 = $3
Account 3 = $4
Account 4 = $9
www.LearnCia.com
$1
$1
$1
Acct. 2
$1
Acct. 4
$1
$1
$1
$1
$1
$1
$1
$1
$1
$1
$1
$1
$1
Part 2, Section E, Topic 1
Estimate of
maximum
error at
confidence
level
Part 2 E – 18
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What is the difference between
descriptive and inferential statistics?
Answer: Descriptive statistics provides tools
and vocabulary to shape raw data in such a
way that inferential statistics can be
used to draw conclusions about the
meaning of the data (as in the preceding
section).
www.LearnCia.com
Part 2, Section E, Topic 2
Part 2 E – 19
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THE IIA’S CIA LEARNING SYSTEMTM
Normal Distributions and the Bell Curve
The individual
values in any
large-scale
population tend to
be distributed
symmetrically
around a midpoint
(m) unless a force
other than chance
distorts the
distribution.
www.LearnCia.com
-3s
-2s
-1s
Part 2, Section E, Topic 2
m
+1s +2s
+3s
Part 2 E – 20
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
Can you get a normal curve when you toss 5
pennies 100 times?
29%
Tosses
Answer:
Not quite;
it’s a small
sample.
28%
17%
20%
4%
2%
5h,0t
www.LearnCia.com
4h,1t
3h,2t
m
Part 2, Section E, Topic 2
4h,1t
4t,1h
5t,0h
Part 2 E – 21
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THE IIA’S CIA LEARNING SYSTEMTM
Measures of Central Tendency:
Mean, Median, and Mode
Mode = Most Frequent
m
1... 2... 3... 3... 3... 4 ... 5
Median =
Midpoint
Mean = Average
1+2+3+3+3+4+5
7
www.LearnCia.com
= 3
-3s
-2s
Part 2, Section E, Topic 2
-1s
m
+1s +2s +3s
Part 2 E – 22
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THE IIA’S CIA LEARNING SYSTEMTM
Impact of an Outlier (Change 5 to 15)
Mode = Most Frequent
Mode = Most Frequent
1 ... 2 ... 3 ... 3 ... 3 ... 4 ... 5 1 ... 2 ... 3 ... 3 ... 3 ... 4 ... 15
Median =
Midpoint
Median =
Midpoint
Mean = Average
1+2+3+3+3+4+5
7
www.LearnCia.com
= 3
Mean = Average
1 + 2 + 3 + 3 + 3 + 4 + 15
7
Part 2, Section E, Topic 2
= 4.43
Part 2 E – 23
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
The standard
deviation,
represented by the
Greek letter sigma
(s), measures
variability of the
sample—the
percentage of items
falling with equal
segments on both
sides of the mean.
www.LearnCia.com
What % of area
lies between –1
and +1 sigmas?
34.13% 34.13%
Answer:
About 68%
13.59%
0.1%
-3s
13.59%
2.14%
-2s
2.14%
-1s
Part 2, Section E, Topic 2
m
+1s +2s
0.1%
+3s
Part 2 E – 24
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THE IIA’S CIA LEARNING SYSTEMTM
Range
The wider the range from “tail” to “tail,” the larger the
standard deviation—because there is more variability
in the sample of items.
Left
tails
Right
tails
Range
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Part 2, Section E, Topic 2
Part 2 E – 25
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THE IIA’S CIA LEARNING SYSTEMTM
MAD (Mean Absolute Deviation)
MAD = Average
MAD example: mileage for 10 cars
deviation of
MPG
MPG – Mean = Absolute deviation
sample items
1—20.0
20.0 – 21.9 = 1.9
61.8 deviation
2—21.5
21.5 – 21.9 = 0.4
from the mean
10 mpg items
3—19.5
19.5 – 21.9 = 2.4
without regard to
4—25.0
25.0 – 21.9 = 3.1
direction of the
5—42.5
42.5 – 21.9 = 20.6
deviation
6—14.0
14.0 – 21.9 = 7.9
7—8.0
8—23.0
9—17.5
10—28.0
Total = 219.0
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8.0 – 21.9 = 13.9
23.0 – 21.9 = 1.1
17.5 – 21.9 = 4.4
28.0 – 21.9 = 6.1
6.18 MAD
Deviation = 61.8
Part 2, Section E, Topic 2
Part 2 E – 26
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THE IIA’S CIA LEARNING SYSTEMTM
Variance
Variance (s2)
measures dispersion
and so is similar to
MAD—except that it
uses the square of
each deviation from
the mean.
www.LearnCia.com
Squares of MPG
deviations (previous slide) Variance (s2)
1.92 =
3.61
756.9
2
0.4 =
0.16
10
2.42 =
5.76
3.12 =
9.61
20.62 = 424.36
7.92 = 62.41
s2 = 75.69
13.92 = 193.21
1.12 =
1.21
Note: Square root
4.42 = 19.36
of variance (s2) is
6.12 = 37.21
standard
deviation (s).
Total = 756.9
Part 2, Section E, Topic 2
Part 2 E – 27
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
If this C chart tracks
account errors per
batch for batches 1
through 10, which
batches (if any)
would likely be
selected for review?
Answer: Batches 3
and 7, which are
“out of control.”
Assignable
variation
UCL
6
Mean
4
Natural
variation
LCL
2
Assignable
variation
1 2 3 4 5 6 7 8 9 10
www.LearnCia.com
Part 2, Section E, Topic 2
Part 2 E – 28
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
If this P chart
measures percentage
of errors committed UCL
4.5%
by tellers 1–10, is it
measuring variables
or attributes?
Mean
Assignable
variation
Natural
variation
3.75%
Answer: P charts
measure attributes
in percentage
terms.
LCL
3.0%
Assignable
variation
1 2 3 4 5 6 7 8 9 10
www.LearnCia.com
Part 2, Section E, Topic 2
Part 2 E – 29
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
This R chart is used
to measure the dollar
amount of
UCL
overcounting in 10
$500
branches. Is it
measuring attributes
Mean
or variables?
Assignable
variation
Natural
variation
$450
Answer: R charts
are used to track
variables, such as
ranges of counting
error.
www.LearnCia.com
LCL
$400
Assignable
variation
1 2 3 4 5 6 7 8 9 10
Part 2, Section E, Topic 2
Part 2 E – 30
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THE IIA’S CIA LEARNING SYSTEMTM
Elements of the Audit Interview
Preparation Production
• Planning
Review
• Opening
• Documenting
• Conducting
• Evaluating
• Closing
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Part 2, Section E, Topic 3
Part 2 E – 31
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some steps to take when planning
the audit interview?
Sample answer:
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Obtain background information.
Define purpose and specific objectives.
Prepare open and closed questions.
Organize questions in logical sequence.
Prepare a written agenda.
Tailor objectives and questions to the person.
Schedule a convenient, agreed-upon time.
www.LearnCia.com
Part 2, Section E, Topic 3
Part 2 E – 32
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some effective ways to open an
audit interview?
Sample answer:
Step 1 Start on time.
Step 2 Build rapport with a warm introduction.
Step 3 Get the interviewee’s name right.
Step 4 After the warm-up, state objectives and purpose.
Step 5 Continue building rapport, if possible.
www.LearnCia.com
Part 2, Section E, Topic 3
Part 2 E – 33
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some do’s and don’ts for
conducting the interview?
Sample answers:
• Be confident but not
intimidating.
• Avoid offensive or confusing
language, humor, etc.
• Watch the interviewee’s body
language/behavior; don’t
focus on note-taking.
• Stay focused; prompt for
feelings as well as facts.
www.LearnCia.com
• Question, summarize, and
rephrase for clarity.
• Don’t confuse opinion with fact.
• Bring a second interviewer if
necessary.
• Be professional in action and
appearance.
• Take appropriate notes.
Part 2, Section E, Topic 3
Part 2 E – 34
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THE IIA’S CIA LEARNING SYSTEMTM
Closing the Interview
Stop at the promised time.
Ask for permission to return if questions remain.
Summarize key points from notes.
Describe the next step.
Provide contact information.
Thank the interviewee.
www.LearnCia.com
Part 2, Section E, Topic 3
Part 2 E – 35
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THE IIA’S CIA LEARNING SYSTEMTM
After the Interview
Document the
interview.
• Put notes in final written
form.
• Do it right away.
www.LearnCia.com
Evaluate your
performance.
• Surprises?
• Right balance of open and
closed questions?
• Organized and logical process?
• Right time and place?
• Rapport?
• Objectives and purpose
explained?
Part 2, Section E, Topic 3
Part 2 E – 36
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some advantages and disadvantages of using
questionnaires?
Branch:
Sample answer:
Advantages—Easy to
administer; uniform
information for comparison;
can go to large numbers of
informants anywhere
Disadvantages—Not
appropriate for some
situations; not good for indepth information; can’t
observe informants
www.LearnCia.com
Area:
Supervisor:
Date completed:
Question
Yes No Comments
1. Are all credit sales approved by the Credit
Department before shipping?
2. Is the Credit Department independent of the
sales department?
3. Are sales priced on the basis of approved price
lists?
4. Are prenumbered sales invoice forms used?
5. Are all sales invoice forms properly
controlled?
6. Are prenumbered shipping orders used to
authorize shipments to customers?
Part 2, Section E, Topic 3
Part 2 E – 37
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What are some appropriate ways to use a
checklist for data-gathering?
Sample answer:
As a reminder of questions to ask
As a data sheet for respondents to
fill out quickly
As a control to ensure complete audit
www.LearnCia.com
Part 2, Section E, Topic 3
Part 2 E – 38
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THE IIA’S CIA LEARNING SYSTEMTM
Third-party Confirmation
Obtains direct written verification of the accuracy of
information from independent third parties
Positive confirmation
Negative confirmation
Asks recipients to respond
regardless of whether or not
they believe the information is
correct
Asks recipients to respond only
when they believe the
information is incorrect
www.LearnCia.com
Part 2, Section E, Topic 3
Part 2 E – 39
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THE IIA’S CIA LEARNING SYSTEMTM
Analytical Review Techniques
yes
Gather
data
Unexpected
finding?
Analyze data
to explain
finding
•
•
•
•
•
•
www.LearnCia.com
Recommend
action
Period—period comparison
Results—budget comparison
Financial—nonfinancial relationship
Element—element relationship
Unit—unit comparison
Organization—industry comparison
Part 2, Section E, Topic 4
Part 2 E – 40
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
(Variance Analysis)
What are the unreasonable
relationships in the chart?
Answer: Divergence is especially
large in July and December.
18,000
16,000
14,000
12,000
10,000
Budget
Actual
8,000
6,000
4,000
Budgeted
Period
expense
January
$9,000
February
10,000
March
10,500
April
10,500
May
10,500
June
10,000
July
10,000
August
12,500
September
13,000
October
12,500
November
9,500
December
9,000
Actual
expense
$8,500
8,500
8,500
9,500
10,500
12,000
16,000
13,000
11,000
9,000
8,000
12,500
Total
127,000
2,000
0
1
www.LearnCia.com
2
3
4
5
6
7
8
9
10
11
12
Part 2, Section E, Topic 4
127,000
Part 2 E – 41
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THE IIA’S CIA LEARNING SYSTEMTM
Trend analysis looks for
unreasonable changes
in a series of historical
data. A typical use of
trend analysis is to
track changes in
financial data through
periods of time—
monthly, quarterly, and
annually.
www.LearnCia.com
Monthly auto sales
Trend Analysis
Model Y—Convertible
Model X—SUV
Jan Feb Mar Apr May Jun
Part 2, Section E, Topic 4
Part 2 E – 42
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THE IIA’S CIA LEARNING SYSTEMTM
Ratio Analysis
By definition, ratio analysis
is the measurement of
relationships between
quantities, such as debt to
equity or all statement
items to gross revenue.
www.LearnCia.com
A
B
Ratio of A to B where A is
any quantity of interest and
B is any other related
quantity.
Part 2, Section E, Topic 4
Part 2 E – 43
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What is the main benefit of common-size
statement analysis?
Sample Common-Size Statement
Answer: Expressing
all items as
percentages of sales
enables comparison
with statements of any
size.
www.LearnCia.com
Revenue
Net sales
Rent revenue
Interest revenue
Total revenue
$3,000,000
35,000
9,000
3,044,000
= 100.00%
= 5.46%
= 0.03%
= 101.47%
Expenses
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
1,750,000
400,000
325,000
40,000
2,515,000
Income before taxes
Income taxes
Net income
429,000 = 14.30%
127,700 = 0.04%
$302,000 = 10.07%
Part 2, Section E, Topic 4
Part 2 E – 44
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=
=
=
=
=
58.33%
13.33%
10.83%
0.01%
83.83%
THE IIA’S CIA LEARNING SYSTEMTM
Financial Ratios
How They Work
General Types
By comparing
relationships of
various financial
statement items to
assess organizational
or unit performance
• Activity ratios
• Liquidity ratios
• Leverage (debt)
ratios
• Profitability ratios
www.LearnCia.com
Part 2, Section E, Topic 4
Users
•
•
•
•
Auditors
Investors
Lenders
Managers
Part 2 E – 45
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THE IIA’S CIA LEARNING SYSTEMTM
Discussion Question
What do activity ratios measure?
Answer:
Ratio
Calculation
Inventory
Turnover
Cost of Goods
Average Inventory
What It Measures
Number of times during the year
inventory is replaced
Days’ Sales
Outstanding
Accounts Receivable
Sales / 360 Days
Effectiveness in collecting
receivables (small is good)
Accounts Payable
Turnover
Accounts Payable
Purchases / 360 Days
Effectiveness in managing all
obligations to creditors
Fixed Assets
Turnover
Total Assets
Turnover
www.LearnCia.com
Sales
Efficiency in use of fixed assets
Average Net Fixed Assets to generate sales
Sales
Average Total Assets
Effectiveness in using total
assets to produce revenues
Part 2, Section E, Topic 4
Part 2 E – 46
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THE IIA’S CIA LEARNING SYSTEMTM
Liquidity Ratios
Ratio
Formula
What It Measures
Current Assets
Current Liabilities
Measures potential to pay down
current liabilities; larger number
= more assets available to pay
debts
Quick Ratio
Current Assets – Inventory
Current Liabilities
Like current ratio except current
assets exclude inventory as least
liquid (least available) current
asset
Net Working
Capital
Current Assets –
Current Liabilities
Current Ratio
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Not a ratio; subtracts current
liabilities from current assets to
gauge potential to pay debts
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Discussion Question:
Leverage (Debt) Ratios
Ratio
Debt Ratio
Formula
Total Liabilities
Total Assets
Debt to Equity
Ratio
Long-term Debt
Times Interest
Earned Ratio
Earnings Before Interest and Taxes (EBIT)
Fixed Payment
Coverage Ratio
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Total Equity
Interest
Earnings Before Interest and Taxes (EBIT)
Interest + (Principal + Preferred
Dividends) × [1 / (1 – Taxes)]
Is Higher or Lower Better?
Answer: Lower. A higher ratio
generally indicates greater debt
relative to assets and more risk.
Answer: Lower, generally. But the
organization should carry some
reasonable debt relative to equity.
Answer: Higher. A higher ratio
indicates greater ability to cover
obligations with earnings (EBIT).
Answer: Higher. A higher ratio
indicates greater ability to cover
fixed obligations within a set time.
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Profitability Ratios
Ratio
Gross Profit Margin
Calculation
What It Measures
Sales – Cost of Goods Sold
Sales
Effectiveness of pricing and cost
control
Operating Profit
Margin
Operating Profits
Sales
Net Profit Margin
Net Profits
Sales
Operational efficiency and
effective pricing
Effective managing of pricing,
cost, operations, debt, and taxes
Return on Investment
(ROI)
Total Asset Turnover × Net
Profit Margin
Effective use of assets to generate
profit
Return on Equity
(ROE)
Net Profits
Shareholders’ Equity
ROE
1 + Debt/Equity Ratio
Total Earnings
No. of Shares Outstanding
Success in generating net profits
relative to equity
Return on Capital
Earnings per Share
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Ability to use equity and debt to
generate profits
Organization’s value to investors
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Regression analysis
traces the impact of one
condition (independent
variable) on another
condition (dependent
variable). Which is the
independent variable in
the scatter diagram?
Answer: Security
expenditures (x axis) is the
independent variable.
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Fraud Losses (USD 000)
Discussion Question
Scatter diagram
90,000
75,000
60,000
45,000
30,000
15,000
0
200 400 600 800 1000 1200
Security expenditures
(USD 000)
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Discussion Question
The regression equation provides a more accurate
representation of the relationship between the
dependent and independent variables than does the
scatter diagram. What does each term stand for?
Y = a + bX
Answer:
Y=
X=
a=
b=
dependent variable
independent variable
value of Y when X is 0; a constant
increase in Y for each unit of increase in X
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Part 2, Section E, Topic 4
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Example: Regression Problem
Y = a + bX
Calculate:
Value of Y (fraud losses) with security budget (X) of
USD 60,000
Y = 75,000,000 + (– 30 × 60,000) = 75,000,000 – 1,800,000
= 73,200,000
Assumptions:
a = 75,000,000 (value of Y when X is 0)
b = – 30 (assuming Y decreases 30 units as X increases 1 unit)
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Part 2, Section E, Topic 4
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Discussion Question
What does r = 0 indicate about the relationship
of the dependent and independent variables in
a regression analysis?
r=
reliability of the
regression analysis
Answer: r = 0 indicates a completely
random relationship between the
variables.
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Part 2, Section E, Topic 4
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Multiple Regression
Y
=
a + b1X1 + b2X2 +…+ bnXn
The multiple regression equation allows the
internal auditor (or anyone else mathematically
inclined) to study the relationship of the
dependent variable with more than one
independent variable.
www.LearnCia.com
Part 2, Section E, Topic 4
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Discussion Question
What are some limitations of regression
analysis?
Sample answer:
• Can show correlation, but not causation.
• Cannot be the basis for concluding that change
in the independent variable caused change
in the dependent variable. Other factors
may have been responsible.
www.LearnCia.com
Part 2, Section E, Topic 4
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Observation
Regulations Study and
and
Standards preparation
Client’s
claims
Experience
Meaningful observations are facts put in context by the
disciplined, experienced observer.
www.LearnCia.com
Part 2, Section E, Topic 5
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Discussion Question
What are some drawbacks or pitfalls to watch
for when using observation as an audit tool?
Sample answer:
• Observations are generally weak evidence that
need backup.
• Being observed may change the behavior of
the audit client, leading to wrong conclusions.
www.LearnCia.com
Part 2, Section E, Topic 5
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5-Attribute Approach to Problem Solving
Condition
What is—the problem found and defined by the
internal auditor
Criterion
What ought to be—as defined by law, regulation,
ethical principle, business objective, etc.
Effect
The risk—what may happen to the organization if
“what is” does not become “what ought to be”
Cause
The root cause—the deepest reason for the condition
and, therefore, the factor that must be eliminated
Guidance to management for dealing with the root
Recommendation cause of the condition
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Part 2, Section E, Topic 6
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Discussion Question
Match each statement below to the letter of the appropriate
element of the 5-attribute problem-solving method.
A. Condition
B. Criterion
C. Effect
D. Cause
E. Recommendation
Answers:
D
C
A
E
B
The most significant correlation seems to link data loss and crashes to the
age and type of hardware rather than employer error or poor maintenance.
Continued hardware crashes and data loss will result in escalating
downtime, employee frustration, and loss of customers.
We’ve documented a rising trend of lost data that staff must recreate after
computer crashes.
We’ve identified several consulting groups experienced in network set-up
and suggest that you select one to oversee total hardware replacement.
Comparison studies show that other units with similar use patterns
experience significantly less data loss and computer crashes.
www.LearnCia.com
Part 2, Section E, Topic 6
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Control Self-Assessment (CSA)
Watergate
turmoil
1973
Initial IA use of
CSA–Canada
1987
IIA sponsors CSA Center CCSA
conference
established certification
1993
1997
1999
Three principles common to CSA views:
1 Broad, integrative control framework, as with COSO.
2
Involvement of all who perform tasks, not the internal auditor
alone, in control assessments.
3 Consideration of measurement as necessary but not
sufficient for control assessment.
www.LearnCia.com
Part 2, Section E, Topic 7
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Embedded Audit Modules
Benefits
Drawbacks
• Instantaneous review of
• Can be difficult to install within
transactions (if desired);
or along with other software
checks incoming data against
set criteria
• No need for sampling if
embedded module checks the
total population
• More reliable information for
management’s Sarbanes-Oxley
reporting
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Discussion Question
What are some of the audit tasks that
generalized audit software (GAS) can perform?
Sample answer:
• Read digital “read only” files (to audit, not to alter).
• Examine particular records according to auditor-defined
criteria (in other words, performing targeted data
extraction).
• Test calculations or make independent
calculations.
• Analyze, summarize, or re-sequence data.
• Test the effectiveness of controls.
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Part 2, Section E, Topic 8
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Discussion Question
What are some benefits of generalized audit
software and some obstacles to adopting it?
Sample answer:
Benefits
Obstacles to adopting GAS
• Scrutiny of all transactions, not
just a sample
• Targeting of specific
transactions within huge
populations
• Much shorter audit durations
• Uniform interface for all tasks
• Facilitation of reviews through
maintenance of test logs
• IS staff reluctance to try new
software
• Blocking of access to production
data by staff concerned that GAS
will interfere with production
software
• Additional costs for training and
new software
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Discussion Question
What are some audit-related capabilities
of spreadsheets?
Sample answer:
• Multitasking
• Linking spreadsheets together
Excel can generate
different charts from data
in a table.
• Creating and running macros (programs
within programs)
18,000
• Converting tables to charts and graphs
12,000
16,000
14,000
10,000
• Performing analyses
8,000
• Performing addition and other
mathematical functions
4,000
www.LearnCia.com
Budget
Actual
6,000
2,000
0
1
Part 2, Section E, Topic 8
2
3
4
5
6
7
8
9
10
11
12
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Discussion Question
What are some benefits and drawbacks of
automated working papers?
Sample answer:
Benefits
Drawbacks
• Cost savings (no printing, etc.)
• Convenience of electronic file transfer
• Efficient communication to multiple
readers simultaneously
• Consistency because of templates and
ease of meeting quality standards
• Multimedia capability
• Security (with password protection)
• Reputation/professional pride
• Need for training
• Difficulty making smooth
transition to new templates, etc.,
which may not be adapted to
organization’s needs
• File deterioration and
obsolescence
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Discussion Question
What are some uses of process maps?
Sample answer: Process maps can be any
drawing or computer rendering of the steps in any
process. They can be used for every process from
planning each step in an audit to taking notes
on an observed work procedure.
www.LearnCia.com
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Standard Flowchart Symbols
Although flowcharts can be
penciled onto napkins or
drawn, erased, and re-drawn
on chalk boards, they are
most efficiently produced by
software.
PowerPoint, for example, has
a set of flow chart symbols in
“AutoShapes” on the drawing
toolbar.
www.LearnCia.com
Flowchart symbols courtesy
of PowerPoint
yes
Process
Decision
Process
no
Alternate
process
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Reinforcing Activity 2-9
Part 2, Section E
Engagement Tools
www.LearnCia.com
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End of Section E
Questions?
www.LearnCia.com
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