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

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

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

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

Benefits of using CAATs
 Increases Audit Economy and Efficiency
 Improves Audit Effectiveness
 Enhances Image of Auditing

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

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

Using CAATs Improves Audit
Effectiveness
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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
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Total file recalculations
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Stratification
– Gap and duplicate key detection
Document work performed

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

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

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

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

An Overview of the Process for
Using CAATs
 Caats Planning Considerations
 Caats Development
 More Examples

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

Implementation Issues:
Training Staff

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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

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

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

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

Generalized Audit Software
Tools
 Include:
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ACL and Idea
– Audit expert systems
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Utility and statistical software

ACL
 Widely used for data extraction and analysis
 Allows for virtual 100% testing of client data