The best definition of auditing can be given as: “Auditingis the accumulation and evaluation of evidence about information to determineand report on the degree of correspondence between the information andestablished criteria. Auditing should be done by a competent, independentperson.” (Beasley, 2010) Auditing concerns itself with assessing the internalfinancial status of a business and comparing it to the picture presented to theoutside world. A company prepares its financial statements such as the balancesheet, income statement and cash flow statement then proceeds to submit them toauditors, who evaluate them according to industry standards for accuracy andrelevance. Audits are extremely important to shareholders, potential investors,regulators, customers and others affected by the company’s operations. Anegative report from a firm’s auditors can seriously damage that firm’sreputation.
The demand for auditing in addition can be attributed tousers’ needs of reliable information and the consequences of users’ erroneousdecision when dealing with inaccurate information. The audit function adds tothe credibility of the financial statements and consequently, users createdecisions that are more accurate.Accounting and reporting practices become more and morecomplex. To evaluate the quality of financial statements, a thoroughunderstanding of accounting and reporting practices and business processesgovernance practices is required. Most financial statement users are not enoughknowledgeable to fully understand financial reports, neither to detect errors.
The auditor is hired to provide users an assessment of the quality of theinformation. 1.1.1 The Audit Process Beasley (2010) define the audit process as a well-definedmethodology for organizing an audit to ensure the evidence gathered issufficient a competent and that all audit objectives are met.The audit process has four specific phases.
In ‘planning anddesigning an audit approach’ (phase I), the client’s business strategies andprocesses are studied. The auditor assesses the risk of misstatements infinancial statements, and evaluates internal controls and their effectivenessIn (phase II) of the audit process, tests of controls andsubstantive tests of transactions are conducted. In (phase III), analyticalprocedures and tests of details are performed.
The auditor assesses whetheraccount balances or other data appear reasonable and performs procedures totest for monetary misstatements in account balances. In (phase IV) at last,evidence is combined and an overall conclusion concerning the financialstatements is formulatedAudit services have been changing rapidly since theearly 1990s. Audit practices have been evolving in response to growing publicexpectations of accountability and to the complexities in economic andtechnological advances implemented in business organizations. The main goal ofa financial statement audit however, is still to reduce the information risk;the risk that the financial statement information may be inaccurate, incompleteor biased. To address the complexity of the information needs of users,auditors nowadays are expected to provide value-added services, such asreporting on irregularities, identifying business risks and advising managementon internal control weakness as well as consideration of other governanceissues 1.2 Definition and History of Technology within theAccounting Industry Technology is the use of scientific knowledge for practicalpurposes or applications, whether in industry or in our everyday lives.Technology has always played a part in making theaccountant’s job just a little easier from the abacus, to the first addingmachines, calculators and then computers and software.
As our knowledge oftechnology increased so has the accountant’s ability to analyse statisticalvalues. Technology has enhanced the ability to interpret data efficiently andeffectivelyAccounting technology has always played a role in keepingtrack of numbers, and the idea of using machines to solve mathematical problemsgoes back centuriesOver the course of the next fifty years, massive computerscapable of only simple calculations went from filling entire rooms to the smalldesktop computer most of us use at home and the office today. Computers and accounting software allow accountants to useelectronic spreadsheets—eliminating the need for adding machines, calculators,and pencils and ledgers in one fell swoop. It became much simpler foraccountants to keep track of information on a minute-by-minute basis andcompletely eliminated most mistakes. This has led to greater efficiency andaccountability, and has changed the face of accounting considerably.Adding machines and then later—much later—calculators madethe job of accounting much easier. They led to fewer mistakes, greateraccountability, and sped up the work of the average bookkeeper or accountant.
Technological advances in accounting always mean increased speed and efficiency 1.2.3 The 20th Century InformationRevolution While there were subtle changes in the field of accountingfrom its early days through the 1970s, the job remained virtually the same:paper records of columns of numbers.
But with the invention of the computer andaccounting software, that all changed. Chapter 2 – Literature Review 2.1 Evolution of the Audit ProcessThe evolution of auditing had an explosion in growth sincethe Industrial Revolution took place which led to a significant increase inbusiness activity resulting in widespread use of auditing methods. From thebeginning of the 1900 to the 1960s, manual auditing procedures continued to beused exclusively even as automate systems began to appear in the 1950s. In 1961a book was published called ElectronicData Processing and Auditing. This book compares auditing around andthrough the computer.
Around the computer simply means using the traditionalmanual approach and ignoring the automated equipment while through the computerinvolves the actual use of the computer systems in testing controls andtransactions. This book concludes with through the computer being able toprovide a much higher level of assurance when contrasted with auditing aroundthe computer. Along with technological devices becoming more affordable,auditing and accounting in general were beginning to change from thetraditional approach.2.2 Evolution of Technology in Accounting andAuditingAfter the first working adding machine, came the inventionof the calculator for information accuracy.
As technology advanced so did thespeed and proficiency of the accountant’s job. But even with adding machinesand calculators the accountant still had to keep track of the businesses’functions with paper entry. The process of identifying, measuring, andcommunicating financial information was documented in the form of paperrecords, columns of numbers and hand written statements. Towards the end of the twentieth century the accountingprofession began to take on a whole new look. Computers and accounting softwarehas changed the industry completely.
With programs such as Microsoft Excel anaccountant now had an electronic spreadsheet. The need for adding machines,calculators, ledgers and pencils was eliminated. The job became less tediouswith less of a margin for error.Accounting is in the midst of digital revolution. With theadvent of Internet, mobile devices and all things digital, technology haswitnessed a big evolution when it comes to accounting. We have come a long waysince the abacus was first used in 16th century for basic, everydaycalculations.
Accounting software has changed the way many work, makingaccountants more productive and efficient. However, while the humble calculatorstill rules for most when it comes to making (or checking) calculations, therehave been many developments and improvements to help both client andaccountant. Mobile phones continue to play a vital role in making accountantsmore accessible than ever, enabling communications with clients over email,phone calls or video conferencing.
This has meant that meetings with clientscan happen in any location and any time, strengthening relationships whilestill providing an efficient service. In addition to this, the development ofcloud accounting apps and software is helping keep clients connected toaccountants. This has changed the way that both accountants and clients worktogether, often providing a more flexible service tailored to suit bothparties. 2.2.
1 Technology Aid Tools and TechniquesComputers have become the primary means used to processfinancial accounting information and have resulted in a situation in whichauditors must be able to use and understand current information technology (IT)to audit a client’s financial statements. Accordingly, knowledge of computerterminology, computer systems, and related audit procedures is essential to anyauditors in this era. The overall need of individuals and organizations forcredible information, combined with changes currently taking place ininformation technology, is also leading to rapid changes in the role of the accountingprofession 2.2.2 CAATS Computer-assisted audit techniques (CAATs) refer to thepractice of using computers in order to automate the audit processes (Coderre,2008) Electronic Spreadsheet often included in generalized auditsoftware, may be used for applications such as analytical procedures andperforming mathematical procedures. Also, auditors often use microcomputer electronic spreadsheets to prepareworking trial balances, lead, and other schedules.
Such spreadsheets maysignificantly simplify the computational aspects of tasks such as incorporatingadjustments and reclassifications on a worksheet and are relatively easy touse, inexpensive, and can be saved and easily modified in the future. Disadvantages include the need for auditortraining, and the fact that original spreadsheet development takes asignificant amount of time. CAATs include basic office software (spreadsheet, wordprocessors and text editing programs) and some advanced software packagesinvolving use of statistical analysis and business intelligence tools.These modern tools and techniques may assist the auditor inany phase of its mission, being used for:· Correctness of accounting processing;· Testing of the system’s security;· Analysis and control of computer applications;· Risk identification and evaluation of anorganization;· Assessment of internal control;· Checking integrity of files;· Analysis of customer information using complexdatabase queries, sample selection, stratification, aggregation etc.Advantages of using CAAT’s include:· The ability to test large volumes of data;· The opportunity to provide greater assuranceregarding the completeness of the population (audit risk);· Ability to provide more flexible and morecomplete analytical information (and complex repetitive calculations);· A strictly control over the selection of samplesby applying statistical techniques;· Issues ready to print materials/documentationfor each test available in the software that can be used as documentation inthe auditor’s work files;· Is independent of the system audited, using aread-only copy of the files in order to avoid corruption of company’s data· Substantial reduction of audit working time.
Chapter 3 – Methodology