Automating the audit function.

The use of information technology in audit is no longer in option; it is a necessity. Computer analysis offers numerous benefits during the planning and conducting of audits and the reporting of audit results. Computer Assisted Audit Tools and Techniques (CAATT) can be used to:

* Increase

* Improve the integration of audit skills - for example, accounting skills and system information skills.

* Increase independence from information system functions. Foster greater credibility for the audit organization.

* Increase cost-effectiveness through the development of reusable computerized techniques.

The following examples demonstrate how automated tools and techniques have improved the value, efficiency, and effectiveness of audit.

* Inventory Control over

Hazardous Materials

The audit's objective was to review controls over the procurement, distribution, storage, and disposal of hazardous materials. During the audit's planning phase, data were obtained from the Inventory System, a mainframe application that keeps track of all items held at warehouses across the country. Every transaction related to the purchase, transfer, storage, and disposal of hazardous materials was extracted from the system, and three main reports were produced.

The first report presented the quantities and types of dangerous goods stored at each warehouse. The second highlighted items with stock levels higher than the maximum. The third identified all sites where excess supply was purchased and later disposed of, possibly creating an environmental problem.

The results of this analysis were used to select sites for the conduct phase of the audit and to determine which government regulations were applicable. A microcomputer with telecommunication software was then used to download the applicable regulations from an electronic bulletin board.

These planning techniques reduced the overall auditing time and identified weaknesses in the management of inventory. The auditors were able to identify the high-risk, high-materiality sites and generated transaction lists for the on-site manual review. The computer analysis pinpointed the sites where no hazardous materials were stored, thus avoiding needless travel time and costs. Further, by obtaining the appropriate regulations prior to visiting the sites, the auditors were better prepared to review the management of hazardous materials.

As a result of the audit, local management minimized the risks associated with hazardous material. Without CAATT, the audit would have been much less effective.

* Review of a Workforce

Reduction Program

A workforce reduction program, where cash incentives were offered to those willing to take early retirement or be laid off, was implemented. The audit reviewed the efficiency and effectiveness of this program.

The data needed were in several different information systems, including the Workforce Reduction System, the Personnel Information System, and the Payroll System. These data were extracted and then combined to obtain a complete picture of the program's results.

The Workforce Reduction System was used to identify all employees who accepted cash incentives to leave the company. Their employee identification numbers were used to extract certain information from the Personnel information System: the employee's department, job classification and level, salary, number of years of service, and other information related to the individual or to the job he or she held.

Using the data from the Personnel Information System, the auditors produced a report that showed, by department, the number of employees before and after the implementation of the program. These numbers were then compared with the total of employees who had left in each department.

This process highlighted departments where there had been hiring activity during the time the reduction program was in force. For example, one department started with 100 employees, ended the year with 80, and had 40 employees accept cash settlements; thus 20 people must have been hired during the time the company was trying to reduce its numbers.

The auditors also classified by job, age, sex, and other categories the employees who had left. This allowed the auditors to determine whether the program was having a negative impact on factors such as employment equity, or creating other problems, such as a shortage of employees with certain skills.

The employee identification numbers were then matched with records in the Payroll System to identify the amount of each cash settlement and the total cost of all cash settlements. Using age and years of employment data from the Personnel information System, the auditors performed a 100 percent verification of the cash settlement calculations and entitlements paid out according to payroll records.

The audit was successful in providing senior management with an assessment of the effectiveness of the program. The data analysis performed would not have been practical without the use of automated tools and techniques.

* Interest Charges on Overdue

Accounts Payable

The company wanted to reduce interest charges on overdue accounts payable. Invoices were paid at approximately 100 invoice processing offices spread across the country. The auditors used the head office financial system to identify all invoices with late payment charges. Summarizing the data, the auditors determined:

* The total interest paid over the last three years.

* The amount of interest paid by each invoice processing office.

* The average number of days it took to pay an invoice.

The audit team calculated the overall average time it took to process an invoice and the average processing time for each office. The auditors determined that 1.3 percent of the invoices that were paid late accounted for more than 34 percent of the interest charges. The analysis also showed that three invoice processing offices were responsible for a majority of the late payment charges.

The auditors selected the top three interest-paying invoice offices for their on-site review. This on-site review determined that all invoices were processed on a first-come, first-served basis. Thus, a large invoice could be processed later than a number of small invoices. The audit recommended that large invoices (more than $100,000) be processed first and less attention be focused on the low-amount/low-risk invoices.

The auditors also suggested that additional staff be hired during the peak invoice processing periods. After implementation of the audit recommendations, the invoice processing time improved; and interest charges on late payments dropped to less than 25 percent of the previous year's charges - and fell another 20 percent the following year. The savings in the first year more than paid for audit costs.

In addition to isolating the systemic problems, the computer allowed the auditors to perform most of the required analysis without leaving the office. Selecting the audit sites via computer data reduced travel costs and the time required to perform the audit. With each of the 100 offices processing more than 100,000 invoices every year, the audit could not have been performed as quickly or with the same degree of success without the aid of automated analysis.

* Plant Closure

The audit examined the controls over the closure process of a production plant. In particular, the audit team wanted to determine whether equipment and inventory items were sold at an appropriate price and properly safeguarded to prevent theft or loss.

During the planning phase, several analyses were developed to extract and download information regarding the specific plant. The audit team calculated the total quantity and dollar value of the inventory and equipment. Then three fists of transactions were produced. For the first, auditor-defined criteria were used to identify transactions considered to be high risk, such as expensive, technological, or portable items considered attractive to thieves. The second listed a random sample of all transactions, and the third identified all items that had been sold for less than market value.

Inventory items numbered over 100,000, so the use of the microcomputer greatly simplified identification of the audit population and selection of sample transactions. As a result, the on-site work was more efficient, reducing the disruption to the auditee. The CAATT developed for this closure uncovered several systemic control weaknesses in the closure process. These techniques were successfully used for other closures, reducing the planning phase for those closures by more than 50 percent.