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							Chapter 11 DQ 35
     CAAT
             Presented by:
             Diana Tai
             Ivan Chen
             Ronnie Lee
             Wilson Wong
              Background
Client:
• Wholesale cosmetics distributor with an
  inventory of thousands of individual items
• Keep inventory in its own distribution
  centre and 2 public warehouses
• Inventory computer file is maintained on a
  computer disk
               Background
Auditor:
• A computer cartridge of the data on the
  inventory file on the date of the physical
  count
• A general-purpose computer software
  package
         Scope of Audit Work
Audit Procedure:
• Planning/Compliance test/Substantive
  testing/Reporting

Assumption:
• Planning and Compliance test have performed and
  obtain satisfactory result
• Focus will be on substantive testing on balance
  and transaction only
              Assumption
• Collection of data is performed by auditor
• Client maintain a sound and effective
  control on the accounting system after
  evaluation
• Client maintain all record in computer
  format
• Auditor is competence with CAAT
 Objective of substantive testing
1.   Existence
2.   Completeness
3.   Ownership
4.   Valuation
5.   Accuracy
6.   Identifying Unusual Items
                   1. Existence

Basic inventory auditing     How general purpose
procedure                    computer software package
                             and type of the inventory
                             file data might be helpful
Stock count: select         Use computer to select
sample and then test count   sample randomly, or
to see the existence         based on some selection
                             criteria
                   1. Existence

Send confirmation to     Select sample by
confirm the inventories   computer randomly or
hold by third parties     based on selection criteria
                          Print confirmation by
                          computer
               2. Completeness

Basic inventory auditing   How general purpose
procedure                  computer software
                           package and type of the
                           inventory file data might
                           be helpful
Omission of invoice no:   Audit software can
Scanning & Cut off        detect the gap of invoice
                           no.
               2. Completeness

Trace the inventory to  Request clients for
documents e.g. invoice,  receiving reports
receiving reports and    and compare with
purchase order           inventory report with
                         software
Analytical procedure by Compare the inventory
human calculation        records of this year and
(reasonableness)         past years
                  3. Ownership

Basic inventory auditing   How general purpose
procedure                  computer software package
                           and type of the inventory
                           file data might be helpful
Check company’s policy    Check company’s policy
of recognition criteria    of recognition criteria
Manual records            Computerized records
                 3. Ownership

Check manual records of   Check computerized
consignment sales         records of consignment
                          sales
Goods held for           Goods held for
consignment               consignment
Good shipped out for     Good shipped out for
consignment               consignment
                  3. Ownership

Check manual records of Join computerized
                         records of
  purchase order;
  receiving reports; and     Receiving report; and
  vendor’s invoice           Ordering report


                            Use generated report of
                            unmatched items
                            To check reasonableness
                   3. Ownership

Prepare manual           Print computerized
management                management
representation letter     representation letter
                          Take the letter to client to
                          sign
                    4. Valuation
Basic inventory auditing    How general purpose
procedure                   computer software package
                            and type of the inventory
                            file data might be helpful
 Check physical            Analyze the inventory
   condition of inventories balance into age categories,
   during stock-taking      by identifying the date of
  eg: slow-moving and       last purchase or last sale
      obsolete items        Select the slow-moving
                            items
                            Physical inspection
                   4. Valuation
 Trace unit cost of         Request for vendor’s
inventory to supporting      invoice file(last year)
documents such as vendor’s   Join with inventory file
invoice                      and matched by item no.
                             Extract the ‘amount
                             deviated ’ from the ‘cost per
                             item’ by applying
                             equation(COST1<>COST)
                     4. Valuation
Trace to subsequent sales     Request for sales invoice
invoices and compare the       file(current year)
selling price to the cost      Join with inventory file
Consider appropriate          and matched by item no.
write-down to net realizable   Consider ‘write-down to
value(NRV)                     NRV’ by applying
                               equation(COST>INV_AMT)
 Perform an analytical        Generate reports showing
  review of the overall        the total amount of each
  reasonableness of the        category of inventories with
  inventory valuation          prior year and budget
                  5. Accuracy

Basic inventory auditing    How general purpose
procedure                   computer software
                            package and type of the
                            inventory file data might
                            be helpful
Recalculate to check for    Test the accuracy of
arithmetical accuracy           the client’s
                                computation
                               –   Check the extensions
                                   and footings
                 5. Accuracy

Check the correctness of Request for payment
discount received         record (last year)
                          Join with inventory file
                          and matched by item no.
                          Check ‘incorrect
                          discount’ by applying
                          equation (Discount percent
                          >0 AND Payment
                          period>30)
              6. Unusual items

Basic inventory auditing   How general purpose
procedure                  computer software
                           package and type of the
                           inventory file data might
                           be helpful
Check the transaction     Request for purchase
with zero or negative      return record (last year)
amount                     Join with inventory file
   –eg. Purchase return    and matched by item no.
              6. Unusual items

Check the transaction   Extract purchases
with cents and odd       with cents in the
dollars                  inventory file by
                         applying equation
                         (COST-@int(COST)<>0)
                         Extract purchases
                         with odd dollars in the
                         inventory file by
                         applying equation
                         (COST-
                         @int(COST/10)*10<>0)
               Conclusion
Advantage of CAAT:
• Time saving
• Accurate result is obtain
• Objectivity in random sampling
• Audit work done can easily transfer
  internationally to other branches when
  necessary
                 Conclusion
Limitation of CAAT:
• Program compatibility of document format
• Competence of Auditors

Common concern of traditional and CAAT audit:
• Evaluation of True and Fairness of inventory
  account is base on auditors’ professional judgment