Solution manual for Core Concepts of Information

Technology Auditing Hunton Bryant Bagranoff

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Solution manual for Core Concepts of Information Technology Auditing Hunton Bryant Bagranoff

IT AUDIT
SOLUTIONS MANUAL
Chapter 8
Discussion Questions

8-1 The disadvantages of using electronic working papers (which include electronic audit

programs and questionnaires) deal primarily with over-reliance and failure to fully

understand the underlying mechanics of the process. Inexperienced auditors may simply

enter information without understanding the full implications of the information. There

is also the danger of entering information in the wrong place, which can lead to incorrect

audit conclusions. Finally, the omission of information in the working papers can also

lead to incorrect audit conclusions.

8-2 Audit expert systems are especially good for structured, routine tasks for which expertise

can be adequately captured and represented in the knowledge base of the system. Some

successful expert system applications include internal control systems, bankruptcy

decisions, and going concern decisions. The expert system must be able to render a

decision such as bankrupt or not, going concern or not, rely on internal controls or not.

Thus, this kind of structured decision is a good candidate for an expert system.

8-3 The liability of an auditor relying on an expert system is an issue in its infancy with

respect to the law. There have been a few cases but the issue is still open. You may wish

to have students read: “An Analysis of Potential Legal Liability Incurred through Audit

Expert Systems,” S. Sutton, R. Young and P. McKenzie, Journal of Intelligent Systems in

Accounting, Finance, and Management, Volume 4, Number 3 (Special Issue on

Accounting), September 1995.

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8-4 A client’s data may be obtained on tape, CD, direct OBDC connection, or disk. Tape is

the least expensive media, but direct OBDC connection is the most efficient, since the

data can be directly imported into the audit software.

8-5 In using test desks, the auditor’s biggest concern is that (s)he must try to cover all

possible exceptions and deviations from the normal output. If a possible deviation is

omitted from testing, this may be the very thing that is in fact problematic. In an

integrated test facility, the auditor must be careful to reverse any test transactions that

have been introduced in the client’s live system. Failure to do so will corrupt the client’s

financial data and resulting statements.

8-6 An input file definition in ACL is the structure that ACL attaches to a file being imported

into ACL. Client data that is imported into ACL must have an input file definition (IFD)

so that ACL can properly identify the data and data types within each field. For example,

is a field numeric or alphanumeric? Is it a data field? The IFD identifies the character of

data in each field being imported into ACL. Once the data are imported into ACL, the

data can be manipulated in many different ways. One can look at various columns and

rows, filtering the data for various criteria of particular interest to the auditor. Each of

these filtered files is called a “view” in ACL. An auditor can establish as many “views”

as (s)he wants. Views are temporary but can be saved if the auditor wishes. A view does

not change the underlying data in the imported file or the IFD.

8-7 The Statistics command can analyze data or numeric data elements within a file. For

example, this command will give you the maximum and minimum values for a selected

field, the number of records with a value of 0 in that field, the number of negative

records, and the average for the field. The Statistics command cannot be run on a

character or alphanumeric field.

8-8 Digital analysis is a technique for detecting anomalies in a dataset. The technique helps

to identify any fields where the first digit of the data in that field is outside the expected
 frequency of occurrence that that particular first digit should appear. For example, in a

large data file of invoice numbers, the number one should appear as a first digit

approximately 30% of the time, while the number nine should appear approximately

4.6% of the time (see Figure 8-17, p. 198). If, for a sufficiently large sample of invoices,

the 15% of them started with the number nine, this would indicate possible fraud within

that file. The auditor would then investigate the reason for the deviation from the

expected frequency for that digit. Digital analysis is based on Benford’s Law, which says

that the first digits of a set of naturally occurring numbers will follow an exponential

distribution. Numbers that occur in a set pattern or sequence will not follow Benford’s

Law. For example, telephone numbers, zip codes, and social security numbers follow a

set pattern, and thus would not follow Benford’s Law.

8-9 A data query model is using an entire set of facts or circumstances to determine if fraud is

present. For example, in examining travel vouchers submitted for payment, one might

examine the entire circumstances of the trip. When did the trip occur? Does the data of

business coincide with the dates submitted for reimbursement. It means looking at more

than just the travel voucher, but going further to see if all of the facts fit to establish the

business nature of the reimbursement being claimed by the employee.

8-10 An embedded audit module is a batch routine inserted into the audit client’s information

system to monitor transactions to determine exceptions as they occur, as opposed to

waiting until the annual audit is conducted. The auditor embeds the audit module, with

the full knowledge and consent of the auditee.

Exercises

8-11

8-11.1 There are 772 records (Analyze, Count).

8-11.2 161 of 772 records have negative amounts (Analyze, Count, If amount<0). The negative

amounts mean credit balances in accounts receivable for that customer/record.

8-11.3 190 of 772 met the test: amount>1000. The total of Amount is: $318,379.09.

8-11.4 The average of total accounts receivable is $607.36 (Analyze, Statistics, Statistics On

Amount). Note that the average of the 609 positive accounts receivable records is

$865.81, while the average of the 161 negative accounts receivable is -$362.71.

8-11.5

The two strata in the middle have the highest amount of receivables.

8-11.6 A rule of thumb to determine if further investigation might be necessary is a z-statistic

larger than one. In the accounts receivable file, there are several first digits that appear

suspect. In particular, the receivables that begin with 2, 5, and 6 bear some further

investigations. The auditor may also look at receivables that begin with 8 or 9 also. An

auditor should view all of these receivables to investigate if fraud is present.

8-11.7 Click on the + next to Input file definition for Ap_trans.

8-11.8 There are 102 transactions in this file (Analyze, Count).

8-11.9 There are 37 vendors represented in the Ap_trans file. (Highlight the Vendor number

column and select Analyze, Classify. This will show the number of records associated

with each vendor.) Note that there are 50 vendors in the Vendor file; however, the

question asks how many vendors are represented in the Ap_trans file.
8-11.10 Yes. There are 101 gaps in invoice numbers. (Highlight the invoice number column,

then select Analyze, Gaps) The auditor would examine this further to determine if this

situation is reasonable or not.

8-11.11 There are no duplicate invoice numbers (Highlight the invoice number column, then

select Analyze, Duplicates).

8-11.12 3 vendors sell inventory items that cost more than $100 (Set filter to Unit_Cost>100.)

The command log looks like this:

11475 8752512 10/21/2000 7,125.80 090584072 41 173

11837 2213337 10/21/2000 3,996.20 090585322 29 137

10134 70075 4/09/2000 467.40 090081001 3 155

8-11.13 The log of the aged A/P file looks like this:

@ AGE ON Invoice_Date CUTOFF 20001231 INTERVAL 0,30,60,90,120,10000 TO SCREEN

<<< Graphable Data >>>
Page ... 1 06/01/2003 15:40:01
Produced with ACL by: ACL for Windows Workbook
<<< AGE over 0-> 10,000 >>>
>>> Minimum encountered was 21
>>> Maximum encountered was 355

Invoice_Date COUNT <-- %

0 -> 29 4 3.92%
30 -> 59 22 21.57%
60 -> 89 19 18.63%
90 -> 119 20 19.61%
120 -> 10,000 37 36.27%

102 100.00%

Clicking on “Graphable Data” yield the following graph:

 This yields a very high amount of old accounts payable. In fact, more than half

of the accounts payable are 90 days or older. The auditor would be very concerned as to

why this company is apparently not paying its bills on time and would investigate

accordingly.

8-11.14 You must open the “Vendor” file to obtain the street addresses of the company’s vendors.

No vendors have P.O. Boxes for addresses. This is important because a P. O. Box is

sometimes (but of course not always) indicative of a suspect address. You can visually

scan the address file, or in a bigger file, you would use the “Sounds Like” expression to

make this determination.

8-11.15 Highlight the Invoice Amount column and choose Analyze, Benford. The command log

looks like this:

@ BENFORD ON Invoice_Amount LEADING 1 TO SCREEN

<<< Graphable Data >>>

Page ... 1 06/01/2003 15:53:02

Produced with ACL by: ACL for Windows Workbook

Leading Actual Expected Zstat

Digits Count Count Ratio

1 29 31 0.260
2 18 18 0.010
3 9 13 0.971
4 12 10 0.541
5 12 8 1.255
6 6 7 0.130
7 8 6 0.671
8 4 5 0.322
9 4 5 0.079

Clicking on “Graphable Data” yields the following graph:

The digit “5” is the only one that appears to be slightly above normal in terms of how many times

you would expect it to appear as the first digit. The auditor may do some investigation here, but

would likely not be overly concerned with this results, as they appear fairly in line with

expectation.

8-12 Open the “Inventory” file.

8-12.1 152 inventory items are maintained by this company. (Analyze, Count)

8-12.2 There are 37 inventory items sold at Location 3. There are two ways to determine this.

One way is to select Analyze, Count and under “If” type: Location=’03’

A second (similar) way is to set the filter to: Location=’03’ and then select Analyze,

Count. Either way accomplishes the same end result.

8-12.3 Highlight the Unit Cost column, then select Analyze, Statistics. The average cost of an

inventory item is $17.73. The most expensive and least expensive inventory items are
381.20 and –6.87 (which, of course, bears looking into). The command log looks like

this:
@ STATISTICS ON UnCst TO SCREEN NUMBER 5
Field : UnCst
Number Total Average
Positive : 149 2,642.35 17.73
Zeros : 0
Negative : 3 -16.88 -5.63
Totals : 152 2,625.47 17.27
Abs Value: 2,659.23
Range : 388.07
Highest : 381.20 173.80 155.80 137.80 87.40
Lowest : -6.87 -6.80 -3.21 0.01 0.03

8-12.4 The profit on item #034255003 is $6.58. Set the filter to:

ProdNo='034255003'

Use the expression builder to calculate the profit (SalePr-UnCst). If you wanted, you could create

a new column for the profit by right clicking and choosing “add column,” enter the expression for

the contents and change the title to “Profit.”

8-12.5 There are 4 inventory items that have a product status of “U.” (Set filter to U:

ProdStat='U')

8-12.6 Yes, there are 3 items for which the sales prices are less than the unit cost. (Set filter to:

SalePr-UnCst<0) As an auditor, I would investigate why there are three items for which

we apparently intend to lose money on.

8-12.7 Yes, there are 6 items for which we should have an order placed but we won’t. (Set filter

to: QtyOH<MinQty AND QtyOO=0). This might indicate a problem in our ordering

system if the system is automated, and even if the system is a manual reordering system.

Obviously these items should be on order. The auditor would investigate why they are

not on order.
8-12.8 The total market value of the inventory is $ 1,029,061.61. (Highlight the Market Value

column and click the sum key).

8-13 Open the Empmast file. (Click the default view for this file.)

8-13.1 There are 42 employee records. (Analyze, Count)

8-13.2 There are 23 male employees (Analyze, Count, If Sex=’M’) and 19 female employees

(Analyze, Count, If Sex=’F’). Note that the characters within the single quotes are case

sensitive. Thus, If Sex=’m’ will return 0 records that match.

8-13.3 Thirty employees have college degrees (Set filter to: EdLevel>=16).

8-13.4 The average salary is $27,441 (Highlight the Salary column and then select Analyze,

Statistics); the max salary is $52,750; the min salary is $15,340. The command log looks

like this:

@ STATISTICS ON Salary TO SCREEN NUMBER 5

Field : Salary
Number Total Average
Positive : 42 1,152,525.00 27,441.07
Zeros : 0
Negative : 0 0.00 0.00
Totals : 42 1,152,525.00 27,441.07
Abs Value: 1,152,525.00
Range : 37,410.00

Highest : 52,750.00 46,500.00 46,500.00 41,250.00 40,175.00

Lowest : 15,340.00 15,900.00 15,900.00 17,250.00 17,750.00

8-13.5 There don’t appear to be any employees who are “grossly” over- or underpaid, though

this is a matter of judgment. Highlighting the Salary field and selecting Analyze,

Statistics, will yield the following command log:

STRATIFY ON Salary ACCUMULATE Salary INTERVALS 10 TO SCREEN

<<< Graphable Data >>>

Page ... 1 06/01/2003 17:43:20

Produced with ACL by: ACL for Windows Workbook
<<< STRATIFY over 15,340.00-> 52,750.00 >>>
 >>> Minimum encountered was 15,340.00
>>> Maximum encountered was 52,750.00

Salary COUNT <-- % % --> Salary

15,340.00 -> 19,080.99 6 14.29% 8.71% 100,410.00

19,081.00 -> 22,821.99 6 14.29% 10.88% 125,350.00
22,822.00 -> 26,562.99 11 26.19% 23.90% 275,510.00
26,563.00 -> 30,303.99 11 26.19% 27.54% 317,410.00
30,304.00 -> 34,044.99 1 2.38% 2.80% 32,250.00
34,045.00 -> 37,785.99 1 2.38% 3.14% 36,170.00
37,786.00 -> 41,526.99 3 7.14% 10.38% 119,675.00
41,527.00 -> 45,267.99 0 0.00% 0.00% 0.00
45,268.00 -> 49,008.99 2 4.76% 8.07% 93,000.00
49,009.00 -> 52,750.00 1 2.38% 4.58% 52,750.00

42 100.00% 100.00% 1,152,525.00

Clicking on Graphable Data yield the following graph:

From an analysis of this data, six people make in the lowest strata (between 15,340.00 ->

19,080.99), while one individual earns in the top strata (49,009.00 -> 52,750.00). If the auditor

wishes, (s)he can verify the salary of this individual by checking with the paymaster

8-13.6 Bonuses are between $300 and $1000 (Analyze, Statistics). Stratifying the bonus column

will yield a distribution of the bonuses as follows:

Produced with ACL by: ACL for Windows Workbook

<<< STRATIFY over 300.00-> 1,000.00 >>>
 >>> Minimum encountered was 300.00
>>> Maximum encountered was 1,000.00

Bonus COUNT <-- % % --> Bonus

300.00 -> 369.99 4 9.52% 5.19% 1,200.00
370.00 -> 439.99 7 16.67% 12.12% 2,800.00
440.00 -> 509.99 13 30.95% 28.14% 6,500.00
510.00 -> 579.99 0 0.00% 0.00% 0.00
580.00 -> 649.99 11 26.19% 28.57% 6,600.00
650.00 -> 719.99 1 2.38% 3.03% 700.00
720.00 -> 789.99 0 0.00% 0.00% 0.00
790.00 -> 859.99 3 7.14% 10.39% 2,400.00
860.00 -> 929.99 1 2.38% 3.90% 900.00
930.00 -> 1,000.00 2 4.76% 8.66% 2,000.00

42 100.00% 100.00% 23,100.00

8-13.7 There are no employees that have the same address. (Analyze, Duplicates, to Screen). If

there were, the auditor would investigate these are possible nepotism.

8-13.8 There don’t appear to be any related employees. This was partly tested by the previous

question and the duplicate address test. You can further test this by testing for duplicates

on last name, which will show no employees with the last name.

8-14 Open the “Payroll” file.

8-14.1 There are no duplicate check numbers. (Highlight “Cheque Number” field, Analyze,

Duplicates)

8-14.2 There is one gap. (Highlight “Cheque Number” field, Analyze, Gaps) The command log

shows the following gap:

@ GAPS ON Cheque_No ERRORLIMIT 10 TO SCREEN PRESORT

Presorting data

Page ... 1 06/01/2003 18:05:15

Produced with ACL by: ACL for Windows Workbook
*** Gap detected between 12388 and 12393
0 data sequence errors detected
1 gaps and/or duplicates detected

8-14.3 Yes, gross pay less taxes equals net pay in all cases. You can verify this by calculating
and inserting a new field, Calculated_tax, which will be equal to Gross_Pay - Net_Pay. (Right
Solution manual for Core Concepts of Information Technology Auditing Hunton Bryant Bagranoff

click where you want the new column to appear, add new column, then use the expression builder
to create the expression.). Then, in the filter box, enter “Gross_Pay - Net_Pay<>Tax_amount.”
This expression will yield no matching records, which means that the two fields are equal.

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