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SolutionsManual–Chapter5

SolutionstoDiscussionQuestions

Thereareseveralacceptableanswers.Primarily,internalauditorscanaccesscompanydatamorequicklyandeasilythanexternalauditorscan.Sincetheinternalauditfunctionprovidesadditionalcoveragebeyondthefinancialstatementaudit,itcanalsoleveragethisdatatohelpmanagementgainbetterinsightsintotheefficiencyandeffectivenessofoperations.Thatisoutsidethescopeoftheexternalaudit.

Incaseswherefirmsoutsourcetheinternalauditdepartmenttoapublicaccountingfirm,theadvisoryserviceswouldtakeonthisroleandsharetheirdevelopedanalyticswithexternalauditorsduringthefinancialaudit.

Itdepends.Thesoftwarevendor,inthiscaseSAP,needstoprovidesomeformofintegrationortranslationsoftwarefortheothervendor’sproduct(e.g.,JDEdwards).Becausetherearemanycompetingversionsinuseatdifferentfirmsatagiventime,thisintegrationmaynotbeasseamless.Inthatcase,third-partysoftwaretranslatesthevaluesfromthevarioussystemsintoacentralizeddatawarehouse,oranauditorormanagerwouldrunreportsinthedifferentsystemsandreconcilethemmanuallyinaspreadsheet.

Yes,butitdependsonthestrategyofthemultinationalandlocallaws.AcompanywithahomogenousERPsystemapproachwillmakesurethatallthelocalreportingunitsusealocalversionofthesamesystemthatrollsuptothecompany’scentraldatabase.Thisapproachhashigherimplementationcostbutenablessimplerinternalcontrolproceduresandconsistentbusinessprocesses.

AcompanywithaheterogeneousERPsystemapproachwillallowvarioussystemstobeusedindifferentlocations(e.g.,subsidiaries)andthentranslatethedataintoacentralizedledger.Thisapproachislessexpensivetodeploy.However,itrequirescomplexinternalcontrolswiththecorrespondingincreasedcostofreconcilingthevariousdata.

SystemtranslatorsoftwareidentifiescommondatatablesandelementsacrosspopularERPsystemsandconvertsthemtoastandardmodel.Forexample,translatorsoftwaretransformsattributesfromcustomerrecords,salestransactions,andinventoryintostandardattributesandplacesinstandardtables.Oncethedataareinastandardizedform,anauditorormanagercancreateuniformqueriesthatwillpulldatafromthenewdatawarehousebasedonthedatafedintoitbythetranslationsoftware.

Everytimeyourunaquery,itrequiresprocessingpowerandexclusiveaccesstotables.Ifabusinessisrecordingthousandsofsalestransactionsaminute,anyslowdowninthesystemisunacceptableasiscausesadelaywiththecustomer.Thedatawarehousesolvesthisproblembyupdatingperiodicallywhenthesystemsarenotbeingused,andaslowdownwillhaveminimalimpactonthebusinessprocess(e.g.,afterhours).

Whentheauditorqueriesthedatawarehouse,thereisnoimpactonday-to-daybusiness.Thisallowstheauditortocreatemorecomplexqueriesandexpressionsthatrequiresignificantcomputerresourcesandprovidebetteranalysisfortheauditormanagement.

Likely,yes.Themoresystemsinplaceandthemorewaysthatdatacanbestored,themoreopportunitythatexistsforerrors,omissionsofkeydata,orfraud.Tomakesurethatthereconciledledgersareaccurate,theauditorwouldneedtoensurecontrolsareinplaceoverthevariousERPsystems,thetranslationprocess,andthefinalfinancialstatementvalues.Increasedcomplexityincreasescontrolriskandauditrisk.

Publicaccountingfirmsareoftenatthemercyoftheirclients.Securityofcloudserviceshasincreasedinrecentyears,butclientscanberiskadversewithanydatathatisstoredonacloudprovider.Theclients’mainconcernisthatadatabreachwouldexposethemtolegalliabilityand/ordivulgeconfidentialdata.

Publicauditorsworktoexplaintherisktotheirclients,whothendecidetoeitheraccepttheriskofusingapublicorprivatecloudforworkingpapersorlimitingcollectionandtransmissionofdatatolocalmachines.

SolutionstoProblems

Homogenoussystemsallowforgreaterinteractionwithinacompanyandlowercostofinternalcontrolssincesystemsaresetupandusedinthesamefashion.ThechoiceofERPsystemusedbyamergertargetislikelylowonthelistofprioritiesfortheacquiringfirm,havinganestablishedsystemreducestheacquisitioncostoftheacquiringfirmandsimplifiestheintegrationofthenewfirmintothecompany.

AR_Adjustmentsshowmanualchangestoaccountsreceivablebalances.Inpractice,thesearecreditanddebitmemos.Iftheauditordidnotincludetheseadjustmentsintheiranalyses,thencalculationstotestaccountbalancesandperformagingoftheaccountsreceivablewouldbeinaccurateandincomplete.

TheAuditDataStandardsweredevelopedasavoluntarystandardbytheAICPA,theprofessionalaccountingassociationintheUnitedStates.BecausetheAICPAisthegoverningbodyofprofessionalaccountants,theycanworktodevelopsolutionsthatareintheinterestoftheirmembersacrosscompaniesandfirms.ABig4firmorsmallpractitionermayattempttodevelopsimilarstandardsbutwouldlikelybemoreself-interestedinsellingadditionalservices.Sinceauditedcompanieschangeauditorsperiodically,thesestandardsmaynotbeuniversaliftheycamefromanaccountingfirm.

Answerswillvary.Outlierdetectionwouldbeasimpleanalysistodeterminethescopeoftheauditandaspartoftheriskanalysis.Othersubstantivetestsmaydothesamewithqueriesandexpressions.Morecomplexdataanalytics,basedontheoutcomesofpastaudits,maybeusefulinassigninganauditriskscoretoagainidentifyriskandscope.

Alarmsresultingfromcontinuousauditexceptionsmayresultininformationoverloadandultimatelyreducetheeffectivenessoftheauditbecausetheauditorwouldbegintoignorethealarms.Alternatively,ifanautomatedcontrolproducestoofewalarms,theauditorswouldmissabnormalevents.Thesesystemsrelyonruleswithparametersdefinedbytheauditor.Forexample,anauditormayonlywanttransactionsoveraspecificlimit.Ineithercase,theauditorsshouldnotignorethe“TrackOutcomes”stepofthedataanalyticscycle.Theyshouldperiodicallyevaluatetherulesandparameterandadjustthemtoanappropriatelevel.Theauditorscouldalsocontinuetoreceivealarmsbutusedatareductiontechniquestofilterthem,sotheyaddressthehighestpriorityissues.

Answerswillvary.Firmsadoptautomationquicklytosupplantexistingmanu