Audit

• Audits are performed to ascertain the validity and reliability of information, also to provide an assessment of a system’s internal control. The goal of an audit is to express an opinion of the person or organization or system etc., in question, under evaluation based on work done on a test basis The general definition of an audit is a evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project mgt, quality mgt, and energy conservation. 1-27

Historical Background of Audit • The role of auditor goes back many 100 of years. • These are records from ancient Egypt and Rome, showing that people were employed to review work done by taxes collector and estate managers. • The emphasis was very much on the detection of fraud and other irregularities. • Emphasis has changed and the role of the auditor becomes much more sophisticated. 1-28

Basic Types of Audit • Audit can be categorised into two types: • Financial audit: Which address questions of accounting, recording, and reporting of financial transactions. Reviewing the adequacy of internal controls also falls within the scope of financial audits • Non-financial audit: It is non statutory one and serves two purposes: • It checks company’s compliance to standards; • It determines whether a product or service satisfy the customer’s demands in terms of quality and features. 1-29

Categories of Audit • Statutory audit: • A legally required review of the accuracy of a company’s or gvt’s financial records. The purpose of statutory audit to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions • For example, a state law may require all municipalities to submit to an annual statutory audit examining all accounts and financial transactions and to make the results of the audit available to the public. The purpose of such an audit is to hold the gvt accountable for how it is spending taxpayers’ money. • Private audit: • When the audit is not a statutory requirement, but is conducted at the desire of owners, such an audit is private audit. The audit is conducted primarily for their own interest. At times the private audit may become a requirement under tax laws, if the turnover exceeds a specified limit. • Private audit is following types: audit of sole proprietorship, partnership firms, individuals accounts, and audit institutions not covered by statutory audit. 1-30

Categories of Audit • Internal audit: • The examination, monitoring and analysis of activities related to a company’s operation, including its business structure, employee behavior and information systems. • Internal audit found to play the following roles: Check whether existing controls are effective and adequate; Whether financial and other reports show the actual results of the company; and Whether sub-units are following the policies and procedures laid down by the company. • Management audit: • Analysis and assessment of competencies and capabilities of a company’s mgt in order to evaluate their effectiveness, especially with regard to the strategic objectives and policies of the b’ness. Objective of a mgt audit is not to appraise individual executive performance, but to evaluate the mgt team in relation to their competition. 1-31

Categories of Audit • Information System Audit: • Address the internal control environment of automated information processing systems and how these systems are used. IS audits typically evaluate system input, output and processing controls, backup and recovery plans, and system security, as well as computer facility reviews. IA;s scope of work is comprehensive and considers all aspects of the organization – both financial and non-financial with an emphasis on constructive improvement. 1-32

Audit Process Staffing the audit team Creating an audit project plan Laying the groundwork for audit Analysing audit results Sharing audit results Writing audit results Dealing with resistance to audit recommendations Building an ongoing audit programs 1-33

Advantages of Audit To Companies directors: Assurance that statutory responsibilities concerning accounts have been carried out. Availability of expert advise. The letter of weakness To shareholder: Assurance that accounts show a true and fair view and comply with statutory requirements. Other organization with publish accounts Assurance that accounts are reliable • In addition they provide reliable accounts to regulatory bodies such as the companies registry, the stock exchange etc. 1-34

Objectives of Auditing Primary objective: • To produce a report by the auditor of this opinion of the truth and fairness of financial statements so that any person reading and using them can belief in them Secondary objective: • Todetecterrorandfraud • To prevent errors and fraud by the deterrent and moral effects of audit Other objectives of audit: • Completeness, Ownership, Accuracy, Valuation, Classification and Disclosure 1-35

Limitation of Audit • An audit can neither help in prioritizing changes nor in allocating resources Audit cannot mobilize people to take actions, though audit identifies various problems that existing in the organizational system and process Audit cannot generate better data than the measures used to gather those data 1-36

Audit Evidence • Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers In the audit engagement acceptance or reappointment stage, audit evidence is the information that the auditor is to consider for the appointment. • For examples, change in the entity control environment, inherent risk and nature of the entity business and scope of audit work. In the audit planning stage, audit evidence is the information that the auditor is to consider for the most effective and efficient audit approach. • For examples, reliability of internal control procedures, and analytical review systems. 1-37

Audit Evidence • In the control testing stage, audit evidence is the information that the auditors is to consider for the mix of audit test of control and audit substantive tests. In the substantive testing stage, audit evidence is the information that the auditor is to make sure the appropriation of financial statement assertions. • For examples, existence, rights and obligations, occurrence, completeness, valuation, measurement, presentation and disclosure of a particular transaction or account balance. In the conclusion and opinion formulation stage, audit evidence is information that the auditor is to consider whether the FSs as a whole presents with completeness, validity, accuracy and consistency with the auditor’s understanding of the entity. 1-38

What is IT Audit An IT audit or IS audit, is an examination of the mgt controls within an IT infrastructure. The evaluation of obtained evidence determines if the ISs are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization’s goals or objectives These reviews may be performed in conjunction with a FS audit, internal audit, or other form of attestation engagement. IT audits are also known as automated data processing (ADP) audits and computer audits. They were formerly called electronic data processing (EDP) audit 1-39

Purpose of IT Audit • An IT audit is different from a FS audit. • While a financial audit’s purpose is to evaluate whether an organization is adhering to standard accounting practices, the purposes of an IT audit are to evaluate the system’s internal control design and effectiveness. This includes, but is not limited to efficiency and security protocols, development processes, and IT governance or oversight One of the most important role of the IT audit is to audit over the critical system in order to support the financial audit or to support the specific regulations announced e.g. Sarbanes-Oxley Act (SOX). 1-40

Purpose of IT Audit Integrated IT audit compliance Quality assurance Business continuity Disaster recovery IT governance, fraud, risk, and forensics resources for IT auditors, compliance, information security and forensics professionals. 1-41

Role of IT Audit The IT audit aims to evaluate the following: Will the organization's computer systems be available for the business at all times when required? (know as availability) Will the information in the systems be disclosed only to authorized users? (know as security and confidentiality) Will the information provided by the system always be accurate, reliable, and timely? (measures the integrity) In this way, the audit hopes to assess the risk to the company’s valuable asset (its information) and establish methods of minimizing those risks. 1-42

IT Audit Process The audit process is generally a ten-step procedure: Notification and request for preliminary information Planning Opening meeting Field work Communication Draft report Management responses Closing meeting Report distribution Follow-up 1-43

Types of IT Audit Technological innovation process audit: This audit constructs a risk profile for existing and new projects. • The audit will assess the length and depth of the company’s experience in its chosen technologies, as well as its presence in relevant markets, the organization of each project, and the structure of the portion of the industry that deals with this project or product, organization and industry structure 1-44

Types of IT Audit Innovative comparison audit: This audit is an analysis of the innovative abilities of the company being audited, in comparison to its competitors. This requires examination of company’s research and development facilities, as well as its track record in actually producing new products Technological position audit: This audit reviews the technologies that the business currently has and that it needs to add. Technologies are characterized as being either base, key, pacing or emerging. 1-45

Functions is to Checked Systems and application: • An audit to verify that systems and applications are appropriate, efficient, and adequately controlled to ensure valid, reliable, timely, and secure input, processing, and output at all levels of a system’s activity Information processing facilities: • An audit to verify that the processing facility is controlled to ensure timely, accurate, and efficient processing of applications under normal and potentially disruptive conditions. Systems development: • An audit to verify that the systems under development meet the objectives of the organization, and to ensure that the systems are developed in accordance with generally accepted standards for systems development 1-46

Functions is to Checked • Management of IT and enterprise architecture: • An audit to verify that IT management has developed an organizational structure and procedures to ensure a controlled and efficient environment for information processing • Client/server, telecommunications, intranets, and extranets: • An audit to verify that telecommunications controls are in place on client (computer receiving services), server, and on the network connecting the clients and servers 1-47

Deep Dive IT Audit The deep dive audit involves detailed study of the IT infrastructure deployed – hardware, software, connectivity, power, security, MIS, and usability by end users. Other areas of study include identifying process coverage, data integrity, productivity improvements, reporting frequency and adequacy, training adequacy, and system availability The focal points of the IT audit are: Business functionality Ease of use • Security 1-48

Deep Dive IT Audit • The capstone of technology audit is the audit findings report which includes gap analysis, recommendations pertaining to technology upgrade/downgrade, training requirements and plan of action • Technology audit recommendation sets the direction for organizations to optimize return on investment of IT 1-49

IT Audit Role • Advising the audit committee and senior management on IT internal control issues • Performing IT risks assessments • Performing: Institutional risk area audits General control audits Application controls audits Technical IT controls audits Internal controls advisors during systems development and analysis activities. 1-50

The Changing Role of the IT Auditor IT audit plays a major role in development of IT governance framework Moving away from policing role into a specialist role in the areas of risks and control Adding value at strategic and operational levels through the provision of business risk-focused advice and assurance Legislation is having a profound impact on IT auditing The continuously changing technology environment brings new risks (i.e. cyber security, wireless) 1-51

Emerging and Prevalent IT Audit Issues Inadequate or lack of management oversight Poor segregation of duties Inadequate or lack of supporting documentation No business continuity/disaster recover plan Change management Data security Data loss incidents There are also new audits being imposed by various standards boards which are required to be performed, depending upon the audited organization, which will affect IT and ensure that IT departments are performing certain functions and controls appropriately to be considered compliant..