e - Audit

Dr.R.MOHANRAJ
M.Com., M.Phil., Ph.D., SET
Vivekananda College
Tiruvedakam West
Tamil Nadu
Acharya

E-AUDIT
Auditing in Electronic Data Processing

The word audit is derived from Latin word
audire which means ‘to hear’.
Auditing is a critical examination of the
records and books of account of a business by an
independent qualified person for ascertaining the
authenticity and the accuracy of entries appearing
in the books of account and financial statement.

Definition - Auditing
Spicer and Pegler have defined audit as “ such an
examination of the books , accounts and vouchers of a
business as will enable the auditor to satisfy himself that
the Balance Sheet is properly drawn up, so as to give a
true and fair view of the state of affairs of the business
and whether the profit and loss account gives a true and
fair view of the profit or loss for the financial period ,
according to the best of his information and explanation
given to him and is shown by the books and if not in what
respect he is not satisfied.”

Objectives of Auditing
 The objective of an audit may be classified as
(1) Primary Objective
(2) Subsidiary Objective
(3) Specific Objective

(1) Primary Objective
To ensure that the primary objective of audit is achieved, an
auditor must:
(a) Examine the Internal Control and Internal Check.
(b) Verify whether all the books of accounts as required by law are kept.
(c) Verify whether proper accounting principles and procedures are
followed.
(d) Check the arithmetical accuracy of the books of accounts.
(e) Verify the authenticity and validity of the transactions.
(f) Confirm the existence and the values of the assets and liabilities by
physical verification.
(g) Find out whether the financial statement is properly drawn up.
(h) Report whether the profit and loss gives a true and fair view of the
profit or loss for the year and Balance sheet gives a true and f

2. Subsidiary or Ancillary objectives: -
Subsidiary objectives of auditing are
(1) Detection and prevention of errors. ( Errors of
Omission, Commission, Compensating and Duplication)
(2) Detection and prevention of frauds.
(Misappropriation of Cash, Goods and Accounts)

3. Specific objectives
There will be specific objective in respect of each type
of specific audits. For example, in operational audit, the aim of
audit is to evaluate the existing operations of the entity in order
to give expert advice to improve their efficiency.
The cost audit is to check the cost records of the entity
in order to make a report on the proper ascertainment of cost of
production of goods or services. Depending upon the nature of
specific audit, there may be different objective in respect of
each specific audit.

Qualification and Qualities of an Auditor
To be an efficient auditor, an auditor must possess certain
professional qualifications and professional and personal qualities.
Professional qualification: - An auditor is a professional
accountant. So he must possess certain professional qualifications.
Under the Companies Act, an auditor of a joint stock Company must be
a Chartered accountant within the meaning of the Chartered
Accountants Act of 1949. To be a Chartered accountant, he must pass
the C.A examination conducted by the Institute of Chartered
Accountants of India.
He must also obtain a certificate from the institute from the
Institute of Chartered Accountants of India to take up public practice
of accountancy.

Professional Qualities: - To perform his work efficiently, an
auditor must possess certain professional qualities. They are :
1. Knowledge of principles and practice of general accounting.
2. Knowledge of Cost accounting
3. Knowledge of Management accounting
4. Thorough knowledge of techniques of auditing
5. Knowledge of provisions relating to income tax , wealth tax,
GST etc.
6. Knowledge of business laws.
7. Knowledge of economics.
8. Knowledge of Mathematics and Statistics
9. Knowledge of Business Management and Organization and
financial administration
10. Knowledge of report writing.
11. Knowledge of the accounts of the business under audit.
12. Attitude, Skills and Knowledge, of technical details of the
business under audit.

Introduction
Technology has continued to advance and businesses have become
more sophisticated. Many business processes which were done manually are
now automated and processed using computers. Accounting has not been left
behind as many organizations now process their accounting information
electronically, consequently auditing in such organizations has to be done
electronically. Hence, this hour identifies to what extent the electronic audit
contributes to achieve the competitive advantage of audit’s office and the
strategy of audit.
Auditors must audit through and with the computer instead of merely
auditing around the computer. The objectives of the auditor in an EDP audit
remains the same as in a manual audit but there is a need for specialization as
the auditor's ability to audit in an electronic data processing environment is a
function of his technical-know-how.

Electronic data processing audits, also called “e-audits”,
EDP audit is the process of auditing in a computerised
environment. The prime objective of EDP audit is to
determine whether computer systems…….
(1) Safeguard assets
(2) Maintain data integrity
(3) Achieve organizational goals effectively
(4) Consume resources efficiently
Objective of EDP

The overall objective and scope of an audit does not change in an
EDP environment. However, the use of a computer changes the
processing and storage of financial information and may effect the
organization and procedures employed by the entity to achieve
adequate internal control. The EDP environment affects all aspects of
Audit including:
(a) The consideration of inherent audit risks and control risks
(b) The procedures followed by auditor to obtain a sufficient
understanding of the internal control
(c) The design and performance of audit procedures by the auditor
Objective of EDP…

Skills and Competence of an Auditor
The auditor should have an understanding of
computer hardware, software and processing system
sufficient to plan the engagement and to understand how
EDP affects the study and evaluation of internal control
and application of auditing procedures including CAAT.
Specialised skills and competence may be required to:

Planning
The auditor should gather the information about the EDP
environment that is relevant to an audit plan. He should obtain the information
in respect of the following:
(a) The computer hardware and software used by the organisation.
(b) The significance and complexity of computer processing in each significant
accounting application.
(c) Planning how, where and when an EDP function will be reviewed including
scheduling the works of EDP experts, as applicable.
(d) Planning auditing procedures using CAAT.
(e) Determining the degree of reliance to place on the EDP controls in his
overall evaluation of internal control. (f) The way in which EDP function is
organised and the extent of concentration or distribution of computer
processing throughout the entity.
(g) The availability of data, source documents, computer files and other
evidences.

Audit evidence
An EDP environment may affect the application of compliance and
substantive procedures in several ways.
The use of CAAT may be required because of the following:
(a) The absence of input documents.
(b) Generation of accounting transactions by computer programs
automatically.
(c) The lack of visible audit trail.
(d) The lack of visible output.
The effectiveness and efficiency of auditing procedures may be
improved through the use of CAAT in obtaining and evaluating audit
evidence e.g. in applying analytical review procedures, transactions or
balance details may be reviewed and reports printed of unusual items
more efficiently by using the computer than by manual methods.

Computerized information system environment or
electronic data processing environment means an
environment where computers are extensively used in
an enterprise for the processing of significant financial
information.
In other words, data processing done with the
help of electronic computers is popularly known as
electronic data processing or computerized information
system (CIS) environment.
AUDITING IN ELECTRONIC DATA PROCESSING ENVIRONMENT (EDP)

USES OR BENEFIT OF COMPUTERIZED AUDIT
1) Speed : the work of recording of transactions , preparation of books ,
accounts can be done with greater speed.
2) Greater accuracy : the chances of arithmetical errors and human errors
are reduced to minimum.
3) Greater economy: under the mechanized accounting system, work can be
done with minimum staff, with minimum cost.
4) Better records: records prepared by machines are neat and clean. It is
more legible, systematic and uniform.
5) Greater information : various types of information and statistical data
regarding the operation of the business can be easily collected.

USES OR BENEFIT OF COMPUTERIZED AUDIT
6) Interim accounts : interim accounts can be prepared without delay. This
will help the management to declare interim dividend.
7) Analysis of data : once the basic information is feed into the computers, it
can be sorted in many different ways to provide analysis of statement .
8) Avoid overtime : the work of accounts are done quickly , the accounts can
be prepared without any loss of time.
9) Reduction in audit fee: the work load of audit works is reduced by the
computers. Hence the computerized audit reduces audit cost.
10) Computerized audit reduces the monotony of audit work:
11) Computersised audit enhances the reliability of audit
12) Computersied audit ensures flexibility in the audit programme.
13) Computersied audit is helpful for the smooth functioning of auditing.

PROBLEMS OR DISADVANTAGES
1) It is not suitable for small business forms.
2) Difficulties to detect the errors and frauds.
3) Absence of supporting vouchers.
4) Storage problem
5) Computer frauds and computer virus.
6) Easy to make alterations
7) It creates unemployment.
8) Absence of input documents.
9) Lack of visible output
10) Coding problem.

AUDIT APPROACHES IN AN EDP ENVIRONMENT
There are three approaches to auditing in an EDP
environment . They are
1) Auditing around the computer
2) Auditing with the computer
3) Auditing through the computer

AUDITING AROUND THE COMPUTER
Auditing around the computer is an audit approach
under which an auditor carries out the audit in the same
way as in a traditional or Manual system except that,
instead of examining hand written books, he examines
computer printouts.

Auditing around the computer.
Under this approach the computer is treated as a
Black Box and only input and output documents are
reviewed. The controls and procedures used in processing
the data are not considered important and the auditor
ignores the programs that causes the transformation of
the input data into output data. Instead, the auditor
selects and test inputs against appropriate outputs and
vice versa.

AUDITING AROUND THE COMPUTER
If they matched and proved to be accurate and
valid, then it is assumed that the system of control is
operating properly.

Advantages.
i. Simple and straight forward approach which can be
easily understood by anyone.
ii. Extensive knowledge of the computer and data
processing is not required for the auditor
iii. Cost of audit resources is generally low.

Disadvantages.
i. Ignores the system of controls and hence fails to
recognize potential errors or weakness with the
system
ii. Represents the after-fact rather than preventive
auditing
iii. Amounts of auditing in nature of post mortem
rather than preventive auditing.
iv. The auditor fails to utilize the full potential of the
computer to assist him.
v. Increasing of printing expenses because of enormous
print-out requirements (lot of data) of the auditor.

Auditing through the computer
Auditing through the computer means making use of
computer in auditing. Under this approach the auditor
evaluates the internal control relating to EDP and on the
basis of evaluation , he determines the nature , timing ,
and extent of his sustentative procedures.

Auditing through the computer.
In this approach computer is treated as a white
box. Auditing through the computer implies that the
auditor makes use of the computer in carrying out his
audit. Under this approach, auditor can test the
processing and control systems.
This technique requires two basic tasks:
• The review and verification of source documents and
• The actual testing of the computer program logic and
program controls.

Advantages.
Utilizes the computer as a tool for performing auditing
functions.
ii. Forces the auditor to get more involved in the system,
there by increasing his ability to perform more complex
audit.
iii. Test results are readily identifiable and can be used
as measures of internal processing reliability
iv. Increases service to clients because controls and
operations are checked by the auditor
v. Provide effective test processing logic and program
controls.

Disadvantages.
i. Requires more computer time.
ii. It is very expensive.
iii. It requires extensive knowledge of computer and data
processing by the auditor.

Auditing with computers: -
under this approach, the auditor does the audit
work with the help of computers that is general software.
Under this approach, audit work is carried on in an
traditional manner, but the computer software is used for
certain operations.

INTERNAL CONTROL UNDER AN EDP ENVIRONMENT
For the control of various problems connected with the
installation and operation of computers in accounting and auditing,
there should exist an adequate and satisfactory internal control
system in the undertaking . The internal control system should be
reliable , effective, and should provide timely , authorized and
required data from the system.
The various internal controls required to be enforced under an EDP
environment may be broadly classified into two categories.
They are,
1) General EDP controls
2) EDP application controls.

Computer assisted Audit Techniques (CAATs)
CAATs are any automated audit techniques and
they are important tools for the auditor in performing
audits in computer environment. There are two main
types:
1.Audit software
2.Test packs

1.Audit software.
This consist of a set of instructions or programs that
an audit uses to extract and examine client’s file.
There are two categories
• Generalized programs (by manufacturer)
• Specialized/Purpose-written programs (by auditor or
outside programmer)

2.Test packs.
They consist of test data which is processed in
the same manner as actual data.
The auditor in this case prepares a test data and
submits it for processing by the client computer
program. The data include both valid and invalid
transactions. They are designed to represent realistic
operating
conditions.

The main aim of test packs is to test whether the
clients system will be able to detect errors, or invalid
transactions included. The resulting of computer
processing are compared with predetermined results.
It is very important to ensure that the program
being tested is the one which the client is using and has
been in use throughout the
year.

Uses of CAATs.
1.In Substantive testing. Test of details of transactions
and balances
2.Analytical review procedures to identify unusual
fluctuations or items
3.Compliance test of Electronic data processing-e.g the
use of test data to test the functioning of a programme.

Considerations in the use of CAATs.
1.Computer knowledge, expertise and experience of the
auditor.
2.Availability of CAATs and suitable computer
facilities.
3.Timing
4.Impracticability of manual tests.

Recent trend in auditing or current issues:
There are several current issues in auditing.
Some of the important current issues or recent
trends in auditing are:
1. Audit committees
2. Social audit
3. Inflation audit
4. Human resource accounting and auditing
5. Energy audit
6. Reporting on financial sickness
7. Financial forecast and their audit.

Conclusion.
Considering the complexity of today’s businesses, there is
a need for the auditor who is an accountant to specialize in more
specific areas such that Electronic Data Processing Audit becomes
a special field and the auditor becomes an expert in this field. The
auditor hence not only qualifies as a professional accountant but
also as a computer expert. If the auditor is a computer expert, it
would become much easier to unravel fraudulent acts by computer
operators in an EDP environment as the auditor would be able to
reach areas previously limited by his technical knowledge.
In extreme cases where the auditor faces limitation due to
his technical knowledge, it is important that a computer expert be
engaged alongside the auditor as the use of this expert would be
essential for the auditor to form an opinion.

e - Audit

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