Computer-Assisted Audit Tools (CAATs) —
Effective use of CAATs by Audit Firms
Preface :
Dhruva is a Practice Director — Data Analytics with
M/s. Assurance & Associates. M/s. Assurance & Associates are
Practice leaders in the field of governance, risk management and control
analytics for the last 5 years. In a short span of 5 years this dynamic
firm had managed to establish a footprint in the accounting and finance
segment which was the erstwhile arena for large accounting and audit
majors. This fast-paced growth was fuelled by a small group of ‘razor
sharp’ smart professionals who delivered consistent value propositions to
all their clients by riding on the backbone of contemporary audit
technology.
M/s. Assurance & Associates leveraged audit
technology like general audit softwares, audit administration tools and
enterprise risk management applications to deliver above-the-board,
high-return results to all the clients from retail to manufacturing, to
logistics and healthcare.
Dhruva was solely responsible for overseeing all data
analytic projects, assignments and academic ventures for the
firm.
In a recent meet of mid-rung audit firms, Dhruva was
presenting on the role of ‘The Power of Analytics’ and ‘Analytics made
Simple’. Dhruva spoke firmly, confidently and charismatically about his
association with general audit tools and the outstanding benefits which
accrued to him and the firm over the last 5 years through the power of
analytics. There was a twinkle in his eye as he drew a colorful picture
about his journey with general audit softwares. His oration captivated the
audience and laid the foundations for prolific use of CAATs by all audit
firms in the days to come.
Dhruva presented on general audit softwares and their
lineage with manufacturing entities :
Manufacturing companies have many of the standard
ledgers; purchasing and payroll can be key concerns. However, the main
business area is inventories.
Inventories (stocks) and
work-in-progress :
There is normally a master or balances file that
contains details of inventory holdings at a particular date. Costs may be
held in a separate file. Transaction history can be particularly useful
although file sizes are often quite large. Selling prices normally have to
be picked up from a separate file.
Tests conducted included, but were not limited
to :
Analysis :
-
Age stock by date of receipt
-
Compute the number of month’s stock of each item
held, based on either sales or purchases. Produce a summary of this
information
-
Stratify balances by value bands
-
Statistically analyse usage and ordering to improve
turnover
-
Summarise products by group, location, type, etc.
-
Report of products in order of profitability
-
Reconcile physical counts to computed amounts
Calculations :
-
Total the file, providing sub-totals of the
categories of inventory
-
Re-perform any calculations involved in arriving at
the final stock quantities and values
-
Re-perform material and labour cost calculations on
assembled items
Exception tests :
-
Identify and total stock held in excess of maximum
and minimum stock levels
-
Identify and total obsolete or damaged stock
-
Identify any items with excessive or negligible
selling or cost prices
-
Identify differences arising from physical stock
counts
-
Test for movements with dates or reference numbers
not in the correct period (cut-off)
-
Identify balances which include unusual items
(e.g., adjustments)
-
Identify work in progress which has been open for an
unreasonable period
-
Identify stocks acquired from group companies
-
Isolate products with cost greater than retail
price, with zero quantities or with zero prices
Gaps and duplicates :
-
Test for missing stock ticket numbers
-
Test for missing transaction numbers
-
Identify duplicate stock items
Matching and comparing :
-
Compare files at two dates to identify new or
deleted stock lines or to identify significant fluctuations in cost or
selling price
-
Compare cost and selling price and identify items
where cost exceeds net realisable value
-
Compare value of physical counts to generate ledger
amounts
-
Check work orders for accuracy against original
sales orders
Other typical
areas of tests include :
Cash disbursements :
-
Reconcile intercompany transfers
-
Summarise cash disbursements by account, bank,
group, vendor, etc.
-
Generate vendor cash activity summary for contract
negotiations
Purchase orders :
-
Extract pricing and receipt quantity variations by
vendor and purchase order
-
Track scheduled receipt dates versus actual
receipt dates
-
Identify duplicate purchase orders or receipts
without purchase orders
-
Reduce inventory by comparing projected receipts to
available stock
-
Analyse late shipments for impact on jobs, projects
or sales orders due
-
Reconcile receipts by comparing accrued payable to
received items
Work-in progress :
-
Use net demand analysis against inventory and
purchase orders to generate a quick material requirement planning report
-
Check work orders, by size, priority, for lease to
shop floor
-
Produce shop floor activity report by any item
-
Generate comparison of planned versus actual
labour, materials and time
-
Reconcile job tickets or time cards to work order
line items
Dhruva glorified general audit software
and its power in working analysis with retail entities :
Retailers often have point-of-sale systems which
collect large volumes of useful data which audit tools can analyse. The
main tests on inventories are similar to manufacturing companies with
perhaps more emphasis on movement, margins and
shrinkage.
Additional
tests include :
-
Gross profit analyses
-
Items past their shelf life
-
Comparisons between stores on holdings and inventory
turnover per product line
-
Price adjustment transactions
Other typical areas of tests
include :
Cash disbursements :
-
Monitor cash disbursements for stores
-
Track cash disbursements for contractor and vendor
services
-
Summarise cash disbursements by account, bank,
group, vendor, etc.
Loss prevention :
-
Compare ‘No Sale’ transactions to cash voided
transactions by associate
-
Identify stores with significant allowances
-
Isolate duplicate return transactions
-
Identify incomplete exchange transactions
-
Look for check purchases and refunds within 15 days
-
Find credit card purchases and refunds to different
credit cards (same day)
-
Identify potential fraudulent or improper
transactions through selling price differences between stores
Purchase order management :
-
Reconcile order received to purchase order to
identify shipments not ordered
-
Extract pricing receipt quantity variations by
vendor and purchase order
-
Track scheduled receipt dates versus actual
receipt dates
-
Compare vendor performance by summarising item
delivery and quality
Compare
accrued payable to received items to reconcile to general
ledger
Distribution and Service :
Typical areas of tests include :
Sales analysis :
-
Generate sales/profitability reports by sales
representative, product, customer
-
Recap product sales by region, customer, category,
etc.
-
Identify high volumes by region, customer, category,
etc.
-
Extract all sales data for audit by customer,
product, region, etc.
-
Compare ratios of current sales to open receivable
(high-low; low-high)
-
Summarise shipments by warehouse for product
distribution analysis
Sales order control :
-
Report on correlation between items shipped and
items ordered
-
Analyse open orders and open invoices by customer
for credit control
-
Isolate detail and average backlog by customer,
item, location, etc.
-
Reconcile booked items to inventory reserved (on
hold) items
-
Control profits by calculating line item margins
before shipment
-
Analyse product demand by summarising products
ordered by due date
Service management :
-
Create real-time service tracking reports in any
format to manage fieldwork
-
Co-ordinate multiple service personnel to maximise
performance in real time
-
Quickly recap routes and times of service calls by
employee, area, etc.
-
Compare arrival and service times for field service
representatives
-
Calculate cost of service by call for labour,
materials and transportation
-
Compare service report time to time-sheet hours from
payroll
Dhruva exemplified general audit software and their
relevance to the healthcare segment :
Typical areas of tests
include :
Accounts receivable, Patient billing and
Managed care :
-
Calculate average days from discharge to bill, bill
to payment, by payer or department
-
Determine appropriate level of contractual allowance
and doubtful accounts reserves
-
Age receivables on date of service rather than
invoice date to recalculate cash flow
-
Analyse rejected payments by financial class,
procedure code, cost centre
-
Evaluate managed care payer performance
-
Identify underpaid managed care accounts
-
Determine profit margin by physician, financial
class, etc.
Charges :
-
Identify late charges by department, by month, etc.
-
Look for invalid, high dollar or duplicate charges
on patient bills
-
Look for lost charges by matching supplies used to
supplies billed
-
Check procedure codes and billed charges to identify
inappropriately billed charges
Clinical subsystems :
-
Compare patient visit data on clinical subsystems to
patient master
-
Identify interface failures
-
Identify pricing discrepancies between subsystems
and master
Marketing :
-
Develop patient statistics by post codes or other
demographic data
-
Look for incomplete or miscoded patient demographic
information
-
Identify profitable segments of patient population
Materials management :
-
Analyse usage and ordering to improve inventory
reordering
-
Report on stock and high-value balances using any
selection criteria
-
Identify obsolete inventory by turnover analysis
-
Compare speed and accuracy of delivery by product
and vendor
-
Profile supply usage by month, by department, etc.
Medical claims :
-
Analyse timeliness of claims payments by comparing
claim date, date claim received, and date claim paid
-
Look for duplicate billings and claim payments based
on patient, provider, date of service and amount
Medical records :
-
Identify duplicate medical records for same patient
-
Track diagnosis coding deficiencies, incomplete
records, etc.
-
List incomplete records and incompatible coding
-
Report on procedure codes by physician, department
or patient
Specialists :
-
Determine specialist/doctor contract compliance
-
Evaluate specialist/doctor practice history by
patient type, payer, etc.
-
Report on incomplete specialist/doctor profiling
information
Purchase order management :
-
Report on purchasing performance by location
-
Identify pricing and receipt quantity variations by
vendor and purchase order
-
Identify duplicate purchase orders and receipts
without purchase orders
-
Reconcile receipts by comparing accrued payables to
received items
-
Compare vendor performance by summarising item
delivery and quality
Brilliant ending :
Dhruva received a standing ovation from the group. He
ended his presentation in all humility by citing that General Audit Tools
are time-tested, stable, robust, powerful, internationally acclaimed and
user-friendly applications. He added that no Tool is a ready substitute
for the auditor’s acumen and judgment, but is a powerful, cost-effective
facilitator. He encouraged all the members present to embrace Tools and
reap the benefits of an idea whose time has come.
Article by Deepjee Singhal
Manish Pipalia Chartered Accountants, who are experts in the field of
Internal
Audits
