Boughton, Charles M.

Hooks, Karen L.

English

eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 49 Issue 1 Article 8 1-1987 Theory and Practice: Combining the Efforts of Internal and Independent Auditors: Using EDP to Maximize Audit Resources Karen L. Hooks Charles M. Boughton Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Hooks, Karen L. and Boughton, Charles M. (1987) "Theory and Practice: Combining the Efforts of Internal and Independent Auditors: Using EDP to Maximize Audit Resources," Woman C.P.A.: Vol. 49 : Iss. 1 , Article 8. Available at: https://egrove.olemiss.edu/wcpa/vol49/iss1/8 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Theory and PracticeCombining the Efforts of Internal and Independent Auditors Using EDP to Maximize Audit ResourcesEditor: Karen L. HooksThe Canadian Institute of Chartered Accountants Toronto, Canada M5S 2Y2By Charles M. BoughtonIncreasing pressure to expand the scope of annual audit coverage and yet include overall audit fees makes the issue of cooperative auditing of timely importance. This article at­tempts to review this issue and to examine an area of cooperation be­tween internal and independent auditors that has yet to be explored: joint utilization of client computer resources.A Review of the IssuesWard and Robertson [1980] and Clark [1981a and 1981b] discussed what elements must be present in an internal audit department in order for CPA firms to rely on this depart­ment’s work and remain in compli­ance with SAS No. 8. In a 1984 arti­cle in Harvard Business Review, Wal­lace points out the cost savings a client can enjoy from cooperative audit efforts.In recent years, attention has be­come focused on the cost and cov­erage of annual audits. Company management is greatly concerned about adequate audit coverage and cost containment. Wallace [1984] indicates that the internal billing rate for internal auditors was approx­imately $18compared with $25, $35, or more for the independent audi­tor’s junior staff. The comparison is justifiable given that the junior staff does the work on the audit — sampling, compilations, file footing, and workpaper preparation — that the internal auditors could supply. 26/The Woman CPA, January, 1987Wallace suggests that there are five areas in which the internal audit department can assist their external counterparts. These include organi­zational support, review assistance, technical assistance, footnote prep­aration, and general assistance.Bridges [1986] adds three more ideas to the areas in which internal and independent auditors could serve complementary functions. Those areas indicated by Bridges for potential cooperation are benefit plans, inventory, and acquisitions.Internal Audit InvolvementTo some extent, internal auditing has undergone recent changes as a result of the Foreign Corrupt Practi­ces Act. These changes, along with an increased emphasis on profes­sional certification, professional development, and advances in the techniques of operational auditing, have lent credibility to the internal audit function.The Certified Internal Auditors (CIA) program has caused many companies to recruit internal audi­tors directly from college into entry level staff positions. For the junior­level internal auditors, as well as for internal auditors recruited from with­in the company, participation in the annual audit broadens their view of the organization as a whole; it also exposes them to the financial audit­ing techniques that contrast with the operational auditing emphasis of many internal audit departments. This exposure should serve to both “round-out” the junior or new audi­tor and broaden his or her perspec­tive of the organization’s overall operations.As a word of caution, many inter­nal auditors may feel that the work transferred to them by the indepen­dent auditor — file footing, work­paper preparation and photocopy­ing documents — is “busy work” or work customarily performed by the independent auditor’s junior staff members. Thus, the independent auditor should consider the type of work delegated to internal audit and broaden the scope of the work when possible.Cooperative Auditing and Client Computer ResourcesIt seems that the main selling point of cooperative auditing from the per­spective of the independent auditor is the efficiency gained through access to client computer resources. This access may also indirectly pro­vide independent auditors with a measure of “job security” by more fully integrating them into the on­going business. This integration can be achieved without the loss of in­dependence necessary to the inde­pendent auditor.Cooperative auditing can be ex­tended to client computer resources in several areas. First, much of the work done by the junior CPA staff could be prepared by the internal audit staff. The information could be extracted from the client’s corporate database or corporate applications data sets with the assistance of a generalized audit software package. Second, micro-computers and elec­tronic spreadsheet packages such as VISI-CALC or LOTUS 1 -2-3 could be utilized to prepare working pa­pers that would support and eventu­ally lead to the preparation of the corporate financial statements. Fi­nally, the internal auditor could assist in the introduction and application of text processing in the preparation of audit workpapers and reports.Most internal auditors recognize the advantages of using a general­ized audit software package for in­ternal audits; the auditor can inde­pendently review computerized files, prepare workpapers, foot files, and select samples, etc. What may not be apparent to most auditors is that this very same generalized audit soft­ware package could be of tremen­dous use in preparing and performing the annual independent audit as well. The same statistical sampling meth­odologies useful to the internal au­ditorcan be used by the independent auditor. This is also true when the independent auditor performs such tasks as file familiarization, file foot­ing, exception analysis, summary analysis, account agings, or file matching, i.e., checking for dupli­cated names, addresses, etc. Gen­eralized audit software seems to be an area of great potential for maxi­mizing corporate audit resources through internal and independent auditor cooperation.Audit Software Packages and SpreadsheetsSome of the advantages of gener­alized audit software include the availability of statistical sampling methodologies for use by both in­ternal auditors and independent au­ditors. These software packages are often transportable. This isa plus for a decentralized or multi-facility firm. Most generalized audit software packages have security procedures that prevent accidental or unautho­rized modification (such as modifi­cation by the auditor) of data files being audited. Many generalized audit software packages are backed up by the vendor’s personnel. And many larger metropolitan areas have user groups formed by profession­als who use these packages within their own firms.Electronic spreadsheet programs have gained wide acceptance for audit use in the past few years. Packages such as Visi-Calc, Lotus 1-2-3 and Multi-Plan have proven their worth, reliability, and adapta­bility for audit use. Figure 1 presents a list of tasks to which electronic spreadsheeets have been applied.Figure 1: Ways to use electronic spreadsheets in auditing:Maintaining time budgets Working or audit trial balances ConsolidationsTax provision calculations Financial statement analysis Depreciation schedules Staff schedulesPresent value computations Lease computations ConfirmationsPartnership income schedules LIFO computationsEPS computations Loan amortizations Statements of changes in financial positionTrend analysis Debt allowancesSource: Golden & GoldenInternal Audit Activities Throughout the YearPerhaps the greatest potential benefit to the company being audited exists because internal audits are performed throughout the year. Communication to the independent auditor about the areas scheduled for internal audit allows the inde­pendent auditor to have input re­garding perceived control weaknes­ses. Internal audit could upgrade internal controls in these areas to a point where compliance testing can replace the much more expensive substantive tests that might other­wise be prescribed. Thus, the inter­nal audit staff can greatly reduce the total cost the client will incur for the annual audit.Top Management SupportIf the internal staff is to be suc­cessfully integrated into the annual audit process, there exists a definite need for top management support of the process and communication of this support to the external audi­tors. The process of communication and coordination between internal audit management and independent auditors must include advance com­munication of internal audit pro­grams, communication of the integ­rity, reliability and professionalism of the internal audit staff, and com­munication of client management’s support of cooperation between the independent and internal auditors.To make cooperative auditing work and to reduce annual audit costs, independent auditors must commit to cooperative auditing; they must coordinate the annual review, work cooperatively with internal auditors, and use the workpapers prepared internally as part of the annual re­view.A by-product of this cooperative effort is effective follow-up on man­agement letter comments. The in­ternal audit department is an excel­lent group to monitor the various operating departments affected by open points in the management let­ter. With the internal audit depart­ment’s becoming responsible for the review and evaluation of internal controls, this department becomes the most logical place in the organi­zation for coordination and follow­up on such open points. Since the management letter normally points out control deficiencies in account­ing and operating departments, follow-up and corrective action taken by those departments can be overseen by the internal audit de­partment.The Bottom LineAn effective, competent internal audit staff coordinating with the in­dependent auditor on the annual audit also produces an intangible benefit. The independent auditor will be able to perform more of the cost- effective compliance audit tests rather than the expensive and time­consuming ones of a substantive nature. ΩBibliographyClark, Myrtle W. et al. “CPA’s judge internal audit department objectivity.” Management Accounting, Vol. 62, No. 8, pp. 40-43. February, 1981a.Clark, Myrtle W. et al. “How CPA’s evalu­ate internal auditors.” CPA Journal, Vol. 51, No. 7, pp. 11-14. July, 1981b.Golden, Charles W. and Mary R. Golden. “Electronic worksheets: an audit tool.” Journal of Accountancy, Vol. 157, No. 4, pp. 38-42. April, 1984.Simms, Joseph E. “Automated working papers.” The Internal Auditor, Vol. 4, No. 6, pp. 32-34. December, 1983.Wallace, Wanda A. “Internal auditors can cut outside CPA costs.” The Har­vard Business Review, Vol. 62, No. 2, pp. 16-20. March/April, 1984.Ward, D. Dewey and Jack C. Robertson. “Reliance on internal auditors.” Jour­nal of Accountancy, Vol. 150, No. 6, pp. 62-73. October, 1980.Charles Boughton is a member of the Business Administration faculty at Northeast Missouri State Univer­sity and teaches in the Information Systems area. A former internal aud­itor with a major independent oil company, Mr. Boughton has recently completed a Master of Science in Accounting degree and has research interests in the areas of accounting policy and accounting information systems.The Woman CPA, January, 1987/27

Theory and Practice: Combining the Efforts of Internal and Independent Auditors: Using EDP to Maximize Audit Resources

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Theory and Practice: Combining the Efforts of Internal and Independent Auditors: Using EDP to Maximize Audit Resources

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