Question

You have been the auditor of Cosmos Company Ltd., a large wholesaling and retailing company with thousands of different items in inventory. In order to improve its control procedures Cosmos has just computerized its inventory control.

All inventory records are maintained on disk. The system has 12 remote terminals located in different parts of the company’s premises. Employees use these terminals to access information about the current status of any inventory item. Updating of the inventory records is also carried out via these remote terminals as stock movements occur.

1. What effect will the new computer system have on your approach to the audit of inventories?

2. Outline the steps that you should take before developing new audit procedures for the computerized inventory control system.

Answer 1

1. Computerized inventory system makes everything from input of inventory data to the taking inventory easier. It can be useful for document generation, remote access to the order details, automatic stock re-order, accuracy and timeliness of data is also maintained.

Effect of Computer system for Inventory on Audit approach -

1. Availability of physical document/ hard copy - In EDP (Electronic data processing) environment the auditor finds it difficult in verifying the voucher and other supporting document with respect to inventory as they are not available in hard copy.

2.Lack of audit trail - Tool that is used to trace the transaction from the source to the completion. In a non computerized inventory system audit trail is present which helps the auditor to ride with transaction. However it is not present in computerized inventory system.

3. Technical Knowledge - Auditor Should posses the knowledge about the working of the computer system and its its potential capability as well. Complexity of computer system can adversely effect quality of audit.

4. Storage of files and data - Computer System are supported by hard disk which store data processed by it. Computer Inventory system may find it difficult to handle huge volume of data and at the same time auditor has to face the ambiguity.

5. Physical verification versus Computer system verification - Physical verification of inventory is time consuming exercise whereas verification report generated by computer system can verified in couple of hours subject to the internal control of the system.

6. Change in auditing technique - It Involves him to change its technique from auditing around computer to auditing through computer.

2. Steps that you should take before developing new audit procedures for the computerized inventory control system.

1. Understanding the computerized system/Application - A manual guiding the working of computer system is of utmost importance for the auditor before moving ahead with audit procedure. Auditor must thoroughly understand the system and formulate a questionnaire on the basis of that.
2. Understanding the Internal control - Identify the control in place at these 12 remote access point. Get to know the person responsible to update the inventory record from remote access point. Review of Input control, output control and processing control is the need the hour.
3. Understanding the Flow of transaction - For understanding the error or irregularities the flow of transaction/ document in application should be understood.
4. Sequence of steps performed by system - This can be obtained with the help of a flowchart and is important for auditor in formulation of the audit procedure.
5. Report produced- By checking the report/ output produced by the system auditor can identify the effectiveness of the output control in place. These evidence will be helpful while drafting the audit procedure.