Professional Documents
Culture Documents
Advanced Auditing and EDP: QUEENS College School of Post Graduate Studies Department of ACCOUNTING and Finance
Advanced Auditing and EDP: QUEENS College School of Post Graduate Studies Department of ACCOUNTING and Finance
Instructor:
— ABDELLA HUSSEN(Ph.D in Finance Candidate
@AAU)
08/20/2021 1
Course description
This module focuses on case-analyses .
It focuses on fraudulent cases relating to violations
of accounting principles, Ethics & professional
responsibility of auditors, internal control systems,
and fraud & inherent risk assessment ,
The course covers revenue and expenditres audits
It also deals with auditing through in computerized
databases And EDP
Contents
OVERVIEW OF AUDITING
internal Control over Financial Reporting:
Management’s Importance to the External
Auditors
Professional Auditing Standards and the
Audit Opinion Formulation Process
Auditing the Revenue cycle
Auditing the Expenditure cycle
EDP auditing
Evaluation
Article review … 25
G assignment 25%
Final …………… 50%
Text book :
A U D I T I N G:A RISK-BASED APPROACH TO
CONDUCTING A QUALITY AUDIT 9th edition by
Karla M. Johnstone et al ,2014
5
Overview Cont’d
The biggest impact on internal auditing as a result of these
scandals was probably the U.S. Sarbanes-Oxley Act of 2002 —
particularly Section 404, which focuses on internal controls
over financial reporting.
A problem companies and external audit firms faced was that
many employees lacked internal control expertise.
Company personnel had for years been working to squeeze
costs out of routine processes, and external audit firms had
shifted away from detailed testing of processes.
Most companies looked to their internal auditors to help them
understand controls and comply with the new law.
We all learned that while financial reporting was supposedly
mature, internal auditors cannot ignore a risk area just
because we have become comfortable with it.
7
Overview Cont’d
2. Financial Markets Meltdown
What does one do when banks that are “too big to fail” look
like they are going to collapse under the weight of toxic loans and
market illiquidity?
In a conversation with a Fortune 50 in 2008, a chief financial
officer said that a government bailout was needed, as liquidity in
the banking system is like blood in the human body — when it is
missing, nothing works and a transfusion is required.
These events taught us all a lot about risk.
While enterprise risk management (ERM) was birthed before the
financial market meltdown, ERM’s lack of maturity became
painfully evident during this period.
N.B: ERM is the process of planning, organizing, leading, and
controlling the activities of an organization in order to minimize
the effects of risk on an organization's capital and earnings.
9
Overview Cont’d
• Financial institutions that were revered for their ERM
expertise were the same ones that apparently didn’t
fully understand risk or see concentrations of risk.
• Many internal auditors who had been trained to audit
internal controls over financial reporting were now
asked to roll up their shirt sleeves to help implement
or improve ERM processes.
• The “best” role for internal audit in ERM has
not been agreed upon, nor probably will it ever be,
given the differences among organizations.
• But it is clear that internal auditing needs to live and
breathe risk.
10
Overview Cont’d
3. Cybersecurity
A newer issue for virtually every organization is cybersecurity
risk.
What started as seemingly isolated attacks on companies for
specific purposes has grown into a generalized concern over
security of all electronic data.
Today, it would be difficult to find a board of directors that
doesn’t have cybersecurity on its agenda.
Internal auditors were often caught unprepared for this risk.
For decades, many audit functions have struggled to find enough
qualified IT auditors.
With cybersecurity risk, that task is even more difficult.
Such situations require expertise of penetration-testing auditors.
The technology is new, and the way it is implemented relies on
methods that didn’t exist at the beginning of the 21st century.
11
Overview Cont’d
4. Bribery and Corruption
Bribery and corruption have been part of human history for
about as far back as records exist.
Many countries have passed new laws addressing bribery — some
stronger than others.
Every company of reasonable size faces risk not only of bribery
perpetrated by its employees, but also of violating strict laws that
are strongly enforced.
Perhaps the most glaring example of bribery occurred at German
industrial group Siemens, where it was reported that processes
organized to implement bribery payments were quite mature.
But any observers who think the risk only involves large
organizations would be fooling themselves.
All it takes is one person with access to cash for bribery to
become a risk.
12
Overview Cont’d
Lessons From the Past
• While it is interesting to look back on the events that
have shaped internal auditing, practitioners must ask
themselves what they should learn from these events
moving forward. A few key messages stand out:
▫ Human behavior is always a risk. Each of the
aforementioned events resulted from people making the
wrong decisions, often for the wrong reasons.
▫ The world of potential risks we might face is enormous.
No matter how good our risk assessments may be, we
will not always be able to anticipate the next big event.
▫ While new risks regularly come into view, the old ones
never seem to go away completely.
13
Overview Cont’d
• So what should an internal auditor, specifically, take
away from this retrospective look?
• S/he must stay true to what makes her/him
indispensable to their respective organizations.
• Audit departments should assemble the best talent they
possibly can, stay focused on risk, keep watching for
what is happening inside and outside the organization,
and challenge themselves to ever increasing levels of
performance.
Any less would be a disservice(harmful practice) to our
organizations.
COMPANY CASES , fraud , ethics , IC
Case 1 Enron
Case 2 Waste Management
Case 3 WorldCom
Case 4 Sunbeam
Case 5 Qwest
Case 6 The Fund of Funds
15
Essence
The word 'audit' comes from the Latin
‘audire’ meaning to hear
Auditing: A systematic process of
objectively accumulating and
evaluating evidence about quantifiable
information, processes, and activities for
the purpose of reporting on the degree
of correspondence between the actual
information and established criteria .
2. Features of Auditing
08/20/2021
Assume you are an independent auditor of XYZ company. During the past
three audits, you have repeatedly warned the top management of the
company about the serious weakness of internal control over cash
disbursements. However, management has not taken any corrective action.
Shortly after the audit, XYZ company learned that two employees in its
accounting department had been embezzling money for the last two years.
The embezzlement scheme involved authorizing cash disbursement in
various expense accounts and then arranging to have the checks cashed. The
management of XYZ company has brought suit against you for the amount
of its losses in this cash fraud.
Required:
A-Suggest at least three arguments that you as an auditor can defend
your self to lessen or eliminate the liability.
B-What arguments might XYZ company advance to indicate that you were
negligent in failing to discover the embezzlement scheme?
C-Briefly describe the auditors’ responsibility for the detection of errors
and irregularities.
2. The lending credibility theory
The lending credibility theory suggests that
the primary function of the audit is to add
credibility to the financial statements.
In this view the service that the auditors
are selling to the clients is credibility.
Audited financial statements are seen to
have elements that increase the financial
statement users’ confidence in the figures
presented by management.
3.The theory of inspired confidence or
Theory of rational expectations
States that the demand for audit services is
the direct consequence of the participation
of third parties or outside stakeholders in
the company.
S.H demand accountability from the
management, in return for their investments
in the company.
Accountability is realized through the
issuance of periodic financial reports.
The theory of inspired confidence or
Theory of rational expectations
Early civilization
08/20/2021
08/20/2021
08/20/2021
2. Operational audit:
An operational audit is a review of any part of an
organization’s operating procedures and methods
for the purpose of evaluating efficiency and
effectiveness.
At the completion of an operational audit,
recommendations to the management for improving
operations are normally expected.
This audit is designed to measure the performance
of an organization, which can be evaluated in
terms of efficiency and effectiveness.
7. Types of Audits and Auditors
08/20/2021
3. Compliance Audit:
This type of audit helps to determine whether the
auditee is following specific procedures or rules set
out by some higher authority such as management,
government, board of directors etc.
The performance of compliance audit is dependent upon
the existence of verifiable data and of recognized criteria
or standards established by an authoritative body. A
familiar example is the audit of an income tax return by
an auditor of the Inland Revenue Authority (IRA).
Forensic auditing
• What is Forensic Accounting?
• Ask Enron and WorldCom
• Legally accurate accounting.
▫ accounting that is sustainable in some adversarial legal
proceeding, or within some judicial or administrative review.
• Although relatively new to the accounting profession, the role of a
forensic expert in other professions has been in place for some time
• Forensic – ‘belonging to, used in, or suitable to courts of judicature
or to public discussion or debate’
• In the accounting profession the term ‘forensic’ deals with the
relation and application of financial facts to legal problems
What is Forensic Accounting/auditing
• The term ‘forensic accounting’ is generally taken to refer to
the comprehensive view of fraud investigation, including
• The audit of accounting records to prove or disprove fraud
• The interview of related parties
• The act of serving as an expert witness
• Focus is:
▫ the evidence of economic transactions and reporting
▫ the legal framework which allows such evidence to be
suitable to the purpose(s) of establishing accountability
and/or valuation
• In other words:
▫ the identification, interpretation, and
communication of the evidence of economic
transaction and reporting events
What is Forensic auditors
• Department of Labor Statistics Job Description
▫ Some public accountants specialize in forensic
accounting—investigating and interpreting white
collar crimes such as securities fraud and
embezzlement, bankruptcies and contract disputes,
and other complex and possibly criminal financial
transactions, such as money laundering by organized
criminals.
▫ Forensic accountants combine their knowledge of
accounting and finance with law and investigative
techniques in order to determine if illegal activity is
going on.
47
Types of Auditors
External Auditors(CPA
,ACCA holders )
Internal Auditors
Government Auditors
48
External auditors
The auditor has no connection to the
organization being audited.
S/he conducts the audit on a fee basis.
S/he is primarily responsible to third
party such as creditors and
shareholders.
The type of audit carried out by an
independent auditor is financial
statement audit.
49
Internal auditor
Internal auditors are employees of the
companies they audit.
S/he conducts the audit on a salary basis.
S/he is part of and primarily responsible to
the management of the organization.
The type of audit carried out by an internal
auditor is compliance audit and operational
audit.
50
Government Auditors
They are employed by various local,
state, and federal governmental
agencies.
In our country, the auditors from the
office of Auditor General, the Audit
Service Corporation, and the Ministry
of revenue are government auditors.
The Office of Auditor General is
responsible for conducting financial
statement audit, compliance audit and
operational audit of various Federal
Government Offices.
51
Assume you are an independent auditor of XYZ company. During the past
three audits, you have repeatedly warned the top management of the
company about the serious weakness of internal control over cash
disbursements. However, management has not taken any corrective action.
Shortly after the audit, XYZ company learned that two employees in its
accounting department had been embezzling money for the last two years.
The embezzlement scheme involved authorizing cash disbursement in
various expense accounts and then arranging to have the checks cashed.
The management of XYZ company has brought suit against you for the
amount of its losses in this cash fraud.
Required:
A-Suggest at least three arguments that you as an auditor can defend
your self to lessen or eliminate the liability.
B-What arguments might XYZ company advance to indicate that you
were negligent in failing to discover the embezzlement scheme?
C-Briefly describe the auditors’ responsibility for the detection of errors
and irregularities.