Auditing in ERP System Environments

Question: Discuss about the Auditing in ERP System Environments. Answer: Introduction Advancement in technology is likely to influence auditors in various ways. Ideally, they will have to incorporate continuous auditing into the audit process. The research question of this paper is what continuous auditing has in store for auditors in the future. Its rationale is to outline continuous auditing and its impact to auditors, to examine the internal controls of the ever-changing IT, to discuss the key auditing aspects of new IT, to address its challenges to audit firms and companies, to comment on what auditors are most concerned with, and to discuss the audit process. Continuous Auditing is as a process of gathering evidence electronically to form a basis that can give an accurate and fair opinion on the financial statements of a company (Rezaee, Elam, and Sharbatoghlie, 2001, pp.150-158). Ideally, it is a process of collecting, evaluating, and presenting audit evidence to determine the internal control system of a firm is efficiency and effectiveness in protecting the companys assets, ensuring the integrity of data, and producing correct information that is deemed reliable. Continuous Auditing has various implications for independent auditors. The first impact on continuous auditing on independent auditors is that they will be required to increase knowledge of the enterprise and its industry. The main reason is to make sure electronic information is relevant and reliable (Kuhn Jr, and Sutton, 2010, pp.91-112). The second implication on continuous auditing on independent auditors is that he will have to familiarize himself with the internal control system of the client. The third implication on continuous auditing (CA) on independent auditors is that he will need to implement an audit plan that is oriented towards control risk. This audit program will have an aim of focusing on the adequacy and effectiveness of internal control activities of a corporation. Besides, the company being audited will incur additional costs when preparing the control risk-oriented audit plans. The company secrets might also leak to the competitors as the auditors would be required to perform a better understanding of the enterprise on how transactions flow within the business and the control activities implemented on those transactions (Kuhn Jr, and Sutton, 2010, pp.91-112). The audit profession will be affected in that they would have to prepare their mindset on the fact that they would be required to incorporate technology in the review process such as the use of continuous auditing (CA) which would require proficiency in technological aspects. Lastly, the level of trust between the company and the auditor will increase as the integrity of management would be maintained and the company would be assured that the auditor would act in the best interest of the firm. Examination of the Ever-changing IT Technology is advancing rapidly. It, therefore, calls for auditors to strengthen the internal control system of the ever-changing IT world. In this case, the audit firms will have to use management assertions to determine whether the internal controls implemented strong or weak. The first administration claim that the auditor will use in the ever changing IT is the validity of data (Alles, Kogan, and Vasarhelyi, 2008, pp.195-214). Here, the auditor will be required to use observation to determine whether the data presented by the firm is valid or not. The second management assertion that the auditor will use is valuation (Brown, Wong, and Baldwin, 2007, pp.1-28). The auditor can do so by engaging experts to value the assets and liabilities. The third management assertion that the auditor will use to determine the strength of the internal controls is accuracy. This can be ascertained by measuring the assets to determine their correct value. The fourth management assertion that the auditor will use is timeliness. Here, the auditors ought to verify that the transactions presented relate to that fiscal period. The fifth management assertion that the auditor will use is completeness (Brown, Wong, and Baldwin, 2007, pp.1-28). Here, the audit firm needs to assess whether correct journal entries have been made. The sixth management assertion that the auditor will use is authorization. Here, the auditor determines if the purchase and sale of assets have been authorized by the designated personnel. Lastly, in the ever-changing IT world, the auditors would be required to assert the posting and summarization of entries. Here, they can do so by observing and tracing the entries to ensure that they are correctly posted to their respective ledgers. Key Aspects of New IT The key auditing aspects of new IT would involve a dynamic change from the traditional ways in which people or companies perform their administrative tasks (Chan, and Vasarhelyi, 2011, pp.152-160). Here, the firms would be mandated to use technology in their day-to-day operations. In the traditional method, people work with hard copy documents. However, after extensive changes in the new IT, companies would result in a paperless society. The speed in which an audit process can be completed will also be improved with improved accuracy, efficiency, and effectiveness. Continuous Auditing, Its Research, Demand and Challenges to Audit Firms and Corporations Continuous audits are viable, they provided certain, and ensure that interrelated conditions are met (Flowerday, Blundell, and Von Solms, 2006, pp.325-331). These interrelated conditions will involve performing analytical procedures and substantive tests to ascertain the validity, valuation, accuracy, timeliness, completeness, authorization, posting, and summarization of entries, rights and obligations and presentation and disclosure of financial information. Research by academics, experiments made by practitioners and other guidance from standard setters are all-necessary in helping continuous audit evolve (Vasarhelyi, Alles, Kuenkaikaew, and Littley, 2012, pp.267-281). This implies that ongoing review cannot change on its own. It would require other experts to aid in its success. Finally, the demand for reliable, timely, and relevant decision-making information might probably create a need for CA, but auditors will need to position themselves to respond appropriately to the ever-changing marketplace. Audit firms and companies face numerous challenges facing audit firms (Li, Huang, and Lin, 2007, pp.2-13). These challenges include adapting to the change, lack of experts to perform valuations, and the business might not be able to adjust to the ever changing IT. Companies also face other challenges such as loss of confidentiality and privacy of data due to security breaches. What Auditors Are Most Concerned With? Auditors are most concerned with material misstatement (Coderre, Verver, and Warren, 2006). Ideally, their main aim of auditing financial statements of a firm is to determine whether the financial statements have been presented in a view, which is free from any misstatement that may be material to the financial statements. The article states that particular electronic evidence may become present at a certain point in time, but it may not be available after that time if files are changed. These records may contain material misstatement, and that is why the auditors are concerned about the future where the files are changed, there is no backup, and electronic evidence may not be available. Audit Process, Analytical Procedures, Tests of Balances, and Tests of Transactions Auditors perform various audit procedures that enable them collect sufficient and adequate audit evidence and use that evidence as a basis for giving an opinion on the true and fair view of the financial statements. Auditors use substantive tests to ascertain whether the financial statements portray a true picture. These substantive criteria include analytical procedures, a test of transactions, and test of balances. Analytical methods are studies of relationships and comparisons among financial data (Hunton, and Rose, 2010, pp.297-312). Ideally, they involve calculation of rates and comparing them with those of prior years to ascertain whether there is an abnormal deviation. Auditors are therefore required to use of IT, and continuous auditing makes to perform analytical procedures. Analytical methods are carried out in the planning phase of the audit to understand the client's business and industry better, to gather evidence against any possible material misstatement and at the financial reporting period. With the use of computer-aided technology and concurrent audit techniques, analytical procedures can prove to be the cheapest audit tests to conduct. Auditors also conduct tests on transactions to assess if erroneous processing of the operations might lead to material misstatement (Du, and Roohani, 2007, pp.133-146). It includes balance sheet auditing where the auditor traces the journal entries to their original documents. Under continuous auditing, auditors conduct these tests to reduce the extent at which the substantive tests will be done after the balance sheet date. This implies that if the evidence gathered indicates that that the financial statements might be materially misstated, and then more substantive tests will be conducted. Tests of balances are tests performed after the date of the balance sheet to gather sufficient and adequate evidence that would provide a reasonable basis for expressing an view on the financial statements (Hunton, and Rose, 2010, pp.297-312). They include accounts receivable confirmations, physical inventory counts, and recalculation of depreciation on fixed assets. Apparently, the scope of tests of balances will depend on the results of the tests of transactions and analytical procedures. Conclusion Continuous auditing is likely to affect the future for audit. With CA, the review process will be efficient and effective, as it will provide sufficient and adequate audit evidence to be able to express an opinion about the financial statements presented by the business. 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