UNIVERSITY OF SANTO TOMAS

AMV COLLEGE OF ACCOUNTANCY

First Semester of Academic Year 2022 - 2023

Module 1 Group Exercise:

OVERVIEW OF AUDITING

Submitted By:
BACCAY, Hannah Rae I.
DE GUZMAN, Jevie M.
JUANICO, Nicole Von B.
QUEZADA, John Rennen N.
SANTOS, Paulo Emmanuel S.
TALACTAC, Ayame V.

4A7 - Group 1

Submitted To:

Prof. Clifford Ramos

ACC5119: Auditing in a CIS Environment

9th of September 2022

 MODULE 1 GROUP EXERCISE: OVERVIEW OF AUDITING
GROUP 1

1. You are the audit team tasked to perform a financial audit of Twice, Inc.. The company has
total assets of P 50 million. Upon review of the interim financial reports, among others, you
noted that there was a P 15 million increase in the company’s fixed assets during the year.

a) What will be your audit objectives and what audit procedures will you design to perform the
test of controls of the company’s fixed assets?

b) What audit procedures will you design to perform the substantive tests for fixed assets?

c) What assertions are being addressed by these audit procedures?

Assertion: Existence
Audit Objective/s: Fixed assets in the Statement of Financial Position Exists
Audit Procedure/s:
● Reconciliation of General ledger with subledger is to be carried out
● Examine additional and disposed fixed assets including those retired
● Inspect fixed assets consisting of physical examination of the assets, specifically the
major additions.
● Analytical Procedures for fixed assets and its related accounts such as lease expense,
depreciation expense, accumulated depreciation, repair and maintenance etc. must be
performed.

Assertion: Accuracy
Audit Objective/s: All of the information about the company’s fixed assets must be recorded,
disclosed, and classified accurately in the financial statements in their correct values.
Audit Procedure/s:
● For disposal of assets, you will have to check asset disposal authorization, selection of
customers (if sold through tender), and receipt of money, accumulated depreciation and
net book value at disposal date and profit or loss on disposal. You will have to check
whether the asset has been removed from the fixed asset register and subsequent
adjustments were made on the accumulated depreciation.
● To test the mathematical accuracy of fixed asset records, the auditor obtains a schedule
from the client, which includes beginning balances, additions, depreciation and
amortization, disposals and ending balances. The auditor should reconcile the beginning
balances with the balances in the prior year’s financial statements and should be alert
for all new assets that may represent unrecorded additions and for assets that have
been removed.
Assertion: Completeness
Audit Objective/s: Fixed Assets include and reflect all data and related transactions that should
be recorded during the appropriate period.
Audit Procedure/s:
● Agreement of subsidiary ledger balances with general ledger balances, as well as a scan
of any unusual items in the reconciliation
● Inspect disbursements for capitalizable expenses
● Review significant lease transactions, as well as repairs and maintenance
● Tracing of supporting documents to the accounting records must be performed for
significant acquisitions/purchases and/or retirement/disposals (i.e. invoice, purchase
orders, purchase receipts)
(Ireneo et al., 2018)

Assertion: Rights and Obligations

Audit Objective/s: Twice Inc. owns and controls the rights to the fixed assets as of the reporting
date.
Audit Procedure/s:
● Vouching of the supporting documents of fixed assets purchases during the year. (i.e.
invoice, purchase orders, purchase receipts)
● Examining ownership documentations such as title deeds for properties, registration
documents for vehicles, insurance documents, and suppliers’ invoices.

Assertion: Valuation or Allocation

Audit Objective/s: To determine whether Fixed Assets balances are recorded in the
appropriate amounts and its corresponding costs and expenses are allocated in the proper
accounting period
Audit Procedure/s:
To ensure the proper valuation and allocation of fixed assets, it will be necessary to assess
the transactions related to the acquisition of the assets, transactions relating to the subsequent
expenditures, testing the provisions for depreciation, examination of the impairment,and
performing analytical procedures on the related accounts (revenue/expense accounts). To
determine the proper valuation from the acquisition of fixed assets, it will be necessary to
examine and analyze the transactions related to the specific asset such as purchase orders,
invoices, etc. to determine whether the capitalizable and non-capitalizable costs are allocated
accordingly. The same applies to the subsequent costs that were incurred in relation to the fixed
assets which can be performed through the supporting invoices. The disposal and retirements
of the fixed assets should also be examined to determine whether the assets are properly
reflected in the accounting records. This can be performed through examination of the revenue
accounts (sale of PPE), checking the taxes paid (property taxes), and inquiring for additional
information from the executives or supervisors. Examination of the company’s policies regarding
depreciation, testing through recalculation of the accumulated depreciation and the depreciation
methods used is necessary to determine its reasonableness. The fixed assets should also be
examined if it is subject to impairment through evaluation of the appropriateness of the
valuation, reasonableness of the estimates, and evaluating basis of the estimates. Lastly,
analytical procedures for PPE must be made depending on the nature of the business
operations. Certain procedures such as ratio and trend analysis may be performed. (Asuncion
et al., 2021)

Assertion: Presentation and Disclosure

Audit Objective/s: Fixed Assets accounts, as well as its corresponding expense accounts, are
properly reported in the Statement of Financial Position, Statement of Comprehensive Income,
and are adequately disclosed in the Notes to the Financial Statements.
Audit Procedure/s:
Evaluation of the financial statements particularly the disclosures should be made to ensure
the proper presentation and disclosure of the Fixed Assets. In accordance with PAS 16
(Accounting for Property Plant and Equipment), the following must be disclosed: (1) Basis for
carrying amounts of the assets, (2) Provisions with regards to depreciation including the
depreciation methods used, and the useful life of the assets, (3) Gross carrying amounts, and
accumulated depreciation and impairment, (4) Reconciliation of the beginning balances, (5) Title
restrictions, (6) Expenditures related to the construction of an asset for the given period, (7)
Commitments related to the acquisition of PPE, and (8) Compensation from third parties for the
assets which were given up, lost, or impaired. Additionally, the related revenue and expense
accounts should also be evaluated and must be properly presented on the financial statements
(Asuncion et al., 2021).

● Account balances of the fixed assets should be properly checked in the presentation of
the Statement of Financial Position
● Examine measurement bases such as depreciation methods used, remaining useful life,
accumulated depreciation, impairment etc must be rightly disclosed.
● Contractual commitments related to the assets must also be checked if it is correctly
stated in the Financial Statements.

2. Give a concrete example of CAATT used in test of controls.

A test of controls is a process used in audits to determine whether a client entity's adoption
of a control is effective in preventing or identifying major misstatements. Businesses need a
strong internal control system to maintain the accuracy of their financial records.

Auditors may decide to rely on a client's system of controls as part of their auditing duties
depending on the outcomes of this test. If an error is found during a test of controls, the auditors
will increase the sample size and carry out additional testing. If more errors are discovered, they
will evaluate whether there is a problem with the controls that renders them ineffective or if the
errors appear to be isolated occurrences that have no bearing on the control's overall
effectiveness. If the auditors find that the controls are insufficient, they will expand the use of
substantive testing, which often raises the audit's cost. Some examples of CAATT used in test
of controls are:
 ● Test Data Method - is used to verify the integrity of production applications under
review by processing specially prepared sets of input data. To gain an unbiased
evaluation of the application logic and control efficacy, the outcomes of each test are
compared to prepared expectations.

● Snapshots - a built-in audit procedure that provides information to auditors later on by

being integrated into a company's computer system. This method involves taking
pictures of transactions as they go through computer systems. Audit software routines
are implemented at numerous processing logic points to record the transaction as it
passes through various processing stages.

● Base Case System Evaluation (BCSE) - is a variant of the test data method. All
conceivable transaction types are included in the set of test transactions used for BCSE
testing. During system development testing, these are processed repeatedly iteratively
until reliable results are produced. The base case findings are those. The effects of
subsequent application changes that take place during maintenance are assessed by
contrasting the current findings with the base case results.
● Tracing - the internal logic of the program is electronically walked through using the test
data approach. Three steps make up the tracing process: 1) To enable the trace option,
the application under review must go through a special compilation; 2) As test data,
some transactions or transaction types are produced; and 3) The program's processing
of the test data transactions is tracked through all phases, and a listing of all
programmed instructions that were carried out throughout the test is generated.

● Integrated Test Facility - is an automated method that enables the auditor to examine
the logic and controls of an application while it is in use. One or more audit modules
that were integrated into the application when the systems were being developed are
part of the ITF.

3. Give a concrete example of CAATT used in substantive testing.

Substantive testing is known as the phase of an audit where the auditor gathers samples to
identify any material misstatements in the client’s accounting records or other information. This
proof is required to support the judgment that a company’s financial records are complete,
relevant, and accurate.

Substantive Analytical Procedures include the consideration of whether there are any major
changes in the entity’s operations, e.g. discontinuation of product lines. Such changes are
indications that the Fixed Assets should be classified as assets held for sale or be retired. If the
Fixed Assets need to be retired, we need to determine if they have been reflected in the level of
disposals. Test of details is normally performed for this purpose.

Computer Assisted Audit Tools and Techniques (CAATTs) are utilized to assist the auditor in
selecting, accessing, and organizing the data needed to perform these substantive analytical
procedures. CAATTs provide a mechanism to gain access and to analyze data as per audit
objective and report the audit findings with greater emphasis on the reliability of electronic
information maintained in the computer system.

■ Embedded Audit Module - An embedded audit module uses codes/modules inserted

into an application program that creates notifications when transactions meet certain
criteria. The intent behind an embedded audit module is to give auditors real-time
notifications of transactions that might be in error, or which possess characteristics that
are worthy of further review. This information is useful for developing more robust
internal controls, as well as for spotting instances of potentially fraudulent transactions.

■ Generalized Audit Software - It is the most common computer-assisted audit tool and
technique (CAATT) used in recent years. It is used to mine and analyze data (often in
vast quantities) to identify anomalies, errors and omissions and is used in gathering audit
evidence rather than documenting.

It is an off-the-shelf package that can provide a means to gain access to and interrogate
data maintained on computer storage media. It is one of the tools IT Auditors utilize to
obtain evidence directly on the quality of the records produced and maintained by
application systems.

GAS consists of a series of computer program routines that can read computer files,
select desired information, perform repetitive calculations, and print reports in an
Auditor-specified format. Generalized Audit Software enables auditors to have direct
access to computerized records and to deal effectively with large quantities of data.

1. Audit Command Language (ACL) - a data analysis software program that helps
auditors remain current with changing technology. Its primary usefulness lies in its
ability to perform analysis and audit tests on 100% of the data available rather
than merely sampling the data. The ability to audit 100% of the available data
assists auditors with identifying potential fraud patterns and data irregularities.

2. Interactive Data Extraction & Analysis (IDEA) - Interactive Data Extraction and
Analysis (IDEA) is a leading eAudit data-analytics software package. IDEA
provides audit, finance and compliance professionals in industry and practice with
an efficient and effective solution for high performance audits. IDEA is also used
by tax authorities throughout the world (including the Revenue Commissioners) to
interrogate taxpayer transaction and system data.
 References

Asuncion, D. et al., (2021). Auditing & Assurance Concepts and Applications. Real Excellence
Publishing.

Bragg, S. (2022). Embedded audit module definition. AccountingTools.

https://www.accountingtools.com/articles/embedded-audit-module

Empleo, P. (2021). Practical Auditing. EDT Book Shop. ISBN-978-621-96557-0-5

Hall, J. (2011). Accounting Information Systems 7th Edition. Cengage Learning.

ISBN-978-1-4390-7857-0

Ireneo, J., Ireneo, S., & James, G. (2018). Auditing and assurance principles 2018. Good
Dreams Publishing. ISBN-978-971-95999-6-8

kzoe1996. (2016). Generalized audit-software.

https://www.slideshare.net/kzoe1996/generalized-auditsoftware