CHAPTER 11

Topics: Auditing, Internal control, Audit Pages: 27 (12597 words) Published: July 2, 2015
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INTEGRATIVE CASE SEATTLE PAPER PRODUCTS
Seattle Paper Products (SPP) is modifying its sales department payroll sysiem to change the way it calculates sales commissions. Under the old system, commissions were a fixed percentage of dollar sales. The new system is considerably more complex,

with commission rates yarying according to the product sold and the total dollar volume of sales.
Jason Scott was assigned to use audit software to write a parallel simulation test program to calculate sales commissions and compare them with those generated by the

new system. Jason obtained the necessary payroll system documentation and the details on the new sales commission policy and prepared his program. 1
Jason used the sales transaction data from the last payroll period to run his pro-

gram. To his surprise, his calculations were 95,000 less than those produced by Sppt new program. Individual differences existed for about half of the company,s salespeo-

ple. Jason double-checked his program code but could not locate any errors. He 322

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selected a salesperson with a discrepancy and calculated the commission by hand. The

result agreed-with his program. He reviewed the new commission policy with the sales mana8et line by line, and concluded that he understood the new policy completely.

Jason is now convinced that his program is correct and that the error lies with SPP's new program. He is now asking himself the following questions:

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How could a programming error of this significance be overlooked by experienced programmers who thoroughly reviewed and tested the new system?

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Is this an inadvertent error, or could it be a fraud?
What-qpn be done to find the error in the program?

lntroduction
This chapter focuses on auditing an accounting information system (AIS). Audiring is the systematic process of obtaining and evaluating evidence regarding assertions about economic actions and events in order to determine how well they correspond with established criteria. The results ofthe audit arc then cammunicated to interested users. Auditing requires carctul planning and the collection, review, and documentation of audit evidence. In developing recommendations, the auditor uses established c teria, such as the pdnciples of control described in previous chapte$, as a basis for evaluation.

Many organizations in the United States employ internal auditors to evaluate company operations. Govemments employ auditon to evaluate management performalce and compliance with legislative intent. The Deparlment of Defense employs auditors to review the linancial records of companies with defense contracts. Publicly held companies hire external auditors to provide an independent rcview of their financial statements.

This chapter is written from the perspective of an intemal a\ditoL Intennl auditing is an independent, objective assurance and consulting activity designed to add value and improve organizational effectiveness and efficiency, including assisting in the design and implementation of an AIS. Internal auditing helps an organization accomplish its objectives by bdnging a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, cootrol, and governance processes.

There are several different types of intemal audits:
1. A finsncial audi, examines the reliability and integrity of financial transactions, accounting records, and hnancial statements.

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PART

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CONTROL AND AUDIT OF ACCOUNTTNG TNFORMATTON sysTEMS

2. An information systems, or internal conlrol, audit reviews the con6ols of an AIS to assess its compliance wilh inlemal control poiicies and procedures and its effectiveness in safeguarding iisets. The audits usually evaiuate system input and output; processing cortrols; backup and recoyery plans; system : ard computer facilities.

3. AD operational audit is concemed with ihe
and efncient use of resources...
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