Auditing with your microcomputer; computer software can lead to more efficient audits.

AUDITING WITH YOUR MICROCOMPUTER

Computer software can lead to more efficient audits.

Computer-assisted techniques are a mandatory part of auditing large clients with voluminous transaction files. Computer assistance can also add efficiency and effectiveness to audits of medium-sized and smaller clients. Today, readily available software and low-cost microcomputer hardware make it feasible to use computer-assisted auditing with clients of any size.

This article focuses on generalized audit software for microcomputers. It is referred to as generalized because it is designed to facilitate the audit of any client, regardless of type of organization or industry. The ultimate goal of using such software is to automate audit functions while reducing dependence on clients' staff and systems.

GENERALIZED AUDIT SOFTWARE

A generalized audit software program consists of integrated applications that can be useful in virtually any audit setting. Historically, such software was used only on large mainframe systems. Auditors would run their software on the client's mainframe, directly accessing client files for analysis. While this is still an effective process, acquiring and using audit software designed for a mainframe computer is expensive and technically complex.

The alternative is using microcomputer-based audit software. Clearly, this is ineffective when client files are so large they would inundate a microcomputer. However, for medium-sized and smaller applications, microcomputer-based audit software represents an inexpensive and readily usable auditing tool.

As with all software, the key facets of microcomputer-based audit software are input, processing and output. That is, the auditor is concerned with getting client data into the microcomputer, manipulating the data and producing output that documents the audit.

Input. Manually keying in data is slow, expensive and error-prone. If generalized audit software is to be effective, data must be downloaded from the client's system into the auditor's computer. Access to client data typically occurs via magnetic tape, floppy disk or a telephone connection between computers. Regardless of the method of access to client data, however, the format of the data and the type of file are the critical factors in reading the data.

Format refers to the internal scheme used to represent a character in a particular system. An IBM mainframe or minicomputer format that internally represents the letter "a" would be different from an IBM microcomputer format. Therefore, data have to be converted to the appropriate format before unlike systems can share data. The two most common data formats are EBCDIC, the IBM large system standard, and ASCII, the microcomputer standard. Numbers in the EBCDIC format are often stored in a condensed fashion, referred to as packed. Generalized audit software must translate and "unpack" EBCDIC files before a microcomputer can read the data.

Even when data are in the same format, different file types exist among programs. Therefore, generalized audit software must be able to either read multiple file types or translate foreign files into readable files. The three most common types of microcomputer files dealt with in an audit are native ASCII files, delimited files and Lotus 123 files. Native ASCII files contain only data. Delimited files separate individual pieces of data with a comma and surround nonnumeric data with quotes; microcomputer database and general ledger packages commonly produce delimited files. Lotus files are spreadsheet files that contain not only the data in the spreadsheet but also directions for the Lotus application software on how to build the spreadsheet. Additionally, other database application files are often used.

Given the mixed formats and file types among client systems, the first task generalized audit software must perform is converting client files into files the audit software can read and manipulate. The more flexible a software package is in accessing files of varying format and type, the more useful it will be in auditing diverse client systems.

Processing. Once data are made readable by audit software, the next step is data manipulation. Such capabilities are designed to perform general procedures inherent in all audits. In addition to complete mathematical manipulation of a data file, common functions include

* Sample selection--calculating different types of statistical samples.

* Extract--the ability to query a data file and remove data that meet the auditor's specified criterion.

* Index--giving each data item in a file a specific reference so the data can be quickly searched and sorted.

* Join--taking two independent files that have at least one data item in common and combining them by matching the common data item.

* Stratify--segmenting the data into subgroups that are based on auditor specified criteria.

* Date arithmetic--counting the number of days since a specific date, so that determining elapsed time between dates is simple addition and subtraction (for example, aging of accounts receivable is easily done if the current date can be subtracted from the invoice date). Exhibits 1 Generalized audit software features and 2 Generalized audit software buyer information outline some of the features of generalized audit software currently available for the microcomputer.

Generalized audit software gives the auditor the tools to manipulate a data set. It does not suggest or design audit programs.

Processing features differ among the generalized audit software products. ACL and Applaud allow a broad range of custom data manipulation to any set of data files. Easytrieve, on the other hand, is less structured and highly flexible but requires some technical expertise. IDEA is menu-driven, which means the auditor simply selects a manipulation task from the menu; however, if the task is not included in the menu, it cannot be done.

The features and functions a package has are listed in exhibit 1. In our use, it appears that the speed differs substantially among generalized audit software programs when carrying out these functions. Individual auditors must decide what levels of technical complexity, speed and flexibility/functionality are appropriate for their practices.

Output. Output can take three forms: standard reports, custom reports and transferring output to another microcomputer application. In addition, the standard report can be a user log, which monitors files used, functions used and elapsed times of work sessions on the microcomputer--effective workpaper documentation for tracking the exact microcomputer audit functions performed.

Standard report printouts are common to all generalized audit software products. However, custom reports require report generators, which are included in three of the packages. The report format can be saved so it can be used over again with different data. Generating custom output is often necessary, since standard reports may not conform sufficiently to a firm's workpaper style.

Workpaper preparation is also facilitated with a software program often referred to as workpaper software. See AUTOMATED WORKPAPER SOFTWARE on page 80 for a discussion and listings of this type of software.

The final option, transferring output to another program, is desirable for two reasons:

* Data can be further processed in other microcomputer applications, such as spreadsheets or databases.

* Generalized audit software does not produce elegant output, but numerous microcomputer programs can create impressive printed documents.

AN EXAMPLE: ACCOUNTS RECEIVABLE

Auditing on a microcomputer basically involves taking data from the client's computer, converting them to a format the auditor's computer can read, processing the client data and finally producing printed output. An example is used to illustrate steps taken in the implementation of computer-assisted auditing. This simple accounts receivable example is not meant to extend generalized audit software to its limit. Rather, the example illustrates the variety of potential audit applications. The following phases are discussed:

* Planning the application.

* Converting the data.

* Processing the data.

Planning the application. Planning the audit is always important, and particularly so when computer processing is involved. A written plan guides implementation and provides audit documentation. The plan starts with the audit objectives and defines the data input and processes necessary to perform the required analyses. If there is any question about using the microcomputer in the audit, an investigation of its feasibility should be performed immediately, particularly if the plan involves audit steps that cannot achieve the intended results in an alternative noncomputerized way.

The primary audit objectives for accounts receivable are existence and valuation. The computer is used to select and print confirmations to test for existence. It also is used to produce an aging of receivables and special reports to help the auditor analyze collectibility. Finally, a schedule of invoices is extracted for auditor testing. Thus, the entire confirmation, bad debt review and invoice selection processes are automated, and the auditor is left with more time to concentrate on factors requiring judgment, such as the valuation of doubtful accounts.

Converting the data. After the application has been defined in general audit terms, the auditor should look at the client's data files. These will need to be downloaded so they can be processed by the generalized audit software.

Typically, the client's data processing department assists in this request. Because of the setup and size of mainframe files, it is often necessary for the client to produce an extract file--a special file containing only audit-related data items--for the auditor. Although producing extract files is straight-forward, all data requests should be placed early to avoid timing conflicts with the data processing department. In our example, we would request a file with records consisting of the following fields: customer name, account number, balance, address, city, state and ZIP code. Additionally, we would request individual invoice data for aging and analysis. With these data we can select and print confirmations, print a negative balance report, print a customer report sorted by balance size, perform an aging of accounts receivable and select a group of invoice records to trace to the original source documents.

The size of the extract file should be estimated before the data request to ensure the data fit on the microcomputer's hard disk. Technical knowledge of field sizes and "bytes" is needed, but the client's data processing staff should be able to assist. In our example, an accounts receivable file with 5,000 customers, their balances, names and addresses occupies between one and two megabytes of disk space (that is, 10% of a small microcomputer hard disk). However, processing requires additional disk space. The amount of space needed depends on the type of software used, but two to three times the size of the data file is a good rule of thumb for estimating disk space needed.

The extract file must be loaded into the auditor's microcomputer by electronic transfer or magnetic tape. Electronic transfer can take place using a modern (that is, a piece of telephone communications hardware connected to the microcomputer) or may be accomplished directly if the client's system supports electronic transfer between the mainframe and microcomputers.

The auditor also should request the data be saved on magnetic tape. Mainframe and minicomputers use nine-track tape. Microcomputers with an attached tape drive can either read this tape directly or dump its contents to the microcomputer's hard disk. In the absence of a tape drive, nine-track tape can be converted to a microcomputer file format and saved to floppy disks by a service bureau.

When the client data have been loaded into the auditor's microcomputer, generalized audit software can perform an on-screen record layout of the extract file, which allows on-screen viewing of the data definitions before converting any formats or file types. If the data are correct, the conversion functions in the generalized audit software package transform the extract file so it can be processed by the auditor's microcomputer.

Processing the data. The extract file can be queried based on the auditor's criteria; in this case, we will use dollar unit sampling. The output from the sample calculations are used as the basis for determining which receivables to confirm. Personalized confirmations are printed for each customer by the audit software, and the accounts selected for confirmation are saved to a file for analyzing returned responses. The only manual step involves adding a signature to the confirmations.

The negative balance report is easily prepared by extracting all receivables with balances less than zero, and a sort on receivable balances is the basis for a customer balance report. From the invoice file, the date arithmetic function allows an aging of accounts receivable, and the extract function creates a file containing records that will be traced to original invoices. Output from these procedures involves sending the appropriate files and the aging schedule to a printer.

The only caveat is: If a data file is of significant size, the processing should be tested on a small sample first. This will allow the "bugs" to be worked out quickly in a risk-free setting.

ADDITIONAL SERVICES

The added flexibility and speed of using microcomputer-based generalized audit software to assist in audits do not come without costs. Initial start-up costs, employee training, microcomputer hardware and software purchase and maintenance are the major outlays required. A generalized auditing system is probably not cost-effective for a one-time application, but it may be so for a single client if the audit is repeated; it certainly is cost-effective if multiple clients can be processed with the same auditing system. While the initial costs may be more easily quantified than the initial benefits, the long-term potential of microcomputer-assisted auditing should be considered in the decision to implement this technology.

Other than costs, the size of files is the most common limiting physical factor in microcomputer-assisted auditing. However, if the auditor is careful to make data requests for only the necessary data fields for auditing, a surprisingly large amount of information can be processed efficiently on the microcomputer.

Performing an effective audit at a lower overall cost is indeed possible with a smooth-running microcomputer system using generalized audit software. Additionally, the client may be so impressed with the auditor's computerized reports that it may request additional services from the auditor. Reduced audit costs, increased audit quality and expanded client services are the rationale for using microcomputer-based generalized audit software.

AUTOMATED WORKPAPER SOFTWARE

Programs known as workpaper, or trial balance, software are probably used more often by accountants who audit with microcomputers than are generalized audit software programs. Workpaper software simplifies the preparation of financial statements by integrating the audit workpapers, schedules and trial balances. When the auditor enters adjustments and reclassifications, related schedules and financial statements are updated automatically. These programs are valuable time-saving tools since they streamline some of the tedious work of preparing financial statements.

A number of standalone and template packages (used in conjuction with a spreadsheet) are available. Following are some popular programs. Prices are generally for site licenses, which vary with the number of users. In some cases, a single-user price is also available.

Accountant's Trial Balance $950

American Institute of CPAs 1211 Avenue of the the Americas New York, New York 10036 [phone]

AuditCube $1,750

Blackman, Kallick & Co. 300 South Riverside Plaza Chicago, Illinois 60606 [phone]

Express Workpapers $550

Litton Shafer Computer Services, Inc. 2 West Second Street Frederick, Maryland 21701 [phone]

FAST! Financial $1,995

Prentice Hall Professional Software P.O. Box 723597 Atlanta, Georgia 30339 [phone]

FAST/CPA $2,225

McGladrey, Hendrickson & Pullen 1300 Midwest Plaza East 800 Marquette Avenue Minneapolis, Minnesota 55402 [phone]

focus: ABC                              $495
Hemming Morse, Inc.               (template)

160 Bovet Road San Mateo, California 94402 [phone]

Pre-Audit $3,600

Coopers & Lybrand 1251 Avenue of the Americas New York, New York 10020 [phone] [Exhibits 1 and 2 Omitted]

SCOTT D. JACOBSON, CPA, is a manager with Deloitte & Touche, Minneapolis, Minnesota. He is a member of the American Institute of CPAs. CHRISTOPHER WOLFE, CPA, DBA, is an assistant professor of accounting at Texas A&M University, College Station, Texas. He is a member of the AICPA and editor of the Journal's Micros/Technology department.