F8 SCENARIO QUESTION DISCUSSIONS –Q4 (a & b), December 2007. Topic: Audit Software

This is a discussion relating to Q4 (a & b), December 2007. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2007_dec_q.pdf

I am looking at both parts (a) and (b) of this question as they both relate to the scenario.

The topic is audit software, the company is called Delphic Ltd.

Part (a) has a relatively straigntforward approach to it: we are being asked for PROCEDURES and REASONS again, so we can approach it in tabular format.
With 2 marks to be obtained for each procedure & reason together, five of each should be enough to get full marks here.

However, if you mention an audit software procedure WITHOUT calling attention to Delphic, which can easily be done, the most you will get is 1/2 a mark for your procedure. So let’s try and relate.

It is the middle two sentences of paragraph one that are relevant to the debtors balance.

“Delphic buys the furniture from six major manufacturers and sells them to over 600 different customers ranging from large retail chain stores to smaller
owner-controlled businesses. The debtors balance therefore includes customers owing up to £125,000 to smaller balances of about £5,000, all with many different due dates for payments and credit limits.“

NOTE:
– Over 600 debtor accounts (long list of debtors; many payments and credit limits)
– Many different due dates for payments (possibility of bad debts)

With this in mind, we must pick the procedures that relate to having many debtors, many due dates for payments, bad debts and credit limits… and apply them here.

Common sense brings to mind several procedures associated with a debtors ledger, credit limits and bad debts. They are (purpose for procedure in brackets):

(1) Casting the debtors ledger. Does it agree with the total in the debtors control account? (For completeness and accuracy)
(2) Comparing the balance of each debtor account with the credit limit to ensure it hasn’t been exceeded. (To make sure system rules are not violated)
(3) Doing an aged debtors analysis to identify bad debts. (Valuation test)
(4) Calculate debtor days for each month. Monitor the debtors ledger throughout the year. (Obtaining relevant statistics)
(5) Look for all material debtors balances and take a sample of those for testing. (Audit testing purposes)

In short – CAST LIST, CREDIT LIMIT, AGED DEBTORS, DEBTOR DAYS, SAMPLE

Part (b)

Part (b) focuses on the problems of using audit software at Delphic. Again, this can be answered in columnar format. Think PROBLEM and RESOLUTION here. I will take the final two paragraphs of the question and highlight the key words in bold.

4 problems and resolutions should be enough for maximum marks.

For the first time at this client, you have decided to use audit software to assist with the audit of the debtors balance. Computer staff at Delphic are happy
to help the auditor, although they cannot confirm completeness of systems documentation (1 and 2), and warn that the systems have very old operating systems in place, limiting file compatibility with more modern programs. (3)
The change in audit approach has been taken mainly to fully understand Delphic’s computer systems prior to new internet modules being added next year. To limit the possibility of damage to Delphic’s computer files, copy files will be provided by Delphic’s computer staff (4) for the auditor to use with their own audit software.

(1) The computer systems of the client have not been fully documented. Set-up costs of the software could be very expensive. (Resolution: Cost-benefit analysis)

(2) It cannot be confirmed that all systems documentation is available. System changes will lead to expensive set-up costs. (Resolution: Possibly defer using audit software until next year)

(3) Changing from very old operating systems to new ones will ensure costly amendments to the audit software. (Resolution: Defer using audit software until a later date)

(4) We can’t be certain that the COPY FILES used are Delphic’s genuine files. (Resolution: The auditor should supervise the copying of the “live” files for testing purposes)

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Hope this helps!