Academic journal article Auditing: A Journal of Practice & Theory

An Empirical Investigation of the Relationship between the Computerization of Accounting Systems and the Incidence and Size of Audit Differences

Academic journal article Auditing: A Journal of Practice & Theory

An Empirical Investigation of the Relationship between the Computerization of Accounting Systems and the Incidence and Size of Audit Differences

Article excerpt

SUMMARY

The decade of the 1980s saw a surge in research examining the empirical characteristics of audit differences detected in audit engagements. This paper examines the differential impact of computerization on common attributes of audit differences that have been studied in previous papers. Consistent with prior studies, the results of this study indicate that the majority of audit differences (misstatements) arise due to incorrect computations, differences in management and auditor judgment, faulty initial identification and processing of transactions, and overworked accounting personnel. Likewise, audit differences related to control attributes are usually associated with inadequately skilled personnel, improper or inadequate independent verifications, or improper documents and records; audit differences are rarely associated with inadequate controls over assets or records. This study reports additional findings that incorrect manual computations, the recording of exchange documents, incorrect application of internal controls, and inadequate internal controls are more likely to be sources of problems when information systems are computerized than when they are not. Finally, very few of the audit differences in this study were associated in any way with failures in the computerized system. This information should be useful for auditor planning in computerized environments and highlights the need to adequately consider the nature and reliability of such systems in the planning stages of an engagement.

Keywords: Audit planning, Audit difference, Fraud, Information technology.

Data Availability: Contact the authors concerning data availability.

Information technology can be viewed as a source of increased control over information and business processes or as a potential source of audit problems. Conventional wisdom suggests that data processing will generally be more reliable when automated, but also suggests some important concerns, e.g., converting of data to electronic form, limiting access to software and data, and developing new software. The purpose of this study is to provide empirical evidence about the differential impact of computerization on the causes of audit differences and the effectiveness of internal controls.(1) To facilitate audit planning, auditors obtain an understanding of internal control, make assessments of the inherent and control risks of significant financial statement assertions, and determine the nature, extent and timing of audit procedures to perform. In order to accurately assess inherent and control risk, auditors must have a good understanding of the attributes of reliable accounting systems. Available evidence suggests that audit differences will occur more frequently when an accounting system is poorly designed, overly complex, relies on manual computation, or lacks key controls. This paper examines whether extensive computerization within the accounting system has a differential impact on the association of these general attributes with the incidence and magnitude of audit differences.

Consistent with prior studies, this study reports that most audit differences arise from differences in judgment between the auditor and management, incorrect manual computations, incorrect application of internal controls, missing internal controls and breakdowns due to overworked accounting personnel. More importantly, this study reports additional findings that incorrect manual computations, improper recording of exchange documents, incorrect application of internal controls, and inadequate internal controls are more likely to be sources of problems when information systems are computerized. The results reported in this paper should be important to auditors who are planning engagements in a computerized environment.

The remainder of the paper is organized as follows. The next section describes the elements of inherent and control risk that are of interest in this study and the expected relationship between computerization and audit risks. …

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