Key Areas to test

WHEN Building an
Effective Audit Plan

Building an Effective Audit Plan

Auditors today work in an exceptionally complex and always-evolving industry. In an

environment where there is pressure to add more value with fewer people and less time,
auditors are being challenged to discover more risks, audit more areas more frequently
and uncover any fraud in their organization.
Yesterdays ineffective audit planning method
Many audits today are conducted at planned intervals rather than based on thoughtful
consideration of evidence that points to patterns or risky areas. Instead, auditors select a
given area and ask the organization if it is risky. Depending on the response, an audit will
either be performed annually or every two to three years if its deemed to be less risky.
Unfortunately, this method of planning can allow areas of risk to be overlooked and fraud
or other issues to go undetected.
Todays effective audit planning method
To help improve the effectiveness of their audits and to clearly demonstrate their value to
the organization by pinpointing findings that will save the company money, auditors must
first plan their audits better.
A more systematic approach to audit planning offers a variety of advantages, including:

Breaking risks down into individual risk factors and then being able
to align those risks across the audit landscape
Individually scoring risks for each auditable process
Calculating an overall score that indicates each audit units
level of risk
Evaluating relative riskiness in order to establish the audit scope

The data analytics approach to audit planning

Its well known amongst auditors that data analytics helps simplify and improve audits, reduce costs and
detect potential fraud, errors and abuse earlier. However, many auditors are missing the opportunity to
leverage data analysis software to help prepare a rounded and well-thought-out audit plan. Using data
analytics during the audit planning phase helps to focus audits, allocate resources effectively, save time
and detect relevant information about the business.

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Building an Effective Audit Plan

Audit planning done right

Running data analytic tests during the audit planning phase helps provide a better
understanding of what is happening in the organization, the areas of greatest risk,
where control breakdowns are occurring, and the state of risk management in the
company. Utilizing insights provided by data analysis in this phase of the audit helps
shift or refine the focus of the audit early on.
Using data analysis in the planning process also provides auditors with a more
comprehensive understanding of the scope of the business, and helps identify
specific questions to put to the company to adjust the focus of the audit as
required. For example, auditors can move from asking general questions such as,
Are you getting the best price from vendors by maximizing credit terms? to more
focused questions like, We usually purchase computer monitors for $250, but after
moving office locations earlier this year we bought the same monitors from the
same vendor for $350. Whats happened that accounts for this change?

How to start building your audit plan

To build an effective audit plan, you must first assess different areas of the
organization for risksbut where do you start? Trying to analyze each and every
area from the get-go can be time-consuming and overwhelming. The best option
is to instead start with a few key areas at a time and the ones that reveal the most
problems are the ones that should be audited first. You can then expand your testing
to include other areas.
Here are five key areas you can test to reveal potential risks to help you build your
audit plan based on information derived from data analytics. Following those
analyses, you can find a list of other calculations and tests to then perform during the
actual audit of these areas:
Accounts Payable
Accounts Receivable
General Ledger
Payroll
Stock and Inventory

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Building an Effective Audit Plan

Data Analytics for Accounts Payable Data

Although suppliers will normally raise any problems regarding Accounts
Payable, it is often important to establish that liabilities are not being
understated or suppressed. Many tests relate to supplier master file details.
This often resides on a different file to the detailed ledger items. Data
analysis software can help in several ways:

Data Analytics for Accounts Payable Data

Task
Tests to run during
audit planning

Description

Reconcile check register to disbursements by vendor invoice

Select and report details of various types of accounts and compare
with turnover
Summarize invoices by supplier to prove individual balances
Create activity summaries for suppliers with duplicate products
Generate cash requirements by bank, period, product, vendor, etc.
Isolate vendor unit price variances by product
Create activity summaries by supplier
Reconcile check register to disbursements by vendor invoice
Total posted invoices for the year for accurate vendor rebates
Evaluate purchasing contract compliance

Calculations to perform
in an audit

Cast (total) files; it is often best to separate debit and credit balances
Identify vendor unit price variances by product over time
Calculate cash requirements by bank, period, product, vendor, etc.
Isolate vendor unit price variances by product
Calculate days in Accounts Payable and average days for invoices to
be paid

Possible exception alerts

during an audit

Identify debit balances, unusual standing data, old invoices and

invoices with missing order numbers
Test for items with dates or references out of range (cut-off)
Identify and total liabilities for goods received and not yet invoiced
Extract total posted invoices for the year for accurate vendor rebates
Find invoices without a purchase order (PO)
Identify cash/lost discounts not taken
Extract total posted invoices for the year for accurate vendor rebates
Extract invoices posted with duplicate PO numbers

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Building an Effective Audit Plan

Data Analytics for Accounts Payable Data
Task

Description

Tests for gaps and

duplicates to run during
an audit

Tests for matching and

comparing to run during
an audit

Test for duplicate payments/invoices, bank account details, POs,

invoice payments, or freight and tax charges
Identify invoices posted with duplicate PO numbers
Create activity summaries for suppliers with duplicate products
Match subsequent period payments against period and balances to
identify unmatched payments
Compare supplier price lists to Electronic Data Interchange invoice
charges to ensure billings are in accordance with agreements
Compare the master file at two dates to identify new suppliers;
voucher or invoices posted against PO amounts
Find distributions to suppliers not in suppliers account ledgers
Compare supplier names, addresses, etc. to those of employees;
recurring monthly expenses to paid invoices; vendor payables to POs
Correlate vouchers or invoices posted versus PO amounts
Check vendor address against mail address lists

Data Analytics for Accounts

Receivable Data
Tests of Accounts Receivable or the Sales Ledger are usually tests of validity.
Items of particular concern are old invoices, unmatched cash and large
balances, particularly where customers are in financial stress. These can all
be identified with exception tests. Some typical tests include:

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Building an Effective Audit Plan

Data Analytics for Accounts Receivable
Task

Description

Tests to run during

audit planning

Calculations to perform
in an audit

Possible exception alerts

during an audit

Tests for gaps and
duplicates to run during
an audit

Tests for matching and

comparing to run during
an audit

Profile debtors using Stratification to see how many large debts there
are and what proportion of value is in the larger items
Analyze average sales amount by customer, sales representative,
product, region, etc.
Stratify and summarize customer information to create customer
profiles
Generate summaries by customer, invoice, amounts, products, etc.
Profile customers purchasing cycles to improve profitability
Report and automatically age total receivables in any format
Cast (or total) files; it often pays to separate out debits and credits
Determine carrying costs by comparing days in collection by
customer; average sales amounts by product, sales rep, etc.
Produce an aged debt analysis (consider how to deal with
unallocated cash and credit notes)
Re-value foreign debts
Check transaction totals to the balance on each account
Calculate lost revenue from unpaid carrying charges by client, day to
payment and summarize by client, region, sales representative, etc.
Show variances between delivery documents and invoices
Identify old items (e.g., greater than three months old); large balances
either in their own right or compared to turnover; unmatched cash or
credits; part payments of debts; invalid transaction types; high-value
credit notes, balances and invoices; credits taken beyond discount
terms
Select accounts with no recorded movements in a set time
Report credit balances
Test for items with dispatch dates or numbers outside expected range
Identify customer addresses that are care of or flagged not to be
sent out
Identify duplicate invoices (both invoice number and customer/
value), credits or receipts, in any order
Report gaps in sequences of invoices generated
Compare balance on an account with its turnover; balances with
credit limits and report exceptions (e.g., accounts with balances in
excess of their credit limits or accounts with no credit limits etc.)
Compare customer balances with credit limits to identify credit policy
exceptions

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Building an Effective Audit Plan

Data Analytics for General Ledger Data

General or Nominal Ledgers contain balances for each account together
with transaction history and various references and descriptions. Some of
the common tests are:

Data Analytics for General Ledger

Task

Description

Tests to run during

audit planning

Provide totals of entries generated by different sources (e.g., purchase

or sales ledger, journal vouchers, etc.) to show the volume and value;
totals of entries generated by different sources (e.g., purchase or sales
ledger, journal vouchers, etc.) to show volume and value; detailed
analysis of selected accounts
Foot (total) balances to ensure they balance to zero; note that some
ledgers include memo amounts which may need to be excluded
Total transactions by account to prove the trial balance
Analyze year-to-date activity for large operating accounts
Create custom balance sheets, P & Ls, cash flow analyses, etc.
Create budget reports by account, division, department, etc.
Speed closing with quick account reconciliations and adjustment
transactions
Re-perform account summarization for management accounts,
financial accounts or consolidation

Calculations to perform
in an audit

Possible exception alerts

during an audit

Test for transactions with dates outside the posting month or year (cutoff); duplicate postings
Select any journal entry for testing and audit purposes for any period

Re-perform automatic allocations over accounts

Calculate and sort percentage variances in accounts between periods
Calculate financial ratios and changes for sales/assets, debt/equity
Compute weighted averages and interest rates
Prepare trial balances by tax groups and calculate various tax
provisions

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Building an Effective Audit Plan

Data Analytics for General Ledger
Task

Description

Tests for gaps and

duplicates to run during
an audit

Tests for matching and

comparing to run during
an audit

Compare balances with previous periods, budgets or management

accounts to show variances and fluctuations
Compare summaries by major accounts in any order
Provide samples of postings for verification (the sample could be
random, exception-based or specified entries)
Stratified random sampling is often appropriate for General Ledgers
as there are often different values and risks associated with different
types of items
Alternatively, the transaction file can be split into different types (e.g.,
sales, purchases) using multiple extractions so that each type can be
tested/analyzed appropriately

Data Analytics for Payroll Data

Payroll is one of the traditional audit areas applicable to most organizations
and an excellent area to use data analysis software. The main objective is
validity, and common tests for this area include:

Data Analytics for Payroll Data

Task
Tests to run during
audit planning

Description

Summarize/stratify salaries by department/grade, etc.

Profile employee ages/years of service to assist in forward planning
Analyze costs for special pay, overtime, premiums, etc.
Summarize payroll distribution for reconciliation to General Ledger
Summarize and compare costs for special pay, overtime, etc.
Create custom payroll reports
Sort employees by name, address and store to identify conflicts-ofinterest where managers have relatives working for them

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Building an Effective Audit Plan

Data Analytics for Payroll Data

Task

Description

Calculations to perform
in an audit

Cast (total) gross pay, net pay, deductions and any other value fields
Calculate gross and net pay

Possible exception alerts

during an audit

Extract all payroll checks where the gross amount exceeds the set
amount

During an audit, assess the

reasonableness of:

Tax code
Pay/grade comparison
Hours worked and overtime claimed
Sick and vacation days taken
Date of birth (over 16, under 65)
Bonuses and other allowances
Gross pay, hourly rates, salary amounts, exemptions, etc.

Tests for gaps and

duplicates to run during
an audit

Duplicate employees (Social Insurance, National Insurance, Social

Security numbers, Employee numbers) on payroll file
Duplicate bank account details, names, and dates of birth

Tests for matching and

comparing to run during
an audit

Comparison of payroll files at two dates to determine recorded hires

and terminations and changes in pay are as expected
Join payroll transactions file to payroll master file to determine if
there are ghost employees on the payroll
Compare time-card entries and pay to payroll and indicate variances;
vendor addresses/phone numbers and employee addresses/phone
numbers to identify conflicts-of-interest

Data Analytics for Inventory

and Stock Data
Inventory and stock can vary in volume and cost within organizations, so its
a worthwhile area to perform some of the following tests:

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Building an Effective Audit Plan

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Data Analytics for Inventory and Stock

Task

Description

Tests to run during

audit planning

Calculations to perform
in an audit

Possible exception alerts

during an audit

Reconcile physical counts to computed amounts

Analyze usage and ordering to improve turnover; analyze high-value
transactions
Summarize and stratify turnover by stock item in any order
Summarize stock on-hand and products by group, location, type, etc.
Create custom reports on stock and high-value balances
Review product reordering volumes by item, warehouse and vendor
Age inventory (e.g., by date of receipt)
Statistically analyze usage and ordering to improve turnover
Test clerical accuracy of totals and extensions
Check product reordering volume by item, warehouse and vendor
Determine the percentage change in sales, price and/or cost levels
by product/vendor
Assess the financial viability of LIFO versus FIFO management

Identify surplus obsolete/damaged inventory by sorted turnover

analysis; differences between standard and actual costs; stock
acquired from group companies
Segregate variances from standard pricing in amount order
Isolate stock lines/products with cost greater than retail price, with
zero/negative quantities, or with zero/negative prices; items where
stock exceeds maximum stock levels
Select items from perpetual stock for test reconciliation

Test for gaps and duplicates

to run during an audit

Test for duplicate parts, item numbers, prices or descriptions

Tests for matching and

comparing to run during
an audit

Compare yearly volume with on-hand quantity for stock items; cost
to retail price for pricing discrepancies; value of physical counts to
General Ledger value

Sampling tests to run during

an audit

Monetary Unit or Random samples for physical verification or

checking additions

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Building an Effective Audit Plan

Build a solid foundation for your audit

based on real facts with IDEA
Advanced data analysis tools, such as CaseWare IDEA Data Analysis software, help you
strategically plan your audits and lead to better, more effective audits.
CaseWare IDEA offers more than 100 audit-relevant tasks and a variety of advanced
features to help auditors better plan their audits. A sampling of these features includes:

Universal file conversion capabilities that make it fast and easy to import all records

Common audit functions with just a click, including Gap Detection, Benfords Law,
advanced Fuzzy Duplicate, Summarization, Stratification, Sampling and more

Data visualization with the ability to either auto-populate or custom build dashboards
with charts and field statistics that can be drilled down into

Project Overview, which graphically presents all tasks completed within a project so
that there is always a reliable and accurate audit trail

Contact us today to find out how CaseWare IDEA can help you quickly identify the areas
of risk in your organization so you can plan your audits with confidence.

About CaseWare Analytics

CaseWare Analytics is home to IDEA Data Analysis and the CaseWare Monitor continuous monitoring
platform. Our software solutions are built on a foundation of industry best practices and expertise, enabling
audit, compliance and finance professionals to assess risk, gather audit evidence, uncover trends, identify
issues and provide the intelligence needed to make informed decisions, ensure compliance and improve
business processes. We offer solutions that meet the needs of auditors, analysts, purchasing card managers,
compliance officers and more. With 40 distribution offices worldwide, CaseWare Analytics products and
solutions serve more than 400,000 professionals in 90 countries.

To learn more visit casewareanalytics.com.

www.casewareanalytics.com
1-800-265-4332 ext. 2800
salesidea@caseware.com
IDEA is a registered trademark of CaseWare International Inc.

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