The term "Data" which was used a few decades ago was generally structured data and most of them were human-generated. However, currently, the way technology has taken over most aspects of the business, the data has become more heterogeneous and more unstructured. Data analysis plays a very important role with the objective of drawing a meaningful conclusion from heterogeneous data. Larger audit firms and increasingly smaller audit firms utilize data analytics as part of their client offering to reduce risk and add value to the clients. For auditors, the main driver of using data analytics is to improve the quality of the audit. It helps in a better understanding of the organization and better-identifying risks. It helps in generating audit programs that address the client-specific risks thus allowing auditors to be more timely and efficient in arriving at the results.
In this article, we would discuss two important areas where the auditors need to concentrate:
a. Accounts Payable
b. Accounts Receivable
During the process study, it is vital to review the controls around the process. For example, in the case of Accounts Payable, it is important to understand whether the client is procuring the right products, at the right price, at the right time from the right vendor.
The following could be a potential risk in ACCOUNTS PAYABLE.
|
Risk |
Implication |
|
Payments are made to the unauthorized supplier |
Unauthorized suppliers could represent former supplier that supplied goods or services which were unacceptable and blocked in the supplier list. OR They could be fictitious suppliers. |
|
Payments are made to individuals or employees |
Payments are made to individuals or employees could represent a diversion of the company’s payment indicating fraud |
|
Unauthorized premiums are given to a supplier |
Unauthorized premiums may represent overpayments to suppliers in return of any undue favor. |
|
Invoices are paid late |
Delays in processing accounts payable approval can result in a loss of available discounts for timely remittances and understatement of liability in a particular period. |
|
Invoices are processed twice |
Duplicate payments can result from failure to cancel documents to prevent re-use or processing errors in Accounts Payable such as restoring a backup file twice. |
|
Payments are made in a way that may not be detected in audits |
Perpetrators of fraud may arrange payments to avoid detection. For example, a large amount may be split into several smaller payments to coincide with the perpetrator's transaction approval limit to avoid limit checks of larger payments |
DATA ANALYSIS
1. Stratify the size of payments and extract any exceptionally high payments.
2. Analyze the payment days and identify suppliers with favorable payment terms.
3. If the computer system captures the approving authority for a transaction, examine the distribution of each manager.
4. Review the terms with vendors and verify the favorable terms with vendors
5. Review the transactions at or near spending authorities.
Testing of exceptions
1. Identify the payments made to unauthorized suppliers by matching the payments and authorized supplier list
2. Test for large discounts
3. Test for duplicate invoices using value and supplier code as key fields for one test purchase order number for another.
4. Identify the payments made on Sundays and other days that are not valid
5. To find if amounts are being approved at or just below the break-up point in authority level by a value distribution across the whole ledger.
6. Look for the splitting of invoices to enable the approval by the fraud perpetrator. Extract all invoices within 90% of the approved limit and search for all the invoices from that supplier.
7. Sort the data by approval manager, department, and date to identify possible splits of invoices or summarize payments by an invoice number and find how many partial payments have been done for each invoice.
8. Test of large one-off payments to the supplier
9. Test for suspected duplicate supplier name
10. Test for incomplete or unusual supplier details
Following are the potential risk in ACCOUNTS RECEIVABLES
|
Risk |
Implication |
|
Accounts receivables ledgers are incorrectly consolidated or summed |
Items could be omitted. The Accounts receivable statement may be overstated or understated depending on the direction of error. |
|
Credit may be granted to customers who are likely to default |
The business may sell goods to the customers from which they will not be able to recover the amount. This has potential implications for liquidity and bad debts |
|
Customers are double billed |
Double billing results in an overstatement of revenue. It can also impact customer satisfaction. |
|
Accounts receivables are invalid or incorrectly stated |
Accounts could be entirely or partially invalid. Fictitious accounts could result in fraud. |
|
Improper allocation of credits and payments |
Improper allocation of accounts may result in improper information and assessment |
|
Ageing of accounts receivables may not be proper |
If the ageing of accounts receivables is not correct, management may fail to take timely action for the overdue’s accounts. |
|
Improper classification of the amount |
Results in a distortion of the information and may hamper the decision-making process |
DATA ANALYSIS
- Profile the debtors using stratification to see the number of large debts and what proportion of value is in large numbers.
- Identification of old / non-moving items through ageing analysis
- Identify large balances either in their own rights or compare the same with turnover
- Report credit balances
- Identify unmatched cash or credits
Testing of Exceptions
1. Test the items with invoice dates or numbers outside the expected range.
2. Compare the balances with credit limits and report the exceptions
3. Identify partial payment of debts
4. Identify invalid transaction types
5. Test the duplicate invoices
6. Verify the vendor master to review the same ID assigned, same vendor name to two different vendors, payment of the same invoice number
7. Comparison of the customer balance with its turnover
8. Compare the vendor ledger to accounts payable
9. Comparing the inventory records with the sales made
Source: Data Analysis by Auditors issued by ICAI
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