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Chapter 7: Computer Assisted Analytical Techniques

Chapter 7: Computer Assisted Analytical Techniques. The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. – Bill Gates.

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Chapter 7: Computer Assisted Analytical Techniques

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  1. Chapter 7: Computer Assisted Analytical Techniques BUSI3172 2015

  2. The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. – Bill Gates BUSI3172 2015

  3. General Analysis Software • High level language similar to Microsoft Access with many functions to enable auditors to retrieve and analyze data. • Common packages are ACL and IDEA • Can be learned in a day • Excel and Microsoft Access can also be used effectively as GAS. BUSI3172 2015

  4. Integrated Test Facility • Can be used to set up a test unit in the client’s organization • Run test transactions through the test unit and subject them to all controls BUSI3172 2015

  5. Typical Audit Functions Available in a GAS package • Extracting Data from Files • Verifying calculation • Joining tables • Reorganizing Data • Statistical sampling • Statistical analysis BUSI3172 2015

  6. Common GAS Packages • Audit Command Language (ACL) www.acl.com • Interactive Data Evaluation and Analysis (IDEA) www.caseware.com • Both come in standalone, client/server and mainframe versions BUSI3172 2015

  7. ACL and IDEA • Very similar in functions. • User friendly, can be learned in a day. • Its power increases with the growth in hardware technology; e.g., computing power of hardware doubles annually BUSI3172 2015

  8. GAS Applications for Banks • Deposits, e.g., checking withdrawals from dormant account. • Loans, e.g., verifying interest calculation. • Credit cards, e.g., verifying service charges to merchants • Non-interest revenue, e.g., verifying calculation. BUSI3172 2015

  9. GAS Applications - Revenue • Sales, e.g., selecting a sample to vouch • Receivable, e.g., aging • Cost of sales, e.g., cross-referencing to inventory relief • Commissions, e.g, verifying calculation BUSI3172 2015

  10. GAS Applications - Expenditure • Purchases, e.g., checking to warehouse receipts indicated in data file • Inventory, e.g., obsolescence • Expenses, e.g, analytical review • Payroll, e.g., verifying calculation BUSI3172 2015

  11. ACL and IDEA Features • Common operators include arithmetic and comparisons • Common functions available for field, character and digit manipulation; similar to Excel’s. BUSI3172 2015

  12. ACL and IDEA Features • Join 2 files based on a common key to a new file that contains all or a subset of the fields from the source files. This enables better correlation and analysis. For example, the accounts receivable master file can be joined with the invoice file to check credit limit to sales. BUSI3172 2015

  13. ACL and IDEA Features • Analyze a file to statistics like averages and media on selected fields • Stratify • Aging BUSI3172 2015

  14. ACL and IDEA Features • Gap analysis • Duplicate record check • Sampling and evaluation • File import and export BUSI3172 2015

  15. ACL and IDEA Features • Fraud analysis based on the Benford Law • Benford Law says that the first digit of a natural number like expense or population is mostly likely 1 and least likely 9. • Formula for the probability of a number starting with the string “n” is Log10 (1 + 1/n); e.g., the probability of a number starting with 1 is Log10 (1+ 1/1), or 30.1%; the probability of a number starting with 314 is Log10(1 + 1/314), or .14%, this makes sense because 314 is so restrictive. You can use Excel to verify this. BUSI3172 2015

  16. Benford’s Law • Benford's law, also called the first-digit law, states that in lists of numbers from many real-life sources of data (i.e., natural numbers like amounts, but not account number which is arbitrarily assigned), the probability of 1 being the leading digit is very high, 30%; and higher order digits occurring as the leading digit have successively less probability, to the point that 9 as the first digit has a probability of less than 5%. BUSI3172 2015

  17. Benford Law Distribution BUSI3172 2015

  18. Benford Analysis • Applying the Benford Law, an analyst can look for frequency of leading digits to compare to the Benford averages. A significant variance may indicate fraud, i.e., some numbers were plugged in as opposed to having arisen from natural transactions. • The law about the first digit also applies to the second digits… in less magnitude. BUSI3172 2015

  19. Benford Law • The longer a number, the more it obeys the Benford Law. • A one-digit number is not in reliable obedience. • Any natural number with at least 3 digits fits the Benford Law quite well, and if a number exceeds 9 digits, the Benford precision will stay fairly constant afterwards, i.e., the law of large numbers. BUSI3172 2015

  20. MC Question • Which of the following number values can be tested with the Benford Law? • A. Social insurance number • B. Student number • C. Store marked down sales price • D. Store inventory value for a product • E. Class size BUSI3172 2015

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