Internal Audit Testing and Sampling Techniques Chartered Institute of Internal Auditors – May 2014
Controls Testing
Testing Priorities Risk B1
Risk B2
Risk C2
Risk A2
Risk C1
Risk A1
Controls testing
Testing techniques
Inquiry
Observation Inspection/ Examination Re-performance
Controls testing
Control testing
Tests of controls are designed to obtain evidence to assess their operating effectiveness. Operating effectiveness means that the controls are functioning as designed on a consistent basis over the period under examination.
- Inquiry – consists of seeking information of knowledgeable people within the client - Observation – consists of looking at a process being performed by others - Examination ◦ inspection of information or data ◦ walkthrough – confirming our understanding of a process by tracing individual transactions from beginning to end - Re-performance – independent execution of procedures that were originally performed as part of management’s internal controls
Controls testing
Determining which Testing technique to use
Re-performance Level of Comfort
Inspection/ Examination
Observation Inquiry
Controls testing
Determining which testing technique to use Considerations: • The susceptibility of the control to change. • The frequency and extent of the control. • Our initial view of the likelihood of control weakness. • Significance of the control to the control environment and how much reliance is being placed on it.
Value Protection - execute
Sampling
• Sampling is the application of auditing procedures to a representative group of less than 100% of the items within a homogenous population
3 Steps to follow: 1.
Determine the control test objective, population and sampling unit
• We use non-statistical sampling
2.
Determining the sample size
3.
Selecting the sample for testing
Value protection – Execute
Sampling Manual Controls Depends on: • Frequency of control or population size • Level of evidence that is judged to be necessary The table below, can be used as a general rule; however, we may use a smaller sampling size: Frequency of Control
Assumed population size
Sample Size
Annual
1
1
Quarterly
4
2
Monthly
12
2 (minimum) to 5 (maximum), Select 3 if you require a mid-range.
Weekly
52
5 to 15. Select 10 if you require a mid-range
Daily
250
20 to 40. Select 30 if you require a mid-range
Multiple Over 250 times per day
25 to 60. Select 30 or 45 if you require a mid-range
Value protection – Execute
Sampling Manual Controls Following factors may indicate that sample sizes should be selected at the higher end of the ranges: - The greater the potential financial loss or adverse event to the company if the control is not effective or fails: - The more complex the control - The greater the degree of judgment in control operation
Value protection – Execute
Sampling Automated Controls If IT General Controls have been tested and found to be effective, it may be sufficient to only test one operation of the Automated Control
Documentation
Audit documentation
Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to:
Remember: if what you did isn’t documented, it’s the equivalent of not performed!
- Understand the nature, timing, extent and results of the procedures performed, evidence obtained, and conclusions reached - Determine who performed the work and the date such work was completed, as well as the person who reviewed the work and the date of such review. - Understand the linkage between conclusions and facts - Document what you have done and how you reached your conclusions
Confidential
The changing shape of internal audit Increased use of technology Drivers for change (top 3):
1. Complexity increased use of technology within the business | higher volume of transactions | increased automation | businesses driven by data | devil is in the detail | how do you find a needle in the hay stack?
2. More for less pressure to deliver more with less | value | quality | efficiency | insight | pressure to deliver with less resource and using samples?
3. Resources skills sets | innovation | technologically minded team | reduced fear factor | development opportunities for your people? May 2014
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Confidential
May 2014
13
Confidential
What are CAATs? Computer Assisted Audit Techniques
A means of accessing large amounts of data in a format that can provide transparency not attainable through other auditing procedures. The results may be used to identify areas of key risk, fraud, errors or misuse; improve business efficiencies; verify process effectiveness; or influence business decisions. (ISACA August 2011) May 2014
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Confidential
Data analytics - methodology
Extract and upload raw data May 2014
Map and organise data
Analyse and visualise data
Finalise audit evidence, identify anomalies and insight
15
Computer Assisted Audit Techniques Advantages How can you ever pick a sample that is representative? Expandable model, allowing tests to be refined, tuned, added, removed Standing still or moving with the times? You can quickly identify and address emerging issues and risks In the future it will allow audit tests to be “pushed” into the organisation as monitoring controls May 2014
1 2 3 4 5
Increased coverage – 100% of transactions Efficiency – repeatable and automated Value and insight – improve the perception of IA Basis for prioritisation of where to look next in the organisation Climb the maturity curve – predictive business enabler 16
Confidential
Data analytics on vendor standing data Identify duplicate vendors based on the same or similar (fuzzy match) vendor name. Identifying and resolving duplicate vendor records is important as otherwise this could lead to loss, error or fraud. For example: loss of purchasing volume discounts available where spend with a specific supplier is recorded across two or more records for the same supplier, error if one vendor record is updated but the duplicate vendor record is not resulting in incorrect and inconsistent records, and fraud for example where duplicate vendor records are used to process payments below a review threshold.
12,253 vendors listed in standing data
1,031 perfect duplicates
May 2014
46
96
231
fuzzy match with 1 character difference
fuzzy match with 2 character difference
fuzzy match with 3 character difference 17
Exercise
You are the internal auditors to an NHS Trust. You have been asked to undertake a review to assess the accuracy of the information used to support the KPIs that are reported to the Board on a monthly basis and to external regulators quarterly. What would you consider in devising a testing approach?
Exercise
You are the internal auditors to an NHS Trust. You have been asked to undertake a review to assess the accuracy of the information used to support the KPIs that are reported to the Board on a monthly basis and to external regulators quarterly. You are driving to work and hear on the radio that a NHS Trust in another part of the country has got into serious trouble for mis-reporting cancer waiting times data. There seems to be an issue in distinguishing between cancellations and DNAs. Would you do anything differently.
May 2014
Exercise
You are the internal auditors to an NHS Trust. You have been asked to undertake a review to assess the accuracy of the information used to support the KPIs that are reported to the Board on a monthly basis and to external regulators quarterly. You are driving to work and hear on the radio that a NHS Trust in another part of the country has got into serious trouble for mis-reporting cancer waiting times data. There seems to be an issue in distinguishing between cancellations and DNAs. In checking the above with the client you realise that they may have innocently mis-interpreted the above and that this might mean that they have been misreporting data to their external regulators. What would you do?
May 2014
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