EXPLAIN THE USE AND APPLICATION OF A CONTRACT AUDIT.
Ken LaMance defines a contract as an oral or written agreement between two private parties that creates mutual legal obligations. (, 2020). The word ‘audit’ is borrowed from accounting. It assesses an organization’s financial report – as presented in the annual report – by an individual independent of the organization. (Mohamed ElBorno, n.d).
Zhaokai, Y., & Moffitt, K. C expounded on the concept of contract auditing and innovatively came up with a proposal of a Contract Analytics Framework (CAF)(2019). This framework guides integrating textual analysis with auditing a large number of contracts. Great uses of contract auditing include risk assessment, analytical procedures, substantive testing, and audit review( Zhaokai, Y., & Moffitt, K. C, 2019). The tactic executed when auditing is dependent on the weight of the contract. Material contracts are circumspectly examined to assess the financial implications, whereas contracts regarded as low risk are usually audited using standard sampling techniques. This proposed CAF enables efficacious and coherent audit analyses on entire contract populations(Zhaokai, Y., & Moffitt, K. C, 2019).
The contract analytics framework is implemented and used in six functional areas which are : (1), Additional Audit Tasks, (2)Document Management (3)Term Verification, (4) Record Confirmation, (5) Cutoff Testing, and (6) Content Identification (Zhaokai, Y., & Moffitt, K. C. 2019). Document management comprises the storage, management, and tracking of electronic documents images of paper-based information digitally recorded through a document scanner, thus easing the CAF because digital storage facilitates a more straightforward assessment of contracts during audits.
The contexts of a single term that is used severally in a contract can be clarified and verified. (Zhaokai, Y., & Moffitt, K. C., 2019). Sensitive records used as references for any vital addendum in a contract are confirmed and verified. In contracts involving suppliers, cut off testing is used to check whether the record is reported in the correct accounting period. (Zhaokai, Y., & Moffitt, K. C., 2019).
CAF in content identification distinctly amplifies the effectiveness of the measures implemented to identify if a content piece belongs to a particular party(Zhaokai, Y.,& Moffit, K.C, 2019).
Zhaokai, Y.,& Moffit, K.C., further discuss the application of the CAF in a contract audit(2019). The audit stages of risk assessment, substantive tests, and review are highlighted. All this is based on auditing standards. The framework is then executed on a group of reinsurance contracts to demonstrate the achievability of entirely auditing populations of contracts(Zhaokai, Y., & Moffitt, K. C. 2019). Risk is an inescapable factor in any event. The better an organization’s risk management measures, the better its equipment in dealing with risk. The CAF is portrayed as an outstanding tool in risk assessment. (Zhaokai, Y.,& Moffit, K.C.) CAF is applied in substantive testing and increases the test’s ability to find and eliminate errors in any financial records(Zhaokai, Y.,& Moffit, K.C, 2019).
In conclusion, CAF is an excellent and innovative discovery that concisely brings out the use and application of contract auditing. A contract audit implemented qualitatively on an entire population of contracts instead of a sample set exponentially increases the audit’s effectiveness. (Zhaokai, Y.,& Moffit, K.C, 2019). The better the model of contract audit implemented, the higher the quality of the audit.
References.
Zhaokai, Y., & Moffitt, K. C. (2019). Contract analytics in auditing. Accounting Horizons, 33(3), 111-126.
Ken LeMance. (, 2020). What is a legal contract? Legalmatch.com