it auditing & assurance, 2e, hall & singleton chapter 4: systems development &...
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IT Auditing & Assurance, 2e, Hall & Singleton
Chapter 4:Systems Development & Maintenance Activities
IT Auditing & Assurance, 2e, Hall & Singleton
PARTICIPANTS Systems professionals End users Stakeholders ACCOUNTANTS
Internal External Limitations of involvement
IT Auditing & Assurance, 2e, Hall & Singleton
ACCOUNTANTS/AUDITORS
Why are accountants/auditors involved? Experts in financial transaction processes Quality of AIS is determined in SDLC
How are accountants involved? Users (e.g., user views and accounting
techniques) Members of SDLC development team
(e.g., Control Risk being minimized) Auditors (e.g., auditable systems)
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I.S. AQUISITION
In-house development
Purchase commercial systems
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TRENDS IN COMMERCIAL SOFTWARE
Trends in commercial software Relatively low cost for general
purpose software Industry-specific vendors Businesses too small to have in-
house IS staff Downsizing & DDP
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Turnkey systems
General accounting systems Typically in modules
Special-purpose systems Example banking
Office automation systems Purpose is to improve productivity
Backbone systems (ERP) SAP, Peoplesoft, Baan, Movex
Vendor-supported systems Hybrids
TYPES OF COMMERCIAL SYSTEMS
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Advantages Implementation time Cost Reliability
Disadvantages Independence Customization needs Maintenance
COMMERCIAL SYSTEMS
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SYSTEMS DEVELOPMENT LIFE CYCLE (SDLC)
New systems1. Systems planning2. Systems analysis3. Conceptual systems design4. System evaluation and selection5. Detailed design6. System programming and testing7. System implementation8. System maintenance
SDLC -- Figure 4-1 [p.141]
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PURPOSE: To link individual systems projects to the strategic objectives of the firm.
Link individual projects to strategic objectives of the firm - Figure 4-2 [p.142]
Who does it? Steering committee CEO, CFO, CIO, senior mgmt., auditors, external
parties Ethics and auditing standards limit when auditors
can serve on this committee Long-range planning: 3-5 years Allocation of resources - broad
SYSTEMS PLANNING– PHASE I
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SYSTEMS PLANNING-PHASE I
Level 1 = Strategic systems planning Why?
1. A changing plan is better than no plan2. Reduces crises in systems development3. Provides authorization control for SDLC4. It works!
Level 2 = Project planning Project proposal Project schedule
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Auditor’s role in systems planning Auditability Security Controls
SYSTEMS PLANNING-PHASE I
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Identify user’s needsPreparing proposalsEvaluating proposalsPrioritizing individual projectsScheduling work
Project Plan – allocates resources to specific project
Project Proposal – Go or not Project Schedule – represents mgmt’s
commitment
SYSTEMS PLANNING-PHASE ISUMMARY
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PURPOSE: Effectively identify and analyze the needs of the users for the new system.
Survey step Disadvantages:
Tar pit syndrome Thinking inside the box
Advantages:• Identify aspects to keep• Forcing analysts to understand the
system• Isolating the root of problem symptoms
SYSTEMS ANALYSIS-PHASE II
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Data sourcesUsersData storesProcessesData flowsControls
Transaction volumesError ratesResource costsBottlenecksRedundant
operations
Gathering facts
SYSTEMS ANALYSIS-PHASE II
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Fact-gathering techniques Observation Task participation Personal interviews Reviewing key documents
(see list, p. 147)
Systems analysis report Figure 4-3 (p.148)
Auditor’s role CAATTs (e.g., embedded modules)
SYSTEMS ANALYSIS-PHASE II
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PURPOSE: Develop alternative systems that satisfy system requirements identified during system analysis
1. Top-down (structured design)[see Figure 4-4, p.150] Designs general rather than specific Enough details for design to demonstrate differences Example: Figure 4-5, p. 151
2. Object-oriented approach (OOD) Reusable objects Creation of modules (library, inventory of objects)
3. Auditor’s role special auditability features
CONCEPTUAL SYSTEMS DESIGN-PHASE III
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PURPOSE: Process that seeks to identify the optimal solution from the alternatives
1. Perform detailed feasibility study Technical feasibility [existing IT or new IT?] Legal feasibility Operational feasibility
Degree of compatibility between the firm’s existing procedures and personnel skills, and requirements of the new system
Schedule feasibility [implementation]
2. Perform a cost-benefit analysis Identify costs Identify benefits Compare the two
SYSTEM EVALUATION & SELECTION–
PHASE IV
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ONE-TIME COSTS:• Hardware acquisition• Site preparation• Software acquisition• Systems design• Programming• Testing• Data conversion• Training
RECURRING COSTS:• Hardware maintenance• Software maintenance• Insurance• Supplies• Personnel
• Allocated existing IS
SYSTEM EVALUATION & SELECTION-PHASE IV
Cost-Benefit Analysis: Costs
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TANGIBLE:• Increased revenues
• Increased sales in existing markets
• Expansion into new markets
• Cost Reduction 1
• Labor reduction• Operating cost reduction
• Supplies• overhead
• Reduced inventories• Less expensive eqpt.• Reduced eqpt. maint.
INTANGIBLE 2:• Increased customer
satisfaction• Improved employee
satisfaction• More current information• Improved decision making• Faster response to
competitors’ actions• More effective operations• Better internal and external
communications• Improved control
environment
SYSTEM EVALUATON & SELECTION–PHASE IV
Cost-Benefit Analysis: Benefits
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NPV 1 [Table 4-4]
Payback 2 [Figures 4-7a, 7b]
BE
Auditor’s role Managerial accounting techniques 3
• Escapable costs• Reasonable interest rates• Identify one-time and recurring costs• Realistic useful lives for competing projects• Determining financial values for intangible
benefits
Cost-Benefit Analysis: Comparison
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PURPOSE: Produce a detailed description of the proposed system that satisfies system requirements identified during systems analysis and is in accordance with conceptual design.
User views Database tables Processes Controls i.e., a set of “blueprints”
DETAILED DESIGN–PHASE V
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DETAILED DESIGN– PHASE V
Quality Assurance
• “Walkthrough”
• Quality assurance
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DETAILED DESIGN – PHASE V
Detailed Design Report
Designs for input screens and source documents
Designs for screen outputs, reports, operational documents
Normalized database Database structures and diagrams
Data flow diagrams (DFD’s) Database models (ER, Relational)
Data dictionary Processing logic (flow charts)
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SYSTEM PROGRAMMING & TESTING– PHASE VI
Program the Application
• Procedural languages• Event-driven languages• OO languages• Programming the system• Test the application {Figure 4-8]
– Testing methodology– Testing offline before deploying online– Test data
• Why?• Can provide valuable future benefits
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PURPOSE: Database structures are created and populated with data, applications are coded and tested, equipment is purchased and installed, employees are trained, the system is documented, and the new system is installed.
Testing the entire system Documenting the system
Designer and programmer documentation Operator documentation User documentation
• Novices• Occasional users• Frequent light users• Frequent power users• User handbook• Tutorials• Help features
SYSTEMS IMPLEMENTATION– PHASE VII
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Converting the databases Validation Reconciliation Backup
Converting the new systemGo live … Auditor involvement virtually stops! Cold turkey cutover Phased cutover Parallel operation cutover
SYSTEMS IMPLEMENTATION–PHASE VII
Conversion
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Reviewed by independent team to measure the success of the system Systems design adequacy [see list p. 170] Accuracy of time, cost, and benefit
estimates [see list p. 170] Auditor’s role
We’re back!! Provide technical expertise Specify documentation standards Verify control adequacy External auditors
SYSTEMS IMPLEMENTATION– PHASE VII
Post-Implementation Review
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We’re back!! Provide technical expertise
AIS: GAAP, GAAS, SEC, IRS Legal Social / behavioral IS/IT (if capable)
Effective and efficient ways to limit application testing
Specify documentation standards Verify control adequacy
COSO – SAS No. 78 – PCAOB Standard #1 Impact on scope of external auditors
SYSTEMS IMPLEMENTATION–PHASE VIIAuditors’ Role
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PURPOSE: Changing systems to accommodate changes in user needs
80/20 rule 1
Importance of documentation? Facilitate efficient changes Facilitate effective changes (at all!)
SYSTEMS MAINTENANCE–PHASE VIII
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PreliminaryFeasibility
ProjectAuthorization
SystemsPlanning
SystemsAnalysis
ConceptualDesign
SystemsSelection
DetailedDesign
SystemImplementation
ProjectProposal
ProjectSchedule
SystemAnalysis Rpt
DFD(general)
ER Diagram
Relational Model
Normalized Data
FeasibilityStudy
Cost-BenefitAnalysis
SystemSelection Rpt
DetailedDesign Rpt
ProgramFlowcharts
Post-Impl.Review
DocumentationUser
Acceptance Rpt
DFD(Detail)
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A materially flawed financial application will eventually corrupt financial data, which will then be
incorrectly reported in the financial statements. Therefore, the
accuracy and integrity of the IS directly affects the accuracy of the
client’s financial data.
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Systems authorization activities User specification activities Technical design activities
Documentation is evidence of controls Documentation is a control!
Internal audit participation User test and acceptance procedures Audit objectives Audit procedures
CONTROLLING & AUDITING THE SDLC
Controlling New Systems Development
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Audit objectives Verify SDLC activities are applied consistently and in
accordance with management’s policies Verify original system is free from material errors and
fraud Verify system necessary and justified Verify documentation adequate and complete
Audit procedures How verify SDLC activities applied consistently? How verify system is free from material errors and fraud? How verify system is necessary? How verify system is justified? How verify documentation is adequate and complete? See page 174 for a list
CONTROLLING & AUDITING THE SDLC
Audit Objectives & Procedures
IT Auditing & Assurance, 2e, Hall & Singleton
Four minimum controls: Formal authorization Technical specifications Retesting Updating the documentation
CONTROLLING & AUDITING THE SDLC
Controlling Systems Maintenance
IT Auditing & Assurance, 2e, Hall & Singleton
Source program library controls Why? What trying to prevent? Unauthorized access Unauthorized program changes SPLMS [Figure 4-13, p. 177]
SPLMS Controls Storing programs on the SPL Retrieving programs for maintenance purposes Detecting obsolete programs Documenting program changes (audit trail)
CONTROLLING & AUDITING THE SDLC
Controlling Systems Maintenance
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Password control On a specific program
Separate test libraries Audit trail and management reports
Describing software changes Program version numbers Controlling access to maintenance [SPL]
commands
CONTROLLING & AUDITING THE SDLC
Controlled SPL Environment
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Audit objectives Detect any unauthorized program
changes Verify that maintenance procedures
protect applications from unauthorized changes
Verify applications are free from material errors
Verify SPL are protected from unauthorized access
CONTROLLING & AUDITING THE SDLC
Audit Objectives & Procedures
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Audit procedures Figure 4-14, p.179 Identify unauthorized changes
Reconcile program version numbers Confirm maintenance authorization
Identify application errors Reconcile source code [after taking a sample] Review test results Retest the program
Testing access to libraries Review programmer authority tables Test authority table
CONTROLLING & AUDITING THE SDLC
Audit Objectives & Procedures
IT Auditing & Assurance, 2e, Hall & Singleton
Chapter 4:Systems Development & Maintenance Activities