Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western

are trademarks used herein under license

Objectives for Chapter 17Controls and audit tests relevant to systems

developmentRisks and controls for program changes and

the source program library Auditing techniques (CAATTs) used to verify

application controlsAuditing techniques used to perform

substantive tests in an IT environment

Systems Development ActivitiesAuthorizing development of new systemsAddressing and documenting user needsTechnical design phasesParticipation of internal auditorsTesting program modules before implementing

Testing individual modules by a team of users, internal audit staff, and systems professionals

Systems Development Life Cycle

1. Systems Strategy - Assessment - Develop Strategic Plan

1. Systems Strategy - Assessment - Develop Strategic Plan

2. Project Initiation - Feasibility Study - Analysis - Conceptual Design - Cost/Benefit Analysis

2. Project Initiation - Feasibility Study - Analysis - Conceptual Design - Cost/Benefit Analysis

3. In-house Development - Construct - Deliver

3. In-house Development - Construct - Deliver

4. Commercial Packages - Configure - Test - Roll-out

4. Commercial Packages - Configure - Test - Roll-out

5. Maintenance & Support - User help desk - Configuration Management - Risk Management & Security

5. Maintenance & Support - User help desk - Configuration Management - Risk Management & Security

SSystemystem Interfaces, Architecture Interfaces, Architecture and Uand User ser RRequirementsequirements

BBusiness usiness RRequirementsequirements

High Priority Proposals undergo High Priority Proposals undergo Additional Study and DevelopmentAdditional Study and Development

FeedbackFeedback::User requests for New SystemsUser requests for New Systems

Selected System Proposals Selected System Proposals go forward for Detailed go forward for Detailed

DesignDesign

New and Revised New and Revised Systems Enter into Systems Enter into

ProductionProduction

Business Needs and Strategy

Legacy Situation

FeedbackFeedback::User requests for System User requests for System Improvements and SupportImprovements and Support

Systems Development Auditing objectives: ensure that...

SDLC activities are applied consistently and in accordance with management’s policies

the system as originally implemented was free from material errors and fraud

the system was judged to be necessary and justified at various checkpoints throughout the SDLC

system documentation is sufficiently accurate and complete to facilitate audit and maintenance activities

Systems Development ICNew systems must be authorized.Feasibility studies were conducted.User needs were analyzed and

addressed.Cost-benefit analysis was done.Proper documentation was completed.All program modules must be

thoroughly tested before they are implemented.

Checklist of problems was kept.

System Maintenance ICLast, longest and most costly phase of

SDLC Up to 80-90% of entire cost of a system

All maintenance actions should requireTechnical specificationsTestingDocumentation updatesFormal authorizations for any changes

Program Change Auditing objectives: detect unauthorized program maintenance and determine that...maintenance procedures protect applications from unauthorized changes

applications are free from material errors

program libraries are protected from unauthorized access

Source Program LibrarySource program library (SPL) library of applications and software

place where programs are developed and modified

once compiled into machine language, no longer vulnerable

Uncontrolled Access to the SPL

Controlled SPL EnvironmentsSPL Management Systems (SPLMS)

protect the SPL by controlling the following functions:storing programs on the SPLretrieving programs for maintenance

purposesdeleting obsolete programs from the

librarydocumenting program changes to

provide an audit trail of the changes

Source Program Library under the Control of SPL Management Software

SPL Control FeaturesPassword controlSeparation of test librariesAudit trailsReports that enhance management

control and the audit functionAssigns program version numbers

automaticallyControlled access to maintenance

commands

Program ChangeAuditing procedures: verify that

programs were properly maintained, including changes

Specifically, verify…identification and correction of

unauthorized program changesidentification and correction of

application errorscontrol of access to systems libraries

Application ControlsNarrowly focused exposures within

a specific system, for example: accounts payablecash disbursementsfixed asset accountingpayrollsales order processingcash receiptsgeneral ledger

Risks within specific applicationsCan affect manual procedures (e.g., entering

data) or embedded (automated) proceduresConvenient to look at in terms of:

input stageprocessing stageoutput stage

PROCESSINGINPUT OUTPUT

Application Controls

Application Input ControlsGoal of input controls - valid, accurate, and complete input data

Two common causes of input errors:transcription errors – wrong character

or valuetransposition errors – ‘right’ character

or value, but in wrong place

Check digits – data code is added to produce a control digitespecially useful for transcription and

transposition errorsMissing data checks – control for blanks

or incorrect justificationsNumeric-alphabetic checks – verify that

characters are in correct form

Application Input Controls

Limit checks – identify values beyond pre-set limits

Range checks – identify values outside upper and lower bounds

Reasonableness checks – compare one field to another to see if relationship is appropriate

Validity checks – compares values to known or standard values

Application Input Controls

Application Processing ControlsProgrammed procedures the processes that transform input data into information for output

Three categories:Batch controlsRun-to-run controlsAudit trail controls

Batch controls - reconcile system output with the input originally entered into the system

Based on different types of batch totals:total number of recordstotal dollar valuehash totals – sum of non-financial numbers

Application Processing Controls

Run-to-run controls - use batch figures to monitor the batch as it moves from one programmed procedure (run) to another

Audit trail controls - numerous logs used so that every transaction can be traced through each stage of processing from its economic source to its presentation in financial statements

Application Processing Controls

Transaction Log to Preserve the Audit Trail

Application Output ControlsGoal of output controls is to ensure that system output is not lost, misdirected, or corrupted, and that privacy is not violated.

In the following flowchart, there are exposures at every stage.

Output Flowchart

Application Controls OutputOutput spooling – creates a file during the printing process that may be inappropriately accessed

Printing – create two risks:production of unauthorized copies of output

employee browsing of sensitive data

Application Controls OutputWaste – can be stolen if not properly disposed of, e.g., shredding

Report distribution – for sensitive reports, the following are available:use of secure mailboxesrequire the user to sign for reports in person

deliver the reports to the user

Application Controls OutputEnd user controls – end users need to inspect sensitive reports for accuracyshred after used

Controlling digital output – digital output message can be intercepted, disrupted, destroyed, or corrupted as it passes along communications links

Testing Application Controls Techniques for auditing

applications fall into two classes: 1. testing application controls – two

general approaches:– black box – around the computer– white box – through the computer

2. examining transaction details and account balances—substantive testing

Auditing Around the Computer - The Black Box Approach

Auditing through the Computer: The ITF Technique

Black Box Approach – focuses on input procedures and output results

To Gain need understanding… analyze flowcharts review documentation conduct interviews

Testing Application Controls

White Box Approach - focuses on understanding the internal logic of processes between input and output

Common testsAuthenticity tests Accuracy testsCompleteness testsRedundancy testsAccess tests Audit trail testsRounding error tests

Testing Application Controls

White Box Testing TechniquesTest data method: testing for logic or

control problems - good for new systems or systems which have undergone recent maintenancebase case system evaluation (BCSE) - using a

comprehensive set of test transactionstracing - performs an electronic walkthrough of

the application’s internal logicTest data methods are not fool-proof

a snapshot - one point in time examinationhigh-cost of developing adequate test data

White Box Testing TechniquesIntegrated test facility (ITF): an

automated, on-going technique that enables the auditor to test an application’s logic and controls during its normal operation

Parallel simulation: auditor writes simulation programs and runs actual transactions of the client through the system

Auditing through the Computer: The Parallel Simulation Technique

Substantive TestingTechniques to substantiate account

balances. For example:search for unrecorded liabilitiesconfirm accounts receivable to ensure they

are not overstatedRequires first extracting data from the

system. Two technologies commonly used to select, access, and organize data are:embedded audit modulegeneralized audit software

Embedded Audit ModuleAn ongoing module which filters out

non-material transactionsThe chosen, material transactions are

used for sampling in substantive testsRequires additional computing

resources by the clientHard to maintain in systems with

high maintenance

Substantive Testing: Embedded Audit Module

Generalized Audit SoftwareVery popular & widely usedCan access data files & perform

operations on them:screen data statistical sampling methodsfoot & balanceformat reportscompare files and fieldsrecalculate data fields

Substantive Testing: Generalized Audit Software