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 17

y Controls and audit tests relevant to systems

development y Risks and controls for program changes and the source program library y Auditing techniques (CAATTs) used to verify application controls y Auditing techniques used to perform substantive tests in an IT environment

Systems Development Activities

y Authorizing development of new systems y Addressing and documenting user needs y Technical design phases y Participation of internal auditors y Testing program modules before implementing y Testing individual modules by a team of users, internal audit staff, and systems professionals

Systems Development Life Cycle

Business Needs and Strategy Legacy Situation
Business Requirements

1. Systems Strategy
- Assessment - Develop Strategic Plan

Feedback: Feedback: User requests for New Systems

System Interfaces, Architecture and User Requirements User

High Priority Proposals undergo Additional Study and Development

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

Selected System Proposals go forward for Detailed Design

Feedback: Feedback: User requests for System Improvements and Support

3. In-house Development
- Construct - Deliver

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

New and Revised Systems Enter into Production

5. Maintenance & Support

- User help desk - Configuration Management - Risk Management & Security

Systems Development
Auditing objectives: ensure that...
y SDLC activities are applied consistently and in

accordance with management s policies y the system as originally implemented was free from material errors and fraud y the system was judged to be necessary and justified at various checkpoints throughout the SDLC y system documentation is sufficiently accurate and complete to facilitate audit and maintenance activities

Systems Development IC
y New systems must be authorized. y Feasibility studies were conducted. y User needs were analyzed and addressed. y Cost-benefit analysis was done. y Proper documentation was completed. y All program modules must be thoroughly tested before they are implemented. y Checklist of problems was kept.

System Maintenance IC
y Last, longest and most costly phase of

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

y All maintenance actions should require y Technical specifications y Testing y Documentation updates y Formal authorizations for any changes

Program Change
Auditing objectives: detect unauthorized program maintenance and determine that...
y maintenance procedures protect

applications from unauthorized changes y applications are free from material errors y program libraries are protected from unauthorized access

Source Program Library

y Source program library (SPL) y library of applications and software y place where programs are developed and modified y once compiled into machine language, no longer vulnerable

Uncontrolled Access to the SPL

Controlled SPL Environments

y SPL Management Systems (SPLMS) protect the SPL by controlling the following functions: y storing programs on the SPL y retrieving programs for maintenance purposes y deleting obsolete programs from the library y documenting program changes to provide an audit trail of the changes

Source Program Library under the Control of SPL Management Software

SPL Control Features

y Password control y Separation of test libraries y Audit trails y Reports that enhance management control

and the audit function y Assigns program version numbers automatically y Controlled access to maintenance commands

Program Change
y Auditing procedures: verify that programs

were properly maintained, including changes y Specifically, verify

y identification and correction of unauthorized

program changes y identification and correction of application errors y control of access to systems libraries

Application Controls
y Narrowly focused exposures within a specific system, for example: y accounts payable y cash disbursements y fixed asset accounting y payroll y sales order processing y cash receipts y general ledger

Application Controls
y Risks within specific applications y Can affect manual procedures (e.g., entering data) or

embedded (automated) procedures y Convenient to look at in terms of:

y input stage y processing stage y output stage

INPUT

PROCESSING

OUTPUT

Application Input Controls

y Goal of input controls - valid, accurate, and complete input data y Two common causes of input errors:
y transcription errors

wrong character or

value y transposition errors right character or value, but in wrong place

Application Input Controls

y Check digits data code is added to produce a

control digit
y especially useful for transcription and

transposition errors

y Missing data checks control for blanks or

incorrect justifications y Numeric-alphabetic checks verify that characters are in correct form

Application Input Controls

y Limit checks identify values beyond pre-set limits y Range checks identify values outside upper and lower bounds y Reasonableness checks compare one field to another to see if relationship is appropriate y Validity checks compares values to known or standard values

Application Processing Controls

y Programmed procedures the processes that transform input data into information for output y Three categories:
y Batch controls y Run-to-run controls y Audit trail controls

Application Processing Controls

y Batch controls - reconcile system

output with the input originally entered into the system y Based on different types of batch totals:
y total number of records y total dollar value y hash totals sum of non-financial

numbers

Application Processing Controls

y Run-to-run controls - use batch figures

to monitor the batch as it moves from one programmed procedure (run) to another y 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

Transaction Log to Preserve the Audit Trail

Application Output Controls

y Goal of output controls is to ensure that system output is not lost, misdirected, or corrupted, and that privacy is not violated. y In the following flowchart, there are exposures at every stage.

Output Flowchart

Application Controls Output

y Output spooling creates a file during the printing process that may be inappropriately accessed y Printing

create two risks:

y production of unauthorized copies of

output y employee browsing of sensitive data

Application Controls Output

y Waste can be stolen if not properly disposed of, e.g., shredding y Report distribution for sensitive reports, the following are available:
y use of secure mailboxes y require the user to sign for reports in

person y deliver the reports to the user

Application Controls Output

y End user controls end users need to inspect sensitive reports for accuracy
y shred after used

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

Testing Application Controls

y 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 balancessubstantive testing

Auditing Around the Computer The Black Box Approach

Auditing through the Computer: The ITF Technique

Testing Application Controls

y Black Box Approach focuses on input procedures and output results y To Gain need understanding
y analyze flowcharts y review documentation y conduct interviews

Testing Application Controls

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

Authenticity tests Accuracy tests Completeness tests Redundancy tests Access tests Audit trail tests Rounding error tests

White Box Testing Techniques

y Test data method: testing for logic or control

problems - good for new systems or systems which have undergone recent maintenance
y base case system evaluation (BCSE) - using a

comprehensive set of test transactions y tracing - performs an electronic walkthrough of the application s internal logic

y Test data methods are not fool-proof

y a snapshot - one point in time examination y high-cost of developing adequate test data

White Box Testing Techniques

y Integrated test facility (ITF): an

automated, on-going technique that enables the auditor to test an application s logic and controls during its normal operation y 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 Testing
y Techniques to substantiate account balances. For

example:

y search for unrecorded liabilities y confirm accounts receivable to ensure they are not

overstated

y Requires first extracting data from the system. Two

technologies commonly used to select, access, and organize data are:

y embedded audit module y generalized audit software

Embedded Audit Module

y An ongoing module which filters out nonmaterial transactions y The chosen, material transactions are used for sampling in substantive tests y Requires additional computing resources by the client y Hard to maintain in systems with high maintenance

Substantive Testing: Embedded Audit Module

Generalized Audit Software

y Very popular & widely used y Can access data files & perform operations on them:
y screen data y statistical sampling methods y foot & balance y format reports y compare files and fields y recalculate data fields

Substantive Testing: Generalized Audit Software