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Chapter 4: Systems Development & Maintenance Activities

Chapter 4: Systems Development & Maintenance Activities. PARTICIPANTS. Systems professionals End users Stakeholders ACCOUNTANTS Internal External Limitations of involvement. ACCOUNTANTS/AUDITORS. Why are accountants/auditors involved? Experts in financial transaction processes

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Chapter 4: Systems Development & Maintenance Activities

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  1. Chapter 4:Systems Development & Maintenance Activities IT Auditing & Assurance, 2e, Hall & Singleton

  2. PARTICIPANTS • Systems professionals • End users • Stakeholders • ACCOUNTANTS • Internal • External • Limitations of involvement IT Auditing & Assurance, 2e, Hall & Singleton

  3. 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) IT Auditing & Assurance, 2e, Hall & Singleton

  4. I.S. AQUISITION • In-house development • Purchase commercial systems IT Auditing & Assurance, 2e, Hall & Singleton

  5. 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 IT Auditing & Assurance, 2e, Hall & Singleton

  6. TYPES OF COMMERCIAL SYSTEMS • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  7. COMMERCIAL SYSTEMS • Advantages • Implementation time • Cost • Reliability • Disadvantages • Independence • Customization needs • Maintenance IT Auditing & Assurance, 2e, Hall & Singleton

  8. SYSTEMS DEVELOPMENT LIFE CYCLE (SDLC) • New systems • Systems planning • Systems analysis • Conceptual systems design • System evaluation and selection • Detailed design • System programming and testing • System implementation • System maintenance • SDLC -- Figure 4-1 [p.141] IT Auditing & Assurance, 2e, Hall & Singleton

  9. SYSTEMS PLANNING– PHASE I 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 IT Auditing & Assurance, 2e, Hall & Singleton

  10. SYSTEMS PLANNING-PHASE I • Level 1 = Strategic systems planning • Why? • A changing plan is better than no plan • Reduces crises in systems development • Provides authorization control for SDLC • It works! • Level 2 = Project planning • Project proposal • Project schedule IT Auditing & Assurance, 2e, Hall & Singleton

  11. SYSTEMS PLANNING-PHASE I • Auditor’s role in systems planning • Auditability • Security • Controls IT Auditing & Assurance, 2e, Hall & Singleton

  12. SYSTEMS PLANNING-PHASE I • SUMMARY • Identify user’s needs • Preparing proposals • Evaluating proposals • Prioritizing individual projects • Scheduling work • Project Plan – allocates resources to specific project • Project Proposal – Go or not • Project Schedule – represents mgmt’s commitment IT Auditing & Assurance, 2e, Hall & Singleton

  13. SYSTEMS ANALYSIS-PHASE II 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 IT Auditing & Assurance, 2e, Hall & Singleton

  14. SYSTEMS ANALYSIS-PHASE II Gathering facts • Data sources • Users • Data stores • Processes • Data flows • Controls • Transaction volumes • Error rates • Resource costs • Bottlenecks • Redundant operations IT Auditing & Assurance, 2e, Hall & Singleton

  15. SYSTEMS ANALYSIS-PHASE II • 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) IT Auditing & Assurance, 2e, Hall & Singleton

  16. CONCEPTUAL SYSTEMS DESIGN-PHASE III 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 • Object-oriented approach (OOD) • Reusable objects • Creation of modules (library, inventory of objects) 3. Auditor’s role • special auditability features IT Auditing & Assurance, 2e, Hall & Singleton

  17. SYSTEM EVALUATION & SELECTION– PHASE IV PURPOSE:Process that seeks to identify the optimal solution from the alternatives • Perform detailed feasibility study • Technical feasibility[existing IT or new IT?] • Legal feasibility • Operational feasibilityDegree of compatibility between the firm’s existing procedures and personnel skills, and requirements of the new system • Schedule feasibility[implementation] • Perform a cost-benefit analysis • Identify costs • Identify benefits • Compare the two IT Auditing & Assurance, 2e, Hall & Singleton

  18. SYSTEM EVALUATION & SELECTION-PHASE IV • Cost-Benefit Analysis: Costs 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 IT Auditing & Assurance, 2e, Hall & Singleton

  19. SYSTEM EVALUATON & SELECTION–PHASE IV • Cost-Benefit Analysis: Benefits 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 IT Auditing & Assurance, 2e, Hall & Singleton

  20. Cost-Benefit Analysis: Comparison • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  21. DETAILED DESIGN–PHASE V 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” IT Auditing & Assurance, 2e, Hall & Singleton

  22. DETAILED DESIGN– PHASE V • Quality Assurance • “Walkthrough” • Quality assurance IT Auditing & Assurance, 2e, Hall & Singleton

  23. 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) IT Auditing & Assurance, 2e, Hall & Singleton

  24. 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 IT Auditing & Assurance, 2e, Hall & Singleton

  25. SYSTEMS IMPLEMENTATION– PHASE VII 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 IT Auditing & Assurance, 2e, Hall & Singleton

  26. SYSTEMS IMPLEMENTATION–PHASE VII • Conversion • Converting the databases • Validation • Reconciliation • Backup • Converting the new systemGo live … • Auditor involvement virtually stops! • Cold turkey cutover • Phased cutover • Parallel operation cutover IT Auditing & Assurance, 2e, Hall & Singleton

  27. SYSTEMS IMPLEMENTATION– PHASE VII • Post-Implementation Review • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  28. SYSTEMS IMPLEMENTATION–PHASE VII • Auditors’ Role • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  29. SYSTEMS MAINTENANCE–PHASE VIII PURPOSE:Changing systems to accommodate changes in user needs • 80/20 rule 1 • Importance of documentation? • Facilitate efficient changes • Facilitate effective changes (at all!) IT Auditing & Assurance, 2e, Hall & Singleton

  30. Project Authorization Preliminary Feasibility SystemsPlanning Project Proposal Project Schedule SystemsAnalysis System Analysis Rpt ConceptualDesign DFD (general) SystemsSelection System Selection Rpt FeasibilityStudy Cost-BenefitAnalysis DetailedDesign DFD (Detail) ER Diagram Detailed Design Rpt Relational Model Normalized Data System Implementation Post-Impl. Review Program Flowcharts Documentation User Acceptance Rpt IT Auditing & Assurance, 2e, Hall & Singleton

  31. 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. IT Auditing & Assurance, 2e, Hall & Singleton

  32. CONTROLLING & AUDITING THE SDLC • Controlling New Systems Development • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  33. CONTROLLING & AUDITING THE SDLC • Audit Objectives & Procedures • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  34. CONTROLLING & AUDITING THE SDLC • Controlling Systems Maintenance • Four minimum controls: • Formal authorization • Technical specifications • Retesting • Updating the documentation IT Auditing & Assurance, 2e, Hall & Singleton

  35. CONTROLLING & AUDITING THE SDLC • Controlling Systems Maintenance • 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) IT Auditing & Assurance, 2e, Hall & Singleton

  36. CONTROLLING & AUDITING THE SDLC • Controlled SPL Environment • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  37. CONTROLLING & AUDITING THE SDLC • Audit Objectives & Procedures • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  38. CONTROLLING & AUDITING THE SDLC • Audit Objectives & Procedures • 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 IT Auditing & Assurance, 2e, Hall & Singleton

  39. Chapter 4:Systems Development & Maintenance Activities IT Auditing & Assurance, 2e, Hall & Singleton

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