The Impact of Information Technology on the Audit Process

1. The Impact of InformationTechnology on theAudit Process Chapter 11

2. Learning Objective 1 Describe how IT improves internal control.

3. How Information Technologies Enhance Internal Control Computer controls replace manual controls. Higher-quality information is available.

4. Learning Objective 2 Identify risks that arise from using an IT-based accounting system.

5. Assessing Risks ofInformation Technologies Reliance on the capabilities of hardware and software Visibility of audit trail Reduced human involvement Systematic versus random errors

6. Assessing Risks ofInformation Technologies Unauthorized access Loss of data Reduced segregation of duties Lack of traditional authorization Need for IT experience

7. Learning Objective 3 Explain how general controls and application controls reduce IT risks.

8. Internal Controls Specific to Information Technology General Controls Application Controls

9. General Controls Physical and online security Administration of the IT function Segregation of IT duties Backup and contingency planning Systems development Hardware controls

10. Application Controls Input controls Processing controls Output controls

11. Relationship Between General and Administrative Controls Risk of unauthorized change to application software Risk of system crash Cash Receipts Application Controls Sales Applications Controls Payroll Application Controls Other Cycle Application Controls GENERAL CONTROLS Risk of unauthorized master file update Risk of unauthorized processing

12. Administration of theIT Function The perceived importance of IT within an organization is often dictated by the attitude of the board of directors and senior management.

13. Segregation of IT Duties Chief Information Officer or IT Manager Security Administrator Systems Development Operations Data Control

14. Systems Development Pilot testing Typical test strategies Parallel testing

15. Physical and Online Security • Physical Controls: • Keypad entrances • Badge-entry systems • Security cameras • Security personnel • Online Controls: • User ID control • Password control • Separate add-on security software

16. Backup andContingency Planning One key to a backup and contingency plan is to make sure that all critical copies of software and data files are backed up and stored off the premises.

17. Hardware Controls These controls are built into computer equipment by the manufacturer to detect and report equipment failures.

18. Input Controls These controls are designed by an organization to ensure that the information being processed is authorized, accurate, and complete.

19. Batch Input Controls Financial total Hash total Record count

20. Processing Controls Validation test Sequence test Arithmetic accuracy test Data reasonableness test Completeness test

21. Output Controls These controls focus on detecting errors after processing is completed rather than on preventing errors.

22. Learning Objective 4 Describe how general controls affect the auditor’s testing of application controls.

23. Impact of Information Technology on the Audit Process Effects of general controls on control risk Effects of IT controls on control risk and substantive tests Auditing in less complex IT environments Auditing in more complex IT environments

24. Learning Objective 5 Use the test data, parallel simulation, and embedded audit module approaches when auditing through the computer.

25. Test Data Approach 1 Test data should include all relevant conditions that the auditor wants tested. 2 Application programs tested by the auditor’s test data must be the same as those the client used throughout the year. 3 Test data must be eliminated from the client’s records.

26. Test Data Approach Input Test Transactions to Test Key Control Procedures Master Files Application Programs (Assume Batch System) Transaction Files (Contaminated?) Contaminated Master Files Control Test Results

27. Test Data Approach Control Test Results Auditor-predicted Results of Key Control Procedures Based on an Understanding of Internal Control Auditor Makes Comparisons Differences Between Actual Outcome and Predicted Result

28. Parallel Simulation The auditor uses auditor-controlled software to perform parallel operations to the client’s software by using the same data files.

29. Parallel Simulation Production Transactions Auditor Makes Comparisons Between Client’s Application System Output and Understanding of the Client Systems Via the Parallel Simulation Master File Auditor- Prepared Program Client Application System Programs Auditor Results Exception Report Noting Differences Client Results

30. Embedded AuditModule Approach Auditor inserts an audit module in the client’s application system to capture transactions with characteristics that are of specific interest to the auditor.

31. Learning Objective 6 Identify issues for e-commerce systems and other specialized IT environments.

32. Issues for DifferentIT Environments Issues for microcomputer environments Issues for network environments Issues for database management systems Issues for e-commerce systems Issues when clients outsource IT

33. End of Chapter 11