Chapter 17

1. Chapter 17 Information Systems Auditing and Assurance

2. Objectives for Chapter 17 • Purpose of an audit and the basic conceptual elements of the audit process • Difference between internal and external auditing and the relationship between them • How auditing objectives and tests of control are determined by the control structure of the client firm • Audit objective and tests of control for each of the nine general control areas • Auditing techniques used to verify the effective functioning of application controls • Auditing techniques used to perform substantive tests in a CBIS environment

3. Attestation versus Assurance • Attestation: • an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. (SSAE No. 1, AT Sec. 100.01) • Assurance: • professional services that are designed to improve the quality of information, both financial and non-financial, used by decision-makers • includes, but is not limited to attestation

4. Attest and Assurance Services

5. What is a Financial Audit? • An independent attestation by a professional (CPA) regarding the faithful representation of the financial statements. • Three phases of a financial audit: • familiarization with client firm • evaluation and testing of internal controls • assessment of reliability of financial data

6. Generally Accepted Auditing Standards (GAAS)

7. External versus Internal Auditing • External auditors represent the interests of third party stakeholders, while internal auditors serve as an independent appraisal function within the organization. • Internal auditors often perform tasks which can reduce external audit fees and help to achieve audit efficiency and reduce audit fees.

8. Elements of an Audit • Systematic procedures are used • Evidence is obtained • tests of internal controls • substantive tests • Determination of materiality for weaknesses found • Prepare audit report & audit opinion

9. Information Technology (IT) Audit • Since most information systems employ information technology, the IT audit is typically a significant component of all external (financial) and internal audits. • IT audits: • focus on the computer-based aspects of an organization’s information system • assess the proper implementation, operation, and control of computer resources

10. Phases of an IT Audit

11. Audit Risk is... the probability the auditor will issue an unqualified (clean) opinion when in fact the financial statements are materially misstated.

12. Components of Audit Risk • Inherent riskis associated with the unique characteristics of the business or industry of the client. • Control riskis the likelihood that the control structure is flawed because controls are either absent or inadequate to prevent or detect errors in the accounts. • Detection riskis the risk that auditors are willing to take that errors not detected or prevented by the control structure will also not be detected by the auditor.

13. Tests of General Controls • Our primary purposes are to understand: • the auditing objectives in each general control area and • the nature of the tests that auditors perform to achieve these objectives.

14. Tests of General Controls • Our discussion is organized around the following : 1. operating system controls 2. data management controls 3. organizational structure controls 4. systems development controls 5. systems maintenance controls 6. computer center security and control 7. Internet and Intranet controls 8. electronic data interchange (EDI) controls 9. personal computer controls

15. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

16. 1. General Control Tests Operating system objective: verify that the security policy and control procedures are rigorous enough to protect the operating system against: • hardware failure • software efforts • destructive acts by employees or hackers • virus infection

17. 1. General Control Tests Operating system (continued) Access controls: • privilege controls • password control • virus control • fault tolerance control

18. 2. General Control Tests • Data management objective: • protect against unauthorized access to or destruction of data & inadequate data backup. • Controls: • access- encryption, user authorization tables, inference controls and biometric devices are a few examples • backup- grandfather-father-son and direct access backup; recovery procedures

19. 3. General Control Tests Organizational structure objectives: • determine whether incompatible functions have been identified and segregated in accordance with the level of potential exposure • determine whether segregation is sustained through a working environment that promotes formal relationships between incompatible tasks Controls: • review organizational & systems documentation, observe behavior, and review database authority tables

20. 4. General Control Tests Systems development 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

21. 4. General Control Tests Systems development (continued) Controls: • systems authorization techniques • good development procedures • internal audit team participation • appropriate testing of system

22. 5. General Control Tests Systems maintenance 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

23. 5. General Control Tests Systems maintenance (continued) Controls: • authorization requirements for program maintenance • appropriate documentation of changes • adequate testing of program changes • reconciling program version numbers • review programmer authority table • test authority table

24. 6. General Control Tests Computer center objectives: determine that... • physical security controls are adequately protect the organization from physical exposures • insurance coverage on equipment is adequate to compensate the organization for the destruction of, or damage to, its computer center • operator documentation is adequate to deal with routine operations as well as system failures • the organization’s disaster recovery plan is adequate and feasible

25. 6. General Control Tests Computer center (continued) Controls: • well-planned physical layout • backup and disaster recovery planning • review critical application list

26. 7. General Control Tests Internet & Intranet objectives: determine that communications controls... • can detect and correct messages loss due to equipment failure • can prevent and detect illegal access both internally and from the Internet • will render useless any data that are successfully captured by a perpetrator • are sufficient to preserve the integrity and security of data connected to the network

27. 7. General Control Tests Internet & Intranet (continued) Controls: • equipment failure: line checks (parity & echo),and backups • subversive threats: access controls, encryption of data, and firewalls • message control: sequence numbering, authentication, transaction logs, request-response polling

28. 8. General Control Tests EDI objectives: determine that... • all EDI transactions are authorized, validated, and in compliance with organizational policy • no unauthorized organizations gain access to data base records • authorized trading partners have access only to approved data • adequate controls are in place to ensure a complete EDI transactions

29. 8. General Control Tests EDI (continued) Controls: • sophisticated authorization & validation techniques • access controls • audit trail modules and controls

30. 9. General Control Tests Personal computers (PCs) objectives: determine that... • adequate supervision and operating procedures exist to compensate for lack of segregation between the duties of users, programmers, and operators • access to microcomputers, data files, and program files is restricted to authorized personnel • backup procedures are in place to prevent data and program loss from hardware failures • systems selection and acquisition procedures produce applications that are high quality, free from errors, and protected from unauthorized changes

31. 9. General Control Tests PCs (continued) Controls: • increased supervision • access & security controls • backup controls • systems development and maintenance controls • systems development and acquisition controls

32. Computer Applications Controls • Techniques for auditing computer applications fall into two classes: 1) techniques for testing application controls 2) techniques for examining transaction details and account balances—substantive testing

33. Testing Application Controls • Black Box Approach - understanding flowcharts, input procedures, & output results • White Box Approach - understanding the internal logic of the application • authenticity (access) tests • accuracy tests • completeness tests • redundancy tests • audit trail tests • rounding error tests

34. Auditing Around the Computer - The Black Box Approach

35. White Box Testing Techniques • Test data method: testing for logic or control problems - good for new systems or systems which have undergone recent maintenance • base case system evaluation (BCSE) - using a comprehensive set of test transactions • tracing - performs an electronic walkthrough of the application’s internal logic • Test Data Methods are not fool-proof • a snapshot - one point in time examination • high-cost of developing adequate test data

36. Auditing through the Computer: The Test Data Technique

37. White Box Testing Techniques • 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 • Parallel simulation:auditor writes simulation programs and runs actual transactions of the client through the system

38. Auditing through the Computer: The ITF Technique

39. Auditing through the Computer: The Parallel Simulation Technique

40. Substantive Testing Techniques • Search for unrecorded liabilities • Confirm accounts receivable to ensure they are not overstated • Determine the correct value of inventory, and ensure they are not overstated • Determine the accuracy of accruals for expenses incurred, but not yet received (also revenues if appropriate)

41. Embedded Audit Module (EAM) • An ongoing module which filters out non-material transactions • The chosen, material transactions are used for sampling in substantive tests • Requires additional computing resources by the client • Hard to maintain in systems with high maintenance

42. Substantive Testing: EAM

43. Generalized Audit Software (GAS) • Very popular & widely used • Can access data files & perform operations on them: • screen data • statistical sampling methods • foot & balance • format reports • compare files and fields • recalculate data fields

44. Substantive Testing: GAS