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  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)

IS Development  In-house development  Purchase commercial systems  General Rule: Never build if you can acquire a system that will provide 80% of your needs.  Qstn: When would you want to build your own system?

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

 Turnkey systems  General accounting systems  Typically in modules  Special-purpose systems  Example banking  Office automation systems  Purpose is to improve productivity  Enterprise systems (ERP)ERP  SAP, Peoplesoft, Baan, Oracle TYPES OF COMMERCIAL SYSTEMS

 Advantages  Implementation time  Cost  Reliability  Disadvantages  Independence  Customization needs  Maintenance COMMERCIAL SYSTEMS

SYSTEMS DEVELOPMENT LIFE CYCLE (SDLC)  New systems 1. Systems planning 2. Systems analysis 3. Conceptual systems design 4. System evaluation and selection 5. Detailed design 6. System programming and testing 7. System implementation 8. System maintenance  SDLC -- Figure 4-1 [p.141]

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 SYSTEMS PLANNING– PHASE I

SYSTEMS PLANNING-PHASE I  Level 1 = Strategic systems planning  Why? 1. A changing plan is better than no plan 2. Reduces crises in systems development 3. Provides authorization control for SDLC 4. It works!  Level 2 = Project planning  Project proposal  Project schedule

 Auditor’s role in systems planning  Auditability  Security  Controls SYSTEMS PLANNING-PHASE I

 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 SYSTEMS PLANNING-PHASE I SUMMARY

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 SYSTEMS ANALYSIS- PHASE II

 Data sources  Users  Data stores  Processes  Data flows  Controls  Transaction volumes  Error rates  Resource costs  Bottlenecks  Redundant operations Gathering facts 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) SYSTEMS ANALYSIS- PHASE II

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 Object-oriented approach (OOD)  Reusable objects  Creation of modules (library, inventory of objects) 3. Auditor’s role  special auditability features CONCEPTUAL SYSTEMS DESIGN- PHASE III

PURPOSE: Process that seeks to identify the optimal solution from the alternatives 1. Perform detailed feasibility study  Technical feasibility [existing IT or new IT?]  Legal feasibility  Operational feasibility Degree of compatibility between the firm’s existing procedures and personnel skills, and requirements of the new system  Schedule feasibility [implementation] 2. Perform a cost-benefit analysis  Identify costs  Identify benefits  Compare the two SYSTEM EVALUATION & SELECTION– PHASE IV

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 SYSTEM EVALUATION & SELECTION-PHASE IV Cost-Benefit Analysis: Costs

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 SYSTEM EVALUATON & SELECTION–PHASE IV Cost-Benefit Analysis: Benefits

 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 Cost-Benefit Analysis: Comparison

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” DETAILED DESIGN–PHASE V

Quality Assurance “Walkthrough” Quality assurance

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)

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

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 SYSTEMS IMPLEMENTATION– PHASE VII

 Converting the databases  Validation  Reconciliation  Backup  Converting the new system Auditor involvement virtually stops!  Cold turkey cutover  Phased cutover  Parallel operation cutover SYSTEMS IMPLEMENTATION– PHASE VII Conversion

 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 SYSTEMS IMPLEMENTATION– PHASE VII Post-Implementation Review

 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 SYSTEMS IMPLEMENTATION– PHASE VII Auditors’ Role

PURPOSE : Changing systems to accommodate changes in user needs  80/20 rule  Importance of documentation?  Facilitate efficient changes  Facilitate effective changes (at all!) SYSTEMS MAINTENANCE–PHASE VIII

Preliminary Feasibility Project Authorization Systems Planning Systems Analysis Conceptual Design Systems Selection Detailed Design System Implementation Project Proposal Project Schedule System Analysis Rpt DFD (general) ER Diagram Relational Model Normalized Data Feasibility Study Cost-Benefit Analysis System Selection Rpt Detailed Design Rpt Program Flowcharts Post-Impl. Review Documentation User Acceptance Rpt DFD (Detail)

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.

 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 CONTROLLING & AUDITING THE SDLC Controlling New Systems Development

 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 CONTROLLING & AUDITING THE SDLC Audit Objectives & Procedures

 Four minimum controls:  Formal authorization  Technical specifications  Retesting  Updating the documentation 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) CONTROLLING & AUDITING THE SDLC Controlling Systems Maintenance

 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 CONTROLLING & AUDITING THE SDLC Controlled SPL Environment

 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 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 CONTROLLING & AUDITING THE SDLC Audit Objectives & Procedures

End Chapter 4: Systems Development & Maintenance Activities