Chapter 4: Systems Development & Maintenance Activities

PROJECT 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 Relatively low cost for general purpose software Industry-specific vendors Businesses too small to have in-house IS staff Downsizing & DDP

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 Enterprise systems (ERP) SAP, Peoplesoft, Baan, Oracle, IBM

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

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

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 - 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 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

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

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

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

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

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 feasibility Degree 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

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

SYSTEM EVALUATON & SELECTION–PHASE IV Cost-Benefit Analysis: Benefits 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 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. (1) When measuring cost savings, it is important to include only escapable costs See Figure 4-6 for illustration of calculating actual escapable costs (2) Professionals use a variety of means to try to quantify intangible benefits: opinion surveys, statistical analysis, expected value techniques, simulation models.

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 NPV of Benefits (over life of system) – NPV costs (over life of system) = NPV If NPV > 0, economically feasible When choosing between projects, choose the one with the greatest NPV Figure 4-7 – BUT must incorporate intangible benefits and design feasibility scores Payback: -- uses present values, i.e., discounted – COST LINE: y intercept = One-time costs Slope = recurring costs Intersection of COSTS and BENEFITS lines = when BREAKEVEN occurs CHOICE: quickest (shortest) payback period (3) Managerial techniques: Escapable Costs Reasonable interest rates Determination of one-time and recurring costs Realistic useful lives in competing projects Determination of financial values for intangible benefits

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

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

SYSTEMS IMPLEMENTATION– PHASE VII Conversion 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 Post-Implementation Review Reviewed by independent team to measure the success of the system Systems design adequacy Accuracy of time, cost, and benefit estimates Auditor’s role Provide technical expertise Specify documentation standards Verify control adequacy External auditors

SYSTEMS IMPLEMENTATION– PHASE VII Auditors’ Role 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 Standards Impact on scope of external auditors

SYSTEMS MAINTENANCE–PHASE VIII PURPOSE: Changing systems to accommodate changes in user needs 80/20 rule Importance of documentation? Facilitate efficient changes Facilitate effective changes (at all!) 80% of the total cost of a system occurs in the Maintenance phase! Only 20% actually occurs in the other 7 phases. Therefore, it makes sense that the place to reduce costs lies more in maintenance than any other phase. And the best way to reduce costs in the maintenance phase is to DOCUMENT adequately in the other phases …

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

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.

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?

End Chapter 4: Systems Development & Maintenance Activities