1. Chapter 4: Systems Development & Maintenance Activities

2. PROJECT PARTICIPANTS Systems professionals End users Stakeholders
ACCOUNTANTS
Internal
External
Limitations of involvement

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)

4. 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?

5. 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

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

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

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

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 -
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

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

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

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

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

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

15. 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

16. 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

17. 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.

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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 …

25. 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

26. 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.

27. 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?

28. End Chapter 4: Systems Development & Maintenance Activities