1. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Information Systems, 8e James A. Hall Chapter 17 IT Controls Part III: Systems Development, Program Changes, and Application Controls

2. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Objectives for Chapter 17  Be familiar with the controls and audit tests relevant to the systems development process.  Understand the risks and controls associated with program change procedures and the role of the source program library.  Understand the auditing techniques (CAATTs) used to verify the effective functioning of application controls.  Understand the auditing techniques used to perform substantive tests in an IT environment. 2

3. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Systems Development Controls Controllable activities that distinguish an effective systems development process include:  Systems authorization  User specification  Technical design  Internal audit participation  Program testing  User test and acceptance procedures 3

4. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Auditor’s objectives The auditor’s objectives are to ensure that  all systems development activities are applied consistently and follow management’s policies  system as originally implemented was free from material errors and fraud  system was judged necessary and justified at checkpoints throughout the SDLC, and  system documentation is sufficiently accurate and complete to facilitate audit and maintenance activities. 4

5. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Tests of Systems Development Controls  New systems must be authorized.  Feasibility studies were conducted.  User needs were analyzed and addressed.  Cost-benefit analysis was done.  Proper documentation was completed.  All program modules must be thoroughly tested before they are implemented.  Checklist of problems was kept. 5

6. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. System Maintenance Controls  Last, longest and most costly phase of systems development  Up to 80-90% of entire cost of a system  All maintenance actions should require  Technical specifications  Testing  Documentation updates  Formal authorizations for any changes 6

7. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Program Change Audit 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 7

8. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Source Program Library  Source program library (SPL)  library of applications and software  place where programs are developed and modified  once compiled into machine language, no longer vulnerable 8

9. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Uncontrolled Access to the SPL 9 Figure 17-2

10. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Controlled SPL Environments  SPL Management Systems (SPLMS) protect the SPL by controlling the following functions:  storing programs on the SPL  retrieving programs for maintenance purposes  deleting obsolete programs from the library  documenting program changes to provide an audit trail of the changes 10

11. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Source Program Library under the Control of SPL Management Software 11 Figure 17-3

12. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SPL Control Features  Password control  Separation of test libraries  Audit trails  Reports that enhance management control and the audit function  Assigns program version numbers automatically  Controlled access to maintenance commands 12

13. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Program Change  Auditing procedures: verify that programs were properly maintained, including changes  Specifically, verify…  identification and correction of unauthorized program changes  identification and correction of application errors  control of access to systems libraries 13

14. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Testing Application Controls  Techniques for auditing applications fall into two classes: 1.testing application controls – two general approaches: –black box – around the computer –white box – through the computer 2.examining transaction details and account balances—substantive testing 14

15. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Auditing Around the Computer - The Black Box Approach 15 Figure 17-9

16. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Auditing through the Computer: The ITF Technique 16 Figure 17-14

17. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Testing Application Controls  Black Box Approach – focuses on input procedures and output results  To Gain need understanding…  analyze flowcharts  review documentation  conduct interviews 17

18. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Testing Application Controls  Auditing through-the-computer  focuses on understanding the internal logic of processes between input and output  Common tests Authenticity tests Accuracy tests Completeness tests Redundancy tests Access tests Audit trail tests Rounding error tests 18

19. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Audit 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 19

20. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Audit 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 20

21. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Parallel Simulation Technique 21 Figure 17-11

22. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Substantive Testing  Techniques to substantiate account balances. For example:  search for unrecorded liabilities  confirm accounts receivable to ensure they are not overstated  Requires first extracting data from the system. Two technologies commonly used to select, access, and organize data are:  embedded audit module  generalized audit software 22

23. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Embedded Audit Module  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 23

24. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Embedded Audit Module Technique 24 Figure 17-12

25. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Generalized Audit Software  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 25

26. Hall, Accounting Information Systems, 8e ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using GAS to Access Complex File Structure 26 Figure 17-14