IT Auditing, Hall, 3e

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an economic event that affects the assets and

equities of the firm, is reflected in its
accounts, and is measured in monetary
terms.
similar types of transactions are grouped
together into three transaction cycles:

the expenditure cycle

the conversion cycle
the revenue cycle

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Hall, 3e

Relationship between Transaction Cycles

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Expenditure Cycle: time lag between the two due to credit

relations with suppliers:
physical component (acquisition of goods)
financial component (cash disbursements to the supplier)
Conversion Cycle :
the production system (planning, scheduling, and control
of the physical product through the manufacturing
process)
the cost accounting system (monitors the flow of cost
information related to production)
Revenue Cycle: time lag between the two due to credit
relations with customers :
physical component (sales order processing)
financial component (cash receipts)

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Source Documents - used to capture and

formalize transaction data needed for
transaction processing
Product Documents - the result of
transaction processing
Turnaround Documents - a product
document of one system that becomes a
source document for another system

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duplicated, or posted to a publicly accessible website, in whole or in part.

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Journals - a record of chronological entry

special journals - specific classes of transactions

that occur in high frequency
general journal - nonrecurring, infrequent, and
dissimilar transactions

Ledger - a book of financial accounts

general ledger - shows activity for each account

listed on the chart of accounts
subsidiary ledger - shows activity by detail for each
account type

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duplicated, or posted to a publicly accessible website, in whole or in part.

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Flow of Information from Economic

Event Into the General Ledger

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Accounting Records in a Computer-Based System

EXPLANATION OF STEPS IN
FIGURE:

1. Compare the AR balance

in the balance sheet with the
master file AR control
account balance.
2. Reconcile the AR control
figure with the AR subsidiary
account total.
3. Select a sample of update
entries made to accounts in
the AR subsidiary ledger
and trace these to
transactions in the sales
journal (archive file).
4. From these journal
entries, identify source
documents that can be
pulled from their files and
verified. If necessary,
confirm these source
documents by contacting the
customers.

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Hall, 3e

Example of Tracing an Audit Trail

Verifying Accounts Receivable

Accounts Receivable Control Account-General Ledger

Accounts Receivable Subsidiary Ledger
(sum of all customers receivables)
Physical

Financial

Sales Journal

Cash Receipts Journal

Sales Order
Shipping Notice

Deposit Slip
Remittance Advice

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Hall, 3e

The audit trail is less observable in

computer-based systems than traditional
manual systems.
The data entry and computer programs are
the physical trail.
The data are stored in magnetic files.

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Master File - generally contains account

data (e.g., general ledger and subsidiary
file)
Transaction File - a temporary file
containing transactions since the last
update
Reference File - contains relatively constant
information used in processing (e.g., tax
tables, customer addresses)
Archive File - contains past transactions for
reference purposes
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Hall, 3e

10

Documentation in a CB environment is
necessary for many reasons.
Five common documentation techniques:

Entity Relationship Diagram

Data Flow Diagrams
Document Flowcharts
System Flowcharts
Program Flowcharts

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duplicated, or posted to a publicly accessible website, in whole or in part.

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11

A documentation technique to
represent the relationship between
entities in a system.
The REA model version of ERD is
widely used in AIS. REA uses 3 types
of entities:
resources (cash, raw materials)
events (release of raw materials into the
production process)
agents (inventory control clerk, vendor,
production worker)

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12

Represent the numerical mapping

between entities:
one-to-one
one-to-many
many-to-many

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13

Cardinalities
Entity
Salesperson

Customer

Vendor

Relationship

1
1

Assigned

Places

Supply

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duplicated, or posted to a publicly accessible website, in whole or in part.

Entity

1
M

Car
Type

Order

M Inventory

Hall, 3e

14

use symbols to represent the processes, data

sources, data flows, and entities in a system
represent the logical elements of the system
do not represent the physical system

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15

Entity
Name

Data Store
Name

N
Process
Description

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duplicated, or posted to a publicly accessible website, in whole or in part.

Direction of
data flow

Hall, 3e

16

illustrate the relationship among

processes and the documents that flow
between them
contain more details than data flow
diagrams
clearly depict the separation of
functions in a system

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duplicated, or posted to a publicly accessible website, in whole or in part.

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17

Symbol Set for Representing

Manual Procedures
Terminal showing source
or destination of documents
and reports

Calculated batch total

Source document or
report

On-page connector

Manual operation
Off-page connector
File for storing source
documents and
reports
Accounting records
(journals, registers,
logs, ledgers)
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duplicated, or posted to a publicly accessible website, in whole or in part.

Description of process
or comments
Document flowline
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18

Flowchart Showing Stated Fact Translated

into Visual Symbols
Sales Department

Credit Department

Warehouse

Shipping Department

Customer
Customer
Order
Prepare
Sales
Orders

Sales
OrderSales
#1
Order #1
Sales
Order #1
Sales
Order #1

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19

Flowchart Showing All Stated Facts

Translated into Visual Symbols

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20

are used to represent the relationship

between the key elements--input
sources, programs, and output
products--of computer systems
depict the type of media being used
(paper, magnetic tape, magnetic disks,
and terminals)
in practice, not much difference between
document and system flowcharts

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21

Symbol Set for Representing Computer

Processes
Terminal input/
output device

Hard copy

Computer process

Process flow

Direct access storage

device

Real-time
(online)
connection

Magnetic tape

Video display
device

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22

Flowchart Showing Translation of

Facts 1, 2, and 3 into Visual Symbols

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23

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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2
4

illustrate the logic used in programs

Program Flowchart Symbols
Logical process

Decision

Terminal start or
end operation
Input/output
operation
Flow of logical
process

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duplicated, or posted to a publicly accessible website, in whole or in part.

Hall, 3e

25

Modern systems characteristics:

client-server based and process transactions in real time

use relational database tables
have high degree of process integration and data sharing
some are mainframe based and use batch processing

Some firms employ legacy systems for certain aspects

of their data processing.
Accountants need to understand legacy systems.

Legacy systems characteristics:

mainframe-based applications
batch oriented
early legacy systems use flat files for data storage
later legacy systems use hierarchical and network databases
data storage systems promote a single-user environment
that discourages information integration

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26

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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27

Destructive updates leave no backup.

To preserve adequate records, backup procedures
must be implemented, as shown below:
The master file being updated is copied as a
backup.
A recovery program uses the backup to create a
pre-update version of the master file.

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28

Two broad classes of systems:

batch systems
real-time systems

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duplicated, or posted to a publicly accessible website, in whole or in part.

A batch is a group of similar transactions that

are accumulated over time and then processed
together.
The transactions must be independent of one

another during the time period over which the

transactions are accumulated in order for batch
processing to be appropriate.
A time lag exists between the event and the
processing.

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30

Batch Processing/Sequential File

Sales
Orders

Unedited
Transactions

Keying

correct errors and

resubmit

Errors

catches clerical errors

Edit
Run
Edited
Transactions

rearranges the transaction data by

key field so that it is in the same
sequence as the master file

Sort
Run
Transactions
Old Master
(father)
AR
Update
Run
New Master
(son)

changes the values in the master

file to reflect the transactions that
have occurred

AR
Transactions (eventually transferred to an archive file)

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31

Keystroke - source documents are transcribed by clerks

to magnetic tape for processing later
Edit Run - identifies clerical errors in the batch and
places them into an error file
Sort Run - places the transaction file in the same order
as the master file using a primary key
Update Run - changes the value of appropriate fields in
the master file to reflect the transaction
Backup Procedure - the original master continues to
exist and a new master file is created

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32

Organizations can increase efficiency by

grouping large numbers of transactions into
batches rather than processing each event
separately.
Batch processing provides control over the
transaction process via control figures.

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33

process transactions individually at the

moment the economic event occurs
have no time lag between the economic
event and the processing
generally require greater resources than
batch processing since they require
dedicated processing capacity; however,
these cost differentials are decreasing
oftentimes have longer systems
development time

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34

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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35

AIS processing is characterized by high-volume,

independent transactions, such are recording
cash receipts checks received in the mail.
The processing of such high-volume checks can
be done during an off-peak computer time.
This is one reason why batch processing maybe
done using real-time data collection.

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36

Concisely represent large amounts of

complex information that would otherwise
be unmanageable
Provide a means of accountability over the
completeness of the transactions
processed
Identify unique transactions and accounts
within a file
Support the audit function by providing an
effective audit trail
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37

Represent items in sequential order

Used to prenumber source
documents
Track each transaction processed
Identify any out-of-sequence
documents
Disadvantages:

arbitrary information
hard to make changes and insertions

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38

Represent whole classes by assigning each

class a specific range within the coding
scheme
Used for chart of accounts
The basis of the general ledger

Allows for the easy insertion of new codes

within a block
Dont have to reorganize the coding structure

Disadvantage:
arbitrary information

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39

Represent complex items or events involving

two or more pieces of data using fields with
specific meaning
For example, a coding scheme for tracking
sales might be 04-09-476214-99, meaning:
Store Number
04

Dept. Number
09

Item Number
476214

Salesperson
99

Disadvantages:
arbitrary information
overused
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40

Used for many of the same purposes as

numeric codes
Can be assigned sequentially or used in
block and group coding techniques
May be used to represent large numbers
of items
Can represents up to 26 variations per
field

Disadvantage:

arbitrary information

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41

Alphabetic characters used as

abbreviations, acronyms, and other
types of combinations
Do not require users to memorize the
meaning since the code itself is
informative and not arbitrary
NY = New York

Disadvantages:
limited usability and availability

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42

Input

Process

General ledger systems should:

collect transaction data promptly and accurately
classify/code data and accounts
validate collected transactions/ maintain accounting
controls (e.g., equal debits and credits)
process transaction data
post transactions to proper accounts
update general ledger accounts and transaction files
record adjustments to accounts

store transaction data

generate timely financial reports

Output
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43

Financial
Reporting
System
Management
Reporting
System

Billings

Sales

Cash
Receipts

General
Ledger
System
(GLS)

Inventory
Control

Payroll

Cash
Disbursements

Cost
Accounting
Accounts
Payable

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44

General ledger master file

principal FRS file based on chart of accounts
General ledger history file
used for comparative financial support
Journal voucher file
all journal vouchers of the current period
Journal voucher history file
journal vouchers of past periods for audit trail
Responsibility center file
financial data by responsibility centers for MRS
Budget master file
budget data by responsibility centers for MRS

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45

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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46

Source
documents

Journal entries
in the journal

Post entries to
the ledger

Adjusting and
closing
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duplicated, or posted to a publicly accessible website, in whole or in part.

Trial balance

Financial
statements
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47

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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48

General ledger analysis:

listing of transactions
allocation of expenses to cost centers
comparison of account balances from prior periods
trial balances

Financial statements:

balance sheet
income statement
statement of cash flows

Managerial reports:

analysis of sales
analysis of cash
analysis of receivables

Chart of accounts: coded listing of accounts

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duplicated, or posted to a publicly accessible website, in whole or in part.

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49

Improperly prepared journal entries

Unposted journal entries
Debits not equal to credits
Subsidiary not equal to G/L control accounts
Inappropriate access to the G/L
Poor audit trail
Lost or damaged data
Account balances that are wrong because of
unauthorized or incorrect journal vouchers

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duplicated, or posted to a publicly accessible website, in whole or in part.

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50

Transaction authorization - journal

vouchers must be authorized by a
manager at the source dept
Segregation of duties G/L clerks
should not:

have recordkeeping responsibility for

special journals or subsidiary ledgers
prepare journal vouchers
have custody of physical assets

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51

Access controls:

Unauthorized access to G/L can result in

errors, fraud, and misrepresentations in
financial statements.
Sarbanes-Oxley requires controls that
limit database access to only authorized
individuals.
Accounting records - trace source
documents from inception to financial
statements and vice versa

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52

Independent verification

G/L dept. reconciles journal vouchers

and summaries.

Two important operational reports

used:
journal voucher listing details of each
journal voucher posted to the G/L
general ledger change report the
effects of journal voucher postings on
G/L accounts

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53

 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
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54

Advantages:
immediate update and reconciliation
timely, if not real-time, information

Removes separation of transaction authorization

and processing
Detailed journal voucher listing and account activity
reports are a compensating control

Centralized access to accounting records

Passwords and authorization tables as controls

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duplicated, or posted to a publicly accessible website, in whole or in part.

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55

Format used to produce Web pages

defines the page layout, fonts, and graphic elements
used to lay out information for display in an appealing
manner like one sees in magazines and newspapers
using both text and graphics (including pictures)
appeals to users

Hypertext links to other documents on the

Web
Even more pertinent is HTMLs support for hypertext
links in text and graphics that enable the reader to
jump to another document located anywhere on the
World Wide Web.

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56

XML is a meta-language for describing

markup languages.
Extensible means that any markup
language can be created using XML.
includes the creation of markup languages
capable of storing data in relational form, where
tags (formatting commands) are mapped to data
values
can be used to model the data structure of an
organizations internal database

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57

XBRL is an XML-based language for standardizing

methods for preparing, publishing, and exchanging
financial information, e.g., financial statements.
XBRL taxonomies are classification schemes.
Advantages:
Business offer expanded financial information to all
interested parties virtually instantaneously.
Companies that use XBRL database technology can
further speed the process of reporting.
Consumers import XBRL documents into internal
databases and analysis tools to greatly facilitate their
decision-making processes.

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58

Audit implication for XBRL

taxonomy creation: incorrect taxonomy results

in invalid mapping that may cause material
misrepresentation of financial data
validation of instance documents: ensure that
appropriate taxonomy and tags have been
applied
audit scope and timeframe: impact on auditor
responsibility as a consequence of real-time
distribution of financial statements

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59