Accounting Information Systems: Essential Concepts and

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Transcript Accounting Information Systems: Essential Concepts and

Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing
Chapter 8: General Controls
and Application Controls
Slides Authored by Somnath Bhattacharya, Ph.D.
Florida Atlantic University
Introduction to Controls
Controls may relate to manual AISs, to
computer-based AISs, or both
Controls may be grouped into General
controls, Application controls, and Security
Controls may also be grouped in terms of risk
aversion: Corrective, Preventive, and
Detective Controls
These categories are intertwined and an
appropriate balance is needed for an effective
internal control structure
Control Classifications
By Setting
By Risk Aversion
Figure 8-1
General Controls
General Controls pertain to all activities
involving a firm’s AIS and resources
(assets). They can be grouped as follows:
Organizational or Personnel Controls
Documentation Controls
Asset Accountability Controls
Management Practice Controls
Information Center Operations Controls
Authorization Controls
Access Controls
Organizational or
Personnel Controls - I
Organizational independence, which separates
incompatible functions, is a central control objective
when designing a system
Diligence of independent reviewers, including
BOD, managers, and auditors (both internal and
 In a manual system, authorization, recordkeeping, and custodial functions must be kept
separate. e.g., purchases, sales, cash handling, etc
Organizational or
Personnel Controls - II
In computer-based AISs the major segregation is
between the systems development tasks, which
create systems, and the data processing tasks,
which operate systems
Within data processing, one may find segregation
between separate control (receiving & logging),
data preparation (converting to machine
readable form), computer operations, and data
library - batch processing
Other personnel controls include the two-week
vacation rule
Flow of Batched Data in
Computer-Based Processing
User Departments
Control Section
Data Preparation
Data Library
to be
Figure 8-4
To users
and summary
Segregation of Functions in a
Direct/Immediate Processing System
User Departments
Computer Operations
Online Files (or data library
for removable disks and
Data Inputs
Displayed Outputs
Printed or
Plotted Outputs
Figure 8-6
Documentation Controls
Documentation consists of procedures manuals
and other means of describing the AIS and its
operations, such as program flowcharts and
organizational charts
In large firms, a data librarian is responsible for
the control, storage, retention and distribution of
Storing a copy of documentation in a fireproof
vault, and having proper checkout procedures are
other examples of documentation controls.
Use of CASEs
System Standards
Systems development policy statements
Program testing policy statements
Computer operations policy statements
Security and disaster policy statements
System Application
 Computer system flowcharts
 DFDs
 Narratives
 Input/output descriptions, including filled-in source
 Formats of journals, ledgers, reports, and other outputs
 Details concerning audit trails
 Charts of accounts
 File descriptions, including record layouts and data
 Error messages and formats
 Error correction procedures
 Control procedures
Program Documentation
Program flowcharts, decision tables, data
structure diagrams
Source program listings
Inputs, formats, and sample filled-in forms
Printouts of reports, listings, and other outputs
Operating instructions
Test data and testing procedures
Program change procedures
Error listings
Data Documentation
Descriptions of data elements
Relationships of specific data
elements to other data elements
Operating Documentation
Performance instructions for executing computer
Required input/output files for specific programs
Setup procedures for certain programs
List of programmed halts, including related
messages, and required operator actions for specific
Recovery and restart procedures for specific
Estimated run times of specific programs
Distribution of reports generated by specific
User Documentation
Procedures for entering data on source
Checks of input data for accuracy and
Formats and uses of reports
Possible error messages and correction
Examples of Asset
Accountability Controls
Subsidiary ledgers provide a cross-check on the
accuracy of a control account
Reconciliations compare values that have been
computed independently
Acknowledgment procedures transfer
accountability of goods to a certain person
Logs and Registers help account for the status
and use of assets
Reviews & Reassessments are used to reevaluate measured asset values
Management Practice
Since management is responsible and thus “over”
the internal control structure, they pose risks to a
General controls include:
Human resource Policies and Practices
Commitment to Competence
Planning Practices
Audit Practices
Management & Operational Controls
In a computerized AIS, management should
instigate a policy for:
Controls over Changes to Systems
New System Development Procedures
Examples of Computer
Facility/Information Center Controls
Proper Supervision over computer operators
Preventive Diagnostic Programs to monitor hardware
and software functions
 A Disaster Recovery Plan in the event of a man-made
or natural catastrophe
 Hardware controls such as Duplicate
Circuitry, Fault Tolerance and Scheduled
Preventive Maintenance
 Software checks such as a Label Check
and a Read-Write Check
Application Controls
Application controls pertain directly to the
transaction processing systems
The objectives of application controls are to
ensure that all transactions are legitimately
authorized and accurately recorded,
classified, processed, and reported
Application controls are subdivided into input,
processing and output controls
Authorization Controls - I
Authorizations enforce management’s policies
with respect to transactions flowing into the
general ledger system
They have the objectives of assuring that:
Transactions are valid and proper
Outputs are not incorrect due to invalid
Assets are better protected
Authorizations may be classified as general or
Authorization Controls - II
 A General authorization establishes the standard
conditions for transaction approval and execution
 A Specific authorization establishes specific criteria for
particular sums, events, occurrences, etc
 In manual and computerized batch processing systems,
authorization is manifest through signatures, initials,
stamps, and transaction documents
 In on-line computerized systems, authorization is usually
verified by the system. e.g., validation of inventory
pricing by code numbers in a general ledger package
Input Controls
Input Controls attempt to ensure the validity,
accuracy, and completeness of the data
entered into an AIS.
Input controls may be subdivided into:
Data Observation and Recording
Data Transcription (Batching and
Edit tests of Transaction Data
Transmission of Transaction Data
Controls for Data
Observation and Recording
 The use of pre-numbered documents
 Keeping blank forms under lock and key
 Online computer systems offer the following features:
Menu screens
Preformatted screens
Using scanners that read bar codes or other
preprinted documents to reduce input errors
Using feedback mechanisms such as a
confirmation slip to approve a transaction
Using echo routines
Data Transcription - I
 Data Transcription refers to the preparation of data for
computerized processing and includes:
Carefully structured source documents and input screens
Batch control totals that help prevent the loss of transactions
and the erroneous posting of transaction data
The use of Batch control logs in the batch control section
Amount control total totals the values in an amount or
quantity field
Hash total totals the values in an identification field
Record count totals the number of source documents
(transactions) in a batch
Data Transcription - II
(Conversion of Transaction Data)
Key Verification which consists of rekeying data and comparing the results
of the two-keying operations
Visual Verification which consists of
comparing data from original source
documents against converted data.
Examples of Batch Control
 Financial Control Total - totals up dollar amounts (e.g.,
total of sales invoices)
 Non-financial Control Total - computes non-dollar sums
(e.g., number of hours worked by employees)
 Record Count - totals the number of source documents
once when batching transactions and then again when
performing the data processing
 Hash Total - a sum that is meaningless except for
internal control purposes (e.g., sum of customer
account numbers)
Definition and Purpose of
Edit Tests
Edit Tests (programmed checks) are most
often validation routines built into application
The purpose of edit tests is to examine
selected fields of input data and to reject
those transactions whose data fields do not
meet the pre-established standards of data
Examples of Edit Tests
(Programmed Checks)
 Validity Check (e.g., M = male, F = female)
 Limit Check (e.g., hours worked do not exceed 40 hours)
 Reasonableness Check (e.g., increase in salary is reasonable
compared to base salary)
 Field Check (e.g., numbers do not appear in fields reserved for
 Sequence Check (e.g., successive input data are in some prescribed
 Range Check (e.g., particular fields fall within specified ranges - pay
rates for hourly employees in a firm should fall between $8 and
 Relationship Check (logically related data elements are compatible employee rated as “hourly” gets paid at a rate within the range of
$8 and $20)
Transmission of
Transaction Data
When data must be transmitted from the point of origin
to the processing center and data communications
facilities are used, the following checks should also be
Echo Check - transmitting data back to the
originating terminal for comparison with the
transmitted data
Redundancy Data Check - transmitting
additional data to aid in the verification
Completeness Check - verifying that all required
data have been entered and transmitted.
Objectives of Processing
 Processing Controls help assure that data are
processed accurately and completely, that no
unauthorized transactions are included, that the
proper files and programs are included, and that all
transactions can be easily traced
 Categories of processing controls include
Manual Cross-checks, Processing
Logic Checks, Run-to-Run Controls,
File and Program Checks, and Audit
Trail Linkages
Examples of Processing
 Manual Cross-Checks - include checking the work
of another employee, reconciliations and
 Processing Logic Checks - many of the
programmed edit checks, such as sequence
checks and reasonableness checks (e.g., payroll
records) used in the input stage, may also be
employed during processing
Examples of Processing
 Run-to-Run Totals - batched data should be controlled
during processing runs so that no records are omitted or
incorrectly inserted into a transaction file
 File and Program Changes - to ensure that transactions
are posted to the proper account, master files should be
checked for correctness, and programs should be
 Audit Trail Linkages - a clear audit trail is needed to
enable individual transactions to be traced, to provide
support in general ledger balances, to prepare financial
reports and to correct transaction errors or lost data
Output Controls
Outputs should be complete and reliable
and should be distributed to the proper
Two major types of output controls are:
validating processing results
regulating the distribution and
use of printed output
Processing Results
Activity (or proof account) listings
document processing activity and reflect
changes made to master files
Because of the high volume of
transactions, large companies may elect
to review exception reports that
highlight material changes in master
Distribution of Printed Output
Reports should only be distributed
to appropriate users by reference
to an authorized distribution list
Sensitive reports should be
shredded after use instead of
Application Controls Arranged
by Two Classification Plans
P re v e n tiv e
D e te c tiv e
C o rre c tiv e
P ro p e rly a u th o rize d
tra n sa ctio n s
B a tch co n tro l to ta ls
S o u n d e rro r co rre ctio n
p ro ce d u re s
W e ll-d e sig n e d a n d
co n tro lle d so u rce
d o cu m e n ts
A d e q u a te in p u t e d it te sts
(p ro g ra m m e d ch e ck s)
C o m p le te a u d it tra il
R u n -to -ru n v e rifica tio n s
C o m p le te a u d it tra il
S o u n d co n v e rsio n co n tro l
te ch n iq u e s
S o u n d file m a in te n a n ce
p ro ce d u re s
A d e q u a te d e te ctiv e -ty p e
A d e q u a te p re v en tiv e p ro g ra m m e d ch e ck s
ty p e p ro g ra m m e d ch e ck s
D istrib u tio n lo g o f
a u th o rize d u se rs
R e co n cilia tio n o f
co m p u te d to ta ls w ith
p re d e te rm in e d co n tro l
to ta ls
R e v ie w s o f o u tp u ts a n d
te sts to so u rce
d o cu m e n ts b y u se rs
R e v ie w s o f lo g s a n d
p ro ce d u re s b y in te rn a l
a u d ito rs
R e v ie w o f e rro rco rre ctio n sta tistics
Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing
Copyright © 2000 John Wiley & Sons, Inc. All rights reserved.
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