Core Concepts of

ACCOUNTING INFORMATION SYSTEMS

Moscove, Simkin & Bagranoff Developed by: S. Bhattacharya, Ph.D. Florida Atlantic University John Wiley & Sons, Inc .

Chapter 5 Computer Controls for Accounting Information Systems

• Introduction • Security and Controls for Technology • Security and General Controls for Organizations • Security and Application Controls for Transaction Processing • Database Controls • Controls in the Information Age

Reasons Why Computers Can Cause Control Problems

• Effects or errors may be magnified.

• Inadequate separation of duties because of decreased manual involvement • Audit trails may be reduced, eliminated, or exist only for a brief time. • Changes to data and programs may be made by individuals lacking knowledge.

• More individuals may have access to accounting data.

• Accounting data stored in computer-based systems are oriented to characteristics of magnetic or optical media.

Security and Controls for Technology

• Security for wireless technology – VPNs – Data encryption • Controls for hard-wired network systems • Security and controls for microcomputers – Risks unique to the micro environment – Controls for microcomputers

Risks Unique to Micro Environment

• •

Hardware

- microcomputers can be easily stolen or destroyed

Data and software

- easy to access, modify, copy or destroy; therefore, are difficult to control.

Control Procedures for Microcomputers

• Take inventory • Keyboard locks • Lock laptops in cabinets • Software protection procedures • Back-up files • Lock office doors

Additional Controls for Laptops

• Identify your laptop • Use nonbreakable cables to attach laptops to stationary furniture • Load antivirus software • Keep laptop information backed up

Computer Control Procedures

• • • Computer controls are frequently classified into two categories: General controls ensure that a company’s control environment is stable and well managed in order to strengthen the effectiveness of application controls.

Application controls are designed to prevent, detect, and correct errors and irregularities in transactions as they flow through the input, processing, and output stages of data processing.

Objectives of Controls over the Data Processing Function

To provide reasonable assurance that: – development of, and changes to, computer programs are authorized, tested and approved prior to their usage.

– access to data files is restricted to authorized users and programs.

• These objectives are referred to as general computer control objectives .

Risks that Control Procedures Seek to Reduce

• Control procedures are aimed at reducing financial risk , the chance that financial statements are misstated.

• Controls also seek to reduce business risk , the risk that the viability of the business is impacted by lack of control.

Backup

• • All companies should backup their vital documents, files and programs.

Grandfather-parent-child procedure batch processing.

is used during • Through electronic vaulting , data on backup tapes can be electronically transmitted to remote sites. • An uninterruptible power system (UPS) is an auxiliary power supply that can prevent the loss of data due to momentary surges or dips in power.

Contingency Planning

• Contingency planning includes the development of a formal disaster recovery plan .

• This plan describes procedures to be followed in the case of an emergency as well as the role of each member of the

disaster recovery team.

• The goal is to recover processing capability as soon as possible.

• A disaster recovery site can either be a hot site or cold site .

General Controls within IT Environments

• Personnel Controls • File Security Controls • Fault-Tolerant Systems, Backup, and Contingency Planning • Computer Facility Controls • Access to Computer Files

Personnel Controls Separation of Duties

• Separation of duties , which separates incompatible functions, is a central control objective when designing a system. • In IT environments separation of duties should include: – separating accounting and information processing subsystems from other subsystems – separate responsibilities within the IT environment

More Personnel Controls

• Companies use separate

computer accounts

that are assigned to users on either a group or individual basis. –

Passwords

are checked against a master list.

–

Call-back procedures

restrict access from remote terminals.

• An

informal knowledge of employees

and their activities can be an important clue for the detection of fraud.

File Security Controls

• The purpose of file security controls is to protect computer files from either accidental or intentional abuse.

Examples:

• External file labels • Internal file labels • Lock-out procedures • File protection rings • Read-only file designations

Fault-Tolerant Systems

• Fault-tolerant systems are designed to tolerate faults or errors and are often based on the concept of redundancy.

• Two major approaches to redundant CPU processing are consensus-based protocols watchdog protocols .

and • Disk mirroring (disk shadowing) to make disks fault-tolerant.

is a process used • Under roll-back processing transactions are never written to disk until they are complete.

Computer Facility Controls

• Locate the Data Processing Center in a safe place.

• Limit employee access. • Buy insurance.

Access to Computer Files

• Password codes and biometric identifications restrict logical access to data.

• Biometric identification devices

identify

distinctive user physical characteristics such as voice patterns, fingerprints and retina prints.

Input Controls

• Input controls attempt to ensure the validity, accuracy and completeness of the data entered into an AIS.

• The categories of input controls include 1) data observation and recording 2) data transcription 3) edit tests 4) additional input controls

Processing Controls

• Processing controls focus on the manipulation of accounting data after they are input to the computer system.

• Two kinds: 1) Data-access controls 2) Data manipulation controls

Output Controls

• • • • • The objective of output controls is to assure the output’s validity, accuracy and completeness.

Activity (or proof) listings

provide complete, detailed information about all changes to master files.

Forms control

check-writing.

is vital for forms associated with

Prenumbered forms

are the most common type of control utilized with computer generated check-writing procedures.

Shred

sensitive documents

Application Controls within IT Environments

• Application controls pertain directly to the transaction processing systems.

• The objectives of application controls are to prevent, detect and correct errors and irregularities in transactions that are processed in an IT environment.

• Application controls are subdivided into

input, processing

and

output controls.

Data Observation and Recording Controls

• Feedback mechanism • Dual observation • Point-of-sale (POS) devices • Preprinted recording forms

Data Transcription

• • Data transcription refers to the preparation of data for computerized processing.

Preformatted screens

use

“masks”

that are an important control procedure.

Edit Tests

• Input validation routines (edit programs) check the validity and accuracy of input data after the data have been entered and recorded on a machine readable file.

• Edit tests examine selected fields of

input data

and reject those transactions whose data fields do not meet the pre-established standards of data quality.

• Real-time systems use edit checks during data entry.

Examples of Edit Tests

Tests for: • Numeric field • Alphabetic field • Alphanumeric field • Valid code • Reasonableness • Sign • Completeness • Sequence • Consistency

Data-Access Control Totals

• Batch control total • Financial control total • Nonfinancial control total • Hash total • Record count

Data Manipulation Controls

• • • • • Once data has been validated by earlier portions of data processing, they usually must be

manipulated

in some way to produce useful output. Data manipulation controls include: Software documentation Compiler Test Data System testing

Database Controls

• Database management software • Layered passwords • Complete documentation including data dictionary • Database administrator • Security modules • Authorization and approval of all significant modifications to software • Changes made by authorized individuals

Controls for Computer Network Systems

• • • • Data encryption minimizes the risk of unauthorized access to data through electronic eavesdropping .

A checkpoint should be established to facilitate recovery from a system failure.

Routing verification procedures help to ensure that no transactions or messages are routed to the wrong computer network system address.

Message acknowledgement procedures are useful in preventing the loss of part or all of a transaction or message on a computer network system.

Copyright

Copyright 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 5