Guide to the Assessment of IT General Controls Scope Based on

GAITGAITGGuide to the AAssessment of ITIT

General Controls Scope Based on Risk

A Top-Down, Risk-Based Approach to the

Scoping of Key ITGC

GAIT

Topics Covered: Problems with IT SOX Compliance Overview / Advantages Four Principles Methodologies – Five Phases Implementation Examples

The Problem

Challenge defining an effective and efficient scope for the annual assessments of ICFR

Internal control assessments and testing by management and external auditors was not focused on risk of material errors (e.g., not following a risk-based approach)

Lack of established guidance (i.e., inconsistency and subjectivity, reliance on checklists, etc.)

CobiT and ITGI provide more scope than SOX expects, causing companies to do too much

Significant cost overruns Difficulty defining the key IT general controls required to

address risks of material errors to financial reports

What is GAIT?

GAIT provides a set principle and methodology that facilitates the cost-effective scoping of IT general control assessments

GAIT is a reasoned thinking process that continues the top-down and risk-based approach to assess risk in ITGCs

GAIT focuses on identifying risk in IT processes that could affect critical functionality needed to prevent/detect material errors

Control objectives are identified in GAIT, but not specific key controls

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Why was GAIT formed?

Based on the problems described earlier, the IIA noticed the need to help companies identify key IT general controls where a failure

indirectly result in a material error to the financial statements

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Who helped with GAIT?

Core team of 7 people wrote and edited the documents• Christine Bellino, Jefferson Wells• Ed Hill, Protiviti• Fawn Weaver, Intel• Gene Kim, Tripwire• Heriot Prentice, The IIA• Norman Marks, Business Objects• Steve Mar, Microsoft – Team Leader

Advisory Board• CPA Firms – Big Four, Mid-sized Firms• SEC Registrants• Regulators

Who is a part of GAIT?

The Institute of Internal Auditors • IIA Support Staff• Advanced Technology Committee

Others• American Institute of Certified Public Accountants

(AICPA)• International Federation of Accountants (IFAC)

How does GAIT work?

The GAIT document has two main parts:– Principles– Methodology

Four Core Principles – Define the relationship between business risk, IT general

controls risk, and the IT general controls that can mitigate these

threats as they pertain to financial reporting objectives Methodology

– Helps organizations to examine each financially significant application and determine whether failures in the IT general control processes at each layer of the IT infrastructure represent a likely threat to the consistent operation of the application's critical functionality – HOW TO APPLY THE PRINCIPLES

Advantages of Applying GAIT

Two Primary Advantages Improves cost effectiveness of IT General Controls

auditing by including within audit scope only the elements or layers of infrastructure and IT general control processes that are relevant to financial control risks.

Aids in the documentation of scoping decisions.

Overall GAIT Scoping

Significant accounts

Business processes

Business controls

Applications

General Controls

RISK of material misstatement/fraud to financial statements & disclosures

Scope SOX according to RISK of material misstatement/fraud.

IT Risk Assessment and Scoping

Significant accountsBusiness processes

Business controls Applications

IT Process Controls:Change Mgt, Operations, Security» Application» Database» Operating System» Network

STEP 1: validate understanding

STEP 2: perform risk assessmentat each layer

STEP 3: Conclude: is it REASONABLY LIKELY a failure in this IT Process area could impact application controls & result in a material misstatement?

Risk is not eliminated; is it reduced to a REASONABLE level.

Controls may be assessed and tested that are not critical, resulting in unnecessary cost and diversion of resources

Controls that are key may not be tested, or may be tested late in the process, presenting a risk to the assessment or audit

Risk of not using GAIT

By not applying a top-down and risk based approach starting at the financial statements and significant account level, there is a risk that:

1. The identification of risks and related controls in IT business processes should be a continuation of the top-down and risk-based approach used to identify significant accounts, risks to those accounts, and key controls in the business processes.

2. The IT general control process risks that need to be identified are those that affect critical IT functionality in financially significant applications and related data.

3. The IT general control process risks that need to be identified exist in processes and at various IT layers: application program code, databases, operating systems, and network.

4. Risks in IT general control processes are mitigated by the achievement of IT control objectives, not individual controls.

GAIT’s Four Principles

Financially Significant – Definition

Application: contains functionality relied upon to assure the integrity of the financial reporting process. – Should that functionality not function consistently and

correctly, there is at least a reasonable likelihood of a material misstatement that would not be prevented or detected.

Data: data that, if affected by an unauthorized change that bypasses normal application controls (i.e., as a result of an ITGC failure), is at least reasonably likely to result in a material misstatement that would not be prevented or detected.

. . . guides you by asking

three questions:1. What IT functionality in the financially significant

applications is critical to the proper operation of the business process key controls that prevent/detect material misstatement?

2. For each IT process at each layer in the stack, is there a reasonable likelihood that a process failure would cause the critical functionality to fail — indirectly representing a risk of material misstatement?

3. If such IT business process risks exist, what are the relevant IT control objectives?

The GAIT Methodology

Phases of GAIT Methodology

Identify controls over financial reporting to provide reasonable assurance as to their reliability

Identify and validate critical IT functionality

Identify significant applications where ITGCs need to be tested

Identify ITGC process risks and related control objectives

Identify ITGC to test that meet control objectives

AS5

Phase 1

Phase 2

Phase 3

Phase 4

Perform a reasonable person reviewPhase 5

AS5

Top Down Approach• Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.• The auditor should use a top-down approach to the audit of internal control over financial reporting to select the controls to test. A top-down approach begins at the financial statement level and with the auditor's understanding of the overall risks to internal control over financial reporting.

Role of IT• The auditor should assess the extent of information technology ("IT") involvement in the period-end financial reporting process;• The identification of risks and controls within IT should not be a separate evaluation but, rather, an integral part of the auditor's top down risk assessment, including identification of significant accounts and disclosures and their relevant assertions, as well as the controls to test.

Methodology – Phase 1

1. Review key controls, reports, and other functionality in the company’s business processes and determine which are manual and which are automated.

2. Develop a list of critical IT functionality.

3. Confirm key automated controls.

4. Determine whether there is additional critical IT functionality not identified as a key control.

Identify and validate critical IT functionality

1. Sort the critical IT functionality by application.2. Identify the financially significant applications that

are in scope for ITGC.

Methodology – Phase 2

Identify significant applications where ITGCs need to be tested

Continue only with financially significant applications.

Methodology – Phase 2

1. What is the likelihood of an IT process failure occurring and what is the potential impact?

2. What is the likelihood of the IT process failing in such a way that it would cause the critical IT functionality to fail?

3. Is it at least reasonably likely that the critical functionality would fail without prompt detection and result in a material error in the financial statements?

Methodology – Phase 3

Risk of IT Process Failures

Identify ITGC process risks and related control objectives

1. Consider the pervasiveness of ITGC . . . Are there risks that may affect multiple applications and their

critical IT functionality?

2. Select Key IT general controls to test.3. Link each key IT general control to the control objectives

identified through GAIT.

Methodology – Phase 4

Identify ITGC to test that meet control objectives

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1. Confirm that the risks and key controls represent a reasonable view of risk to financial reporting.

2. Ensure that the selection of risks is reasonable, given the organization’s risk tolerance in their 404 scope.

Methodology – Phase 5

Perform a reasonable person review

Implementation GAIT

Prior to implementing GAIT, companies should perform a top-down, risk-based assessment of their business processes and identify the key controls in those processes.

GAIT will utilize the information gathered from this assessment and define what functionality within the IT applications is critical and to see what IT applications provide this functionality.

Sample GAIT Matrix

Risk Factors

Factors that affect the risk associated with a control include:

• The degree to which the control relies on the effectiveness of other controls (e.g., the control environment or information technology general controls);

• Whether the control relies on performance by an individual or is automated (i.e., an automated control would generally be expected to be lower risk if relevant information technology general controls are effective);

Case Study 1

Energy Trading Company

• Key IT general controls reduced from 48 to 20• Able to consolidate many of the controls• Added 2 applications due to reliance of financial controls• Identified other risk areas related to a key application

Case Study 2

Financial Institution

• Eliminated 3 systems from scope – no controls dependent upon the systems

• Able to eliminate all Network related controls except for access

• Some controls were added back at management’s request due to the immaturity of the processes

Case Study 3

Utility Company

• Reduced key IT general controls from 49 to 18• Reduction had significant potential for reducing

administrative overhead• Paved the way for self assessment program• Able to provide good rationale for in-scope applications

Maximizing GAIT’s Implementation

Tips and Techniques • Start with a top-down, risk-based assessment of each

risk and key control in the business process being evaluated

• Build a team of internal controls experts with both business and IT knowledge to complete or review GAIT results

• Engage external auditor• Perform GAIT assessment early in the process• Focus on getting scope right, not just on reductions• Document results carefully and be sure to explain

what is and is not in scope

More Information . . .

• GAIT Resourceswww.theiia.org

• Questions? Ask Dr. GAITdrgait@theiia.org

Questions

• Feel free to contact me with questions:

Bill McSpadden, CISA

Protiviti

913-685-6200 or 913-661-7403

Bill.mcspadden@protiviti.com