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Accounting Information Systems: Accounting Information Systems: Essential Concepts and ApplicationsEssential Concepts and Applications Fourth Edition by Wilkinson, Cerullo, Raval, and Fourth Edition by Wilkinson, Cerullo, Raval, and Wong-On-WingWong-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 measures
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
General
ApplicationInputProcessingOutput
By Risk Aversion
Corrective
Preventive
Detective}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 external)
In a manual system, authorization, record-keeping, 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
Convert to
machinereadable
media
Data PreparationSection
Receive
and
Log
Log
and
Distribute
Control Section
Process
Outputs
To users (exception
and summaryreport)
Computer Operations
Data
Inputs
Outputs
Errorsto be
corrected
User Departments
Flow of Batched Data in Computer-Based Processing
Data LibrarySection
Files
Files
Figure 8-4
BatchFiles
OnlineFiles
Online Files (or data libraryfor removable disks and
backups
Process
Computer Operations
Data Inputs
Displayed Outputs
Printed orPlotted Outputs
User Departments
Segregation of Functions in a Direct/Immediate Processing System
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 documentation
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 Documentation
Systems development policy statements
Program testing policy statements
Computer operations policy statements
Security and disaster policy statements
System Application Documentation
Computer system flowcharts DFDs Narratives Input/output descriptions, including filled-in source documents Formats of journals, ledgers, reports, and other outputs Details concerning audit trails Charts of accounts File descriptions, including record layouts and data dictionaries Error messages and formats Error correction procedures Control procedures
Program Documentation
Program flowcharts, decision tables, data structure diagrams
Source program listingsInputs, formats, and sample filled-in formsPrintouts of reports, listings, and other outputsOperating instructionsTest data and testing proceduresProgram change proceduresError listings
Data Documentation
Descriptions of data elementsRelationships of specific data
elements to other data elements
Operating Documentation
Performance instructions for executing computer programs
Required input/output files for specific programsSetup procedures for certain programsList of programmed halts, including related messages,
and required operator actions for specific programsRecovery and restart procedures for specific programsEstimated run times of specific programsDistribution of reports generated by specific programs
User Documentation
Procedures for entering data on source documents
Checks of input data for accuracy and completeness
Formats and uses of reportsPossible error messages and correction
procedures
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 re-evaluate measured asset values
Management Practice Controls
Since management is responsible and thus “over” the internal control structure, they pose risks to a firm
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
inputs Assets are better protected
Authorizations may be classified as general or specific
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
Authorization Controls - II
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
Converting) 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 dataThe use of Batch control logs in the batch control
sectionAmount control total totals the values in an amount
or quantity fieldHash total totals the values in an identification fieldRecord count totals the number of source documents
(transactions) in a batch
Data Transcription - II(Conversion of Transaction Data)
Key Verification which consists of re-keying 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 Totals
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 software
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 quality
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
words) Sequence Check (e.g., successive input data are in some
prescribed order) Range Check (e.g., particular fields fall within specified ranges -
pay rates for hourly employees in a firm should fall between $8 and $20)
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 considered: 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 process
Completeness Check - verifying that all required data have been entered and transmitted.
Objectives of Processing Controls
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, ProcessingLogic Checks, Run-to-Run Controls,File and Program Checks, and AuditTrail Linkages
Examples of Processing Controls
Manual Cross-Checks - include checking the work of another employee, reconciliations and acknowledgments
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 Controls
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 validated
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 recipients
Two major types of output controls are: validating processing results regulating the distribution and
use of printed output
Validating/Reviewing 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 files
Regulating/Controlling 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 discarding
Application Controls Arranged by Two Classification Plans
Preventive Detective Corrective
Properly authorizedtransactions
Well-designed andcontrolled sourcedocuments
Sound conversion controltechniques
Batch control totals
Adequate input edit tests(programmed checks)
Sound error correctionprocedures
Complete audit trail
Sound file maintenanceprocedures
Adequate preventive-type programmed checks
Run-to-run verifications
Adequate detective-typeprogrammed checks
Complete audit trail
Distribution log ofauthorized users
Reconciliation ofcomputed totals withpredetermined controltotals
Reviews of outputs andtests to sourcedocuments by users
Reviews of logs andprocedures by internalauditors
Review of error-correction statistics
Input
Processing
Output
Control Stage
Control Purpose
Copyright © 2000 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 back-up 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.
Accounting Information Systems: Accounting Information Systems: Essential Concepts and ApplicationsEssential Concepts and Applications Fourth Edition by Wilkinson, Cerullo,Fourth Edition by Wilkinson, Cerullo,Raval, and Wong-On-WingRaval, and Wong-On-Wing