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EDP Audit

Presentation By:R.T.I. JAIPUR

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The Era of Computers

Greatest achievement of scientific & technological development.Increased application of computers and IT in accounting operations.

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Significant Trends

Development of IT based networks largely powered by the development of Internet, Intranet, Telecom and network computers.More efficient information storage.Emergence of object oriented tools for system development.Transactions are processed and received electronically.

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Significant Trends

Expert and Automated Management systems.Growth of mobile PC’s.Development of new and improved security measures.

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Characteristics of an EDP environment

Organizational structureAbsence of Input documentsLack of visible Audit trailLack of visible outputEasy access to data and programsConsistent performanceProgrammed controls

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Computer frauds

Financial fraudsProperty fraudsInformation theftTheft of servicesVandalism of equipmentDestruction of records

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Internal controls

General EDP controlsEDP application controls

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Auditing in EDP Environment

When auditing under EDP system, auditors are not supposed to change audit objectives or auditing scopes set by auditing programs but are supposed to analyze the impact on auditing caused by IT and adopt some new auditing methodology.

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Auditing in EDP Environment

The change of the Auditees.Changed nature of wrongdoings and frauds. For example:-– Permitting people to deal with economic and accounting

affairs anonymously.– Allowing modification of accounting data without authorization

or modification of accounting data without documentation of the modification.

– Allowing unauthorized visitors.– Hiding or carrying out some invisible operations.

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Auditing in EDP Environment

Changes of Auditing evidence.Changes of working papers.

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Audit risks in EDP Environment

Visible Audit Clues may disappear naturally.– In manual accounting system, every step in

accounting circle is verified by paper recording and concerned signatures leaving visible and clear audit clues.

– In IT environment paper information is altered into magnetic codes therefore traditional audit evidence no longer exists.

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Audit risks in EDP Environment

Electronic accounting data are liable to be misused, distorted or lost.– In manual accounting system, paper information can

be easily identified and sourced.

Lack of original journals.Lack of Original evidence.

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Audit risks in EDP Environment

Great variety of accounting software & security protocols make auditing more difficult.Risks on Internal Controls.– In manual accounting, internal control stressed staff

controlling. Employee responsibility system are clearly defined while in IT environment, Internal controls consist of both staff and computer management, with the latter drawing more attention.

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Audit risks in EDP Environment

Abnormal accounting errors become possible.Risks in Audit Process.– Version updating.– Difficult to trace historic data.

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Preventive Methods

Reforming Audit Techniques and Methodology.Uses of CAATsImproving Preliminary and Follow up Audit on IT System.

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Preventive Methods

Strengthening Audit on Internal Controls and urging Audited Entities to establish and improve the Internal Control System in EDP Environment. Enhancing the training of Auditors.Speeding up the development of Software.

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Uses of CAATs

        Tests of details of transactions and balances;         Analytical review procedures        Compliance tests of EDP controls

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Considerations in the use of CAATs

Computer Knowledge, Expertise and Experience of the Auditor Availability of CAATs and Suitable Computer Facilities

Timing Documentation

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Types of CAATs

CAATs used to validate processes in programs Program review Code comparison Parallel simulation Test data The Trace

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. CAATs used to analyse data files

File interrogation software Generalised audit software Industry specific interrogation software SCARF

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Summary  Reforming audit techniques and methodology, Improving preliminary and follow up audit on IT System,  Establishing a unified audit data channel,Strengthening audit on internal controls and urging audited entities to establish and improve the internal control system in IT Environment,  Enhancing the training of auditors; and Speeding up the development of audit software.

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I D E A

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IDEA- Introduction

Interactive Data Extraction and AnalysisA comprehensive CAAT Developed by Office of Auditor General of CanadaHelpful for Auditors, Financial Managers, Investigators and Accountants

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IDEA- Introduction…

display, analyse, manipulate, sample or extract from data files from almost any source - mainframe to PC, including reports printed to a file Lower audit cost, enhance the quality to work and take on new roles by putting the power of IDEA

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Functions of IDEA

Import data from wide range of file typesPerform analysis of data including comprehensive statistics, profiles, summaries and ageingConducts extensive tests with 70 functionsPerform calculationsTests for gap in sequence or duplicate data

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Functions of IDEA….

Sampling : Random, Systematic, Monetary

Match or compare different files

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Downloading the Data

5 stages– Planning– Requesting the Data– Performing the Transfer– Importing the Data– Checking the Data

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Downloading the Data

Planning: discussion with user and IT staff– File formats of different types

• Excel, Access, dBASE, Lotus etc• ODBC (Oracle, SQL etc)• ASCII files (American standard code for information

interchange)

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USE of IDEA

ImportImport almost any file type from almost any source, using IDEA's Import Assistant to guide you. For more complex files, variable length records or multiple record types, IDEA provides a companion product, Record Definition Editor (RDE). RDE can also be used to modify record definitions created and saved by the Import Assistant.

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USE of IDEA

ExtractExtractions, or exception testing, is the most frequently used function in IDEA, used to identify items which satisfy a specific characteristic, such as payments more than Rs10,000 or transactions before a given date. The extraction criteria are entered using the Equation Editor and all records satisfying the specified criterion are output to a new database. You can perform a single extraction on a database, or up to 50 separate extractions with a single pass through the database.

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USE of IDEA

Indexed Extraction allows you to limit the scope of data for which IDEA searches in the database. An indexed extraction saves time when reviewing large databases. You can select and index for the search, rather than have IDEA search through the entire database.

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USE of IDEA

@Functions@Functions are used to perform more complex calculations and exception testing. IDEA provides over 60 functions which can be used for date arithmetic, text manipulation and conversion and numerical, financial and statistical calculations. IDEA functions begin with the '@' symbol, very similar in style and operation to functions found in Microsoft Excel.

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USE of IDEA

AppendThe Append Databases option is used to append or concatenate two or more files into a single database for audit testing. For example, you may append 12 monthly payroll files to produce a database of all payroll transactions for the year. The database could then be summarized by Employee to produce year-to-date gross, net, tax, deductions, etc. Up to 32,768 files can be appended into a single database.

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USE of IDEA

GapsYou can search a file for gaps in numeric or date sequence, or alphanumeric sequences with a user defined mask. For date gaps, you can choose to ignore weekends or user specified holidays. Like many other IDEA functions, you can apply criteria before your search, e.g. look for gaps in check numbers, where the check amount is greater than Rs1,000. You can also modify the increment – look for gaps in multiples of 10, for instance.

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USE of IDEA

SortThe Sort option is used to create a new database physically sorted in the specified order. Sorting can significantly improve performance of certain functions

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USE of IDEA

ChartThe Chart Data option can be used to graph data files or test results, in bar, stacking bar, pie, plot or area charts. The Charting Assistant will guide you through the steps for creating a chart. Chart options include titles, 3D effects, legends, colors and patterns, and grid styles. Charts can be printed, saved to as a Bitmap file or copied into any other windows application via the clipboard.

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USE of IDEA

StratificationNumeric Stratification, Character Stratification and Date Stratification are powerful tools used to total the number and value of records within specified bands. Examples of use include analyzing items by postal code or alphanumeric product code or fixed assets by date of acquisition.

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USE of IDEA

SummarizationThe Quick Summarization function is used to accumulate the values of numeric fields for each unique key where there is a single field in the key. The Key Field Summarization function is used where there is a one or more fields in the key. Summarization results can be graphed and users can drill down on each unique key.

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USE of IDEA

SamplingIDEA offers four sampling methods together with the ability to calculate sample sizes based on parameters entered and evaluate the results of sampling tests. The sampling methods available are systematic (e.g. every 1000th record), random (number of items chosen purely at random), stratified random (a specified number of items selected randomly from within range bands), and monetary unit (e.g. every 1000th Rs or other monetary unit).IDEA also provides an Attribute Planning and Evaluation option which can be used to calculate sample sizes, confidence levels, error limits and number of sample errors. These calculations are used to plan and then evaluate the results of the samples.

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USE of IDEA

Satisfy financial statement – Accuracy – checking totals and calculations

Analytical Review – comparisons, profiling, stratifying Validity – duplicates, exceptions, statistical samples Completeness – gaps and matches Cut-off – date and number sequence analysisValuation –inventory provisions

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Thank You