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Unformatted text preview: ISSUES IN ACCOUNTING EDUCATION
Vol. 18, No. 3
pp. 275–290 Designing Audit Procedures
When Evidence Is Electronic:
The Case of e-Ticket Travel Revenue
A. Faye Borthick and Jack E. Kiger
ABSTRACT: The objective of the Fly Airline case is for you to learn to develop audit
procedures in a context, e-ticket revenue, in which most of the evidence is available
electronically, and in which many tests of controls and substantive tests can be performed using data stored in electronic form. In sequence, you will identify controls and
their objectives, match controls to financial statement assertions for revenue, develop
tests of controls, develop substantive tests for each assertion, and organize audit procedures into an effective and efficient audit program.
Keywords: auditing; e-ticket revenue; collaborative learning; electronic evidence; internal
control; monitoring; systems expertise for auditing. OVERVIEW
ly Airline’s revenue generation begins when a customer selects a flight for a specific date
and time. The process is similar whether a ticket agent or the customer interacts with the
system to make the reservation. If the customer is paying with a credit card, the system
validates the credit card number the customer presents for billing before making the reservation.
When it obtains approval of the credit charge (electronically, from the card issuer), the system
records the charge and other details of the reservation. The customer gets a confirmation number and
itinerary immediately, and gets a boarding pass at the gate only by presenting picture identification.
Daily, the system batches each day’s charges by credit card issuer and transmits them electronically to credit card issuers. Until a flight occurs, ticket sales are recorded as unearned revenue. After
a flight, the system records earned revenue based on the reservations for the flight and decreases
unearned revenue accordingly. Furthermore, Fly Airline’s bank provides electronic bank statements.
In addition to offering flights to customers and allowing customers to make reservations, Fly’s
system accommodates changing reservations, handling cash and credit card receipts, boarding passengers, and booking revenues. The system includes procedures for setting fares and for passengers
flying free. The system includes monitoring activities designed to ensure the effectiveness of operations and information analysis that management uses to maximize revenue per seat-mile. Figure 1
presents an overview of the system and Figure 2 illustrates the system database. Details about how
the system works appear following Figures 1 and 2. F A. Faye Borthick is a Professor at Georgia State University and Jack E. Kiger is a Professor at the
University of Tennessee.
The authors are indebted to the airline personnel that revealed nuances of business processes, to the many students that
pointed out what they did not understand and what they needed to learn to develop effective audit programs, and to editor
Tom Howard, associate editor Tom Hall, and two anonymous reviewers for helpful comments. 275 276 Borthick and Kiger FIGURE 1
Ticketless Travel: Data Flow Diagram (DFD)a
Ticketless Travel: Data Flow Dia gram (DFD)* Customer Check for
flights flights Check for
seat seat inventory Determine
fare fares Charge
customer charges Make
reservation reservations Display
manifes t Customer Log seat
manifes t a In DFDs, circles represent processes, squares indicate sources or destinations of data, arcs with arrows designate flows of
data, and parallel lines signify a store of data. Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue FIGURE 2
Data Tables with Example Records
Flight Table (primary keys in bold; foreign keys in italics)
1012 Type Arrive
fare Off peakadvance
fare Off peakregular
$159 Departs Arrives Depart
New York Chicago
Miami 8:00 am
8:05 am 8:49 am
10:10 am Departs Arrives Seat
New York Chicago
101 Seat Inventory Table
07/14/2002 Reservation Table 13999191
A 13596310 Manifest Tablea
number Flight date Departs Arrives Confirmation
number Lastname Firstname Seat 1012
07/04/2002 New York
New York Miami
(continued on next page) 277 Issues in Accounting Education, August 2003 Confirmation Reservation Customer
number 278 Issues in Accounting Education, August 2003 FIGURE 2 (continued)
card issuer Credit card
date Visa 222-44-4444 03/05 $100 Cash
agent Receipt date M108 06/02/2002 0021991 Cash Receipts Table
fee 1021896 Fare
$129 $129 Free Flier Table
amount Charge date $199 $124 Authorization
E4342T 06/02/2002 Authorization
code 0652141 Change Fare
fee amount 393255 1011992 Free Flights Table
number Affiliation Authorization
code 80289992 Employee 393255 Street City 1011992 Firstname 0021991
Kitai 123 Bea St
25 Ratcliff Ln
199 Roe Rd
826 Sky Way
4512 Coop Rd Chicago
agent $119 State Zip IL
561-8978 Email address
firstname.lastname@example.org a The database is unnormalized with respect to the manifest table to enable better performance at boarding time and in order to keep historical records of
passenger lists that are archived separately from other tables. Borthick and Kiger Customer Table
waived Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 279 Offering Flights to Customers
Fly offers flights to customers through a system that customers and agents access through the
Internet. Customers and ticket agents enter the origination and destination cities and the dates and
preferred times for travel. The system generates information that permits customers to choose
In collaboration with other Fly units, flight operations establishes the flight schedule. To change
the schedule, flight operations enters changes into a flight change edit program. After the flight
operations manager has approved schedule changes by attaching an electronic signature to the
schedule change file, the system schedules the changes for application on the right day (at midnight),
counts the number of schedule changes, creates a hash total of the flight numbers, adds a header
record to the charge file containing the count, the hash total, and the manager’s electronic signature,
copies the file to the update queue, and notifies computer operations of the pending update of the
flight table. A file of schedule changes is maintained.
Fares vary based on the route to be traveled, whether travel is during peak or off-peak times, and
whether the ticket purchase is an advance or regular purchase. Tickets bought 14 days before the
flight date are advance purchase tickets. Given the destination and whether the purchase is an
advance or regular purchase, the system determines, based on the date and hour of the flight, whether
travel is during peak or off-peak times and displays the appropriate fare.
While customers and ticket agents do not actually see the flight table (Figure 2), its contents
determine the fare the system displays. Marketing personnel are responsible for maintaining fares.
Once they decide on fare changes, marketing personnel enter approved fare changes and their
effective dates into a fare change edit program. This program verifies the flights exist and determines
that the changes meet reasonableness criteria such as not falling below minimum fares or exceeding
maximum fares and as functions of the destination, type of purchase, and time of day. Once all
changes pass input edits, the fare change edit program creates a fare change file for the marketing
manager’s approval. After the marketing manager has approved the fare change file by attaching an
electronic signature, the system schedules the fare changes for application on the right day (at
midnight), counts the number of fare changes, creates a hash total of the flight numbers, adds a
header record to the charge file containing the count, the hash total, and the manager’s electronic
signature, copies the file to the fare update queue, and notifies computer operations of the pending
update of the flight table. A file of fare changes is maintained.
Once the customer selects an acceptable flight, the system determines whether seats are available by examining the seat inventory table and the applicable fare. Ticket agents may not override
fares. The flight operations department provides data for the seat inventory table (Figure 2), which
contains dates, flight numbers, seat capacity, and the number of seats remaining. The system automatically updates the number of seats remaining by reducing (increasing) it by one each time a
reservation is made (canceled).
When making a reservation, the system prompts customers (or ticket agents) for a customer
number, which it uses to look up information about the customer. If the customer is new, the system
prompts for a customer name, address, phone number, email address, credit card number, credit card
issuer, and expiration date and writes the information in the customer table (Figure 2). Fly’s system,
linked with credit card issuers, requests approval for the charge. If the charge is not approved, the
customer may enter new credit card information and request approval. If credit authorization is
unobtainable, no reservation can be made unless the customer is at the airport with cash to pay for the
ticket. Issues in Accounting Education, August 2003 280 Borthick and Kiger Once credit has been authorized, the system writes information about the charge (a unique
charge number generated by the system, the credit card issuer and card number and expiration date,
the amount of the charge, the authorization code from the credit card issuer, and the charge date) in
the charge table. If a customer pays cash at the ticket counter in the airport, the system records the
cash receipt in the cash receipts table.
For complimentary fliers such as employees, members of employees’ families, or employees of
other airlines, the system looks up the customer number and the affiliation that entitles the person to
fly free (such as employee) in the free flier table. If the customer number and affiliation match a
record in the free flier table, the system writes the appropriate record in the free flights table. Each
day, the system generates reports about changes to the free flier table and free fliers, which the
personnel director reviews daily.
After creating an entry in the charge table, the cash receipts table, or the free flights table, the
system writes the reservation record in the reservation table. The record includes a unique confirmation number generated by the system; either the charge number in the charge table, the cash receipt
number in the cash receipts table, or the free flight number in the free flights table; the flight date; the
flight number; the customer number; and the date the reservation was made. The system displays the
confirmation number and itinerary and emails a receipt and an itinerary to the customer.
When the data tables were first created, the charge number field in the reservation table was
designated as a foreign key to the charge table; the cash receipt number in the reservation table
was designated as a foreign key to the cash receipts table; and the free flight number in the reservation table was designated as a foreign key to the free flights table. This means that before an entry can
be made or updated in a record in the reservation table, the system verifies that the charge number
already exists in the charge table, that the cash receipt number already exists in the cash receipts
table, or that the free flight number already exists in the free flights table.1 If a corresponding number
does not exist in the any of the tables, then either credit has not been approved, cash payment has not
been received, or free flying has not been authorized. In this case, the system will not write a
reservation record, and no supervisor can override the prohibition.
To change a reservation using the website, a customer selects the flight to be changed and then
the change function. After the customer selects the new flight, the system requests credit card
authorization and writes the appropriate charges (a $100 change fee and the amount by which the
new fare exceeds the fare amount for the previously purchased flight) in the charge table. The
customer forfeits any difference if the fare for the new flight is less than the earlier one. Then the
system writes the new reservation in the reservation table and changes the status of the old reservation to canceled. The system adjusts the values of seats remaining in the seat inventory table for the
old and new flights. Similarly, to change a reservation, a ticket agent selects the change function and
records the change in either the charge table or the cash receipts table.
Flights may be canceled due to weather conditions, the unavailability of suitable aircraft, or
other circumstances beyond an airline’s control. Most customers are rerouted on other flights. To
cancel a flight, a flight operations supervisor indicates to the system that the flight is canceled and the
reason for the cancellation. Upon receiving the cancellation, the system permits the customer to be
rerouted on another flight. These reservation changes do not incur the $100 change fee.
1 In database terminology, this way of linking records in two different files is known as referential integrity. That is, before
a record containing a foreign key can be written, the object of the reference must exist as the primary key of the target
table. In this case, the charge number is the primary key of the charge table, the cash receipt number is the primary key of
the cash receipts table, and the free flight number is the primary key of the free flights table. Thus, through systemimplemented referential integrity, the reservation system will not record a reservation for which there is no charge,
payment, or authorized fare waiver. Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 281 Handling Cash and Credit Card Receipts
Agents at airports may record cash receipts and credit card transactions while the website may
record only credit card transactions. Each agent has a drawer with a change fund that only he or she
operates. At the completion of each shift, agents submit the cash collected to their supervisors. The
system determines the amount of cash a ticket agent should have based on charges for tickets issued,
change fees, and credit card charges. The amount of cash an agent is over or short is recorded.
Agents that are careless in handling cash receipts are dismissed. The system generates a cash receipts
total that is reconciled with total cash receipts for all cash drawers each day. If a supervisor in the
cashier’s office cannot reconcile the cash receipts within 24 hours, the system notifies the treasurer
electronically. For each bank deposit, the employee making the deposit enters the amount from the
deposit ticket receipt into the system. Daily, the system performs a reconciliation of deposits per
deposit tickets to the cash collections determined by the system. If the totals differ, details of the
deposit ticket receipts are recorded in a suspense file. A cash receipts supervisor can remove the
amounts from the suspense file only after reconciling the amounts and entering an explanation of the
cause of the discrepancy. Whenever ticket receipts are not reconciled to system-determined totals
within one day, the treasurer is notified electronically.
Daily, the system generates a reconciliation of credit card charges by issuer with total credit card
charges for the day. If balancing does not occur, electronic notification goes to a supervisor and
details of the day’s activity go into a suspense file. If the supervisor fails to reconcile the amounts and
clear the suspense file within one day, the system notifies the treasurer electronically. The actions
undertaken to reconcile the amounts are recorded online.
The system batches each day’s charges by credit card issuer and electronically transmits charges
to credit card issuers. Credit card charges by issuer by day are reconciled with bank account receipts
that occur in the airline’s online ticket receipts bank account. If the charges do not reconcile,
electronic notification goes to a supervisor and details of the day’s activity go into a suspense file. If
the supervisor fails to reconcile the amounts and clear the suspense file within one day, the system
notifies the treasurer electronically. The actions undertaken to reconcile the amounts are recorded
online. In effect, the procedure constitutes a daily reconciliation of bank records with the airline’s
cash journal. Monthly bank statements are available online from the bank.
Before boarding begins, the system writes records in a manifest table (Figure 2) for the flight
that contains an entry for each confirmed passenger. The manifest table is a real table, not a view,
because it is the permanent record of persons on the flight. At the gate, the boarding agent verifies
fliers’ identification, matches fliers to the manifest, gives them boarding passes, and permits them to
board. With each flier verification, the system logs the seat occupancy in the manifest table.
Based on the number of boarding passes issued, the system generates a total number of passengers, which must match a count determined by the on-plane flight attendant. The attendant counts the
passengers (or the number of empty seats) and enters the number into the system. If the numbers
differ, the attendant recounts the passengers and reenters the number. If the numbers still differ, the
gate agent must enter an explanation into the system. The plane is permitted to depart after the pilot
enters his or her electronic signature into the system.
Ticket sales are recorded as unearned revenue when reservations are recorded, and change fees
are recorded as revenue when reservations are changed. When a plane departs, operations records a
time for its departure that triggers the system to record earned revenue. Revenue for a flight may not
be recorded until the system has received notification of the flight’s departure. Based on the manifests Issues in Accounting Education, August 2003 282 Borthick and Kiger for all the flights that occur, the system records earned revenue by type (domestic or international, by
flight in the flight table) and decreases unearned revenue accordingly. A flight is designated as
domestic or international when the operations manager adds the flight to the flight table. Forty-eight
hours after a flight’s arrival, entries associated with it are removed from the reservation table, the
charge table, the cash receipts table, and the manifest table. Before being archived, the removed
entries are added to a flight history data warehouse.
Each day’s revenue consists of fares for the flights that occurred that day plus the fees charged
for reservation changes that day. The system prepares a summary of revenue by flight, a summary of
charges for reservation changes, and a total for the day. This total is posted as earned revenue. Flight
operations personnel have access to the summary, which shows for each flight the number of paying
fliers, the number of complimentary fliers, and the averages for each of those on the same day of the
week during the preceding month.
Daily, the system performs a balancing routine that verifies that: (1) unearned revenue by type
(domestic or international) reconciles to the charges for which reservations have been made and the
flight time has not yet passed, and (2) earned revenue by type (domestic or international) reconciles
to the charges made to unearned revenue for flights that occurred. If the amounts differ, details are
recorded in a suspense file and a supervisor is notified electronically. The supervisor must bring the
system into balance, clear the suspense file, and record the cause of the difference.
Assessing the Effectiveness of Monitoring
The airline’s risk management department has the responsibility for assuring the integrity of
monitoring activities. Risk management personnel have read-only access to all files containing: (1)
notifications of unreconciled amounts, e.g., for cash drawers, deposit ticket receipts, credit card
charges, credit card collections, earned and unearned revenue; and (2) explanations of the causes of
reconciliation failures and attempts to reconcile accounts.
Controlling Operations and Improving the System
The files containing the underlying causes for reconciliation failures are available to department
managers, who are responsible for identifying system changes consistent with more effective operations. Department managers consult with system development personnel on proposed changes and
authorize those that appear to be cost-effective process improvements. For example, a cash receipts
manager might suggest modifications to the system to reduce the incidence of reconciliation failures
between system-determined revenue and cash receipts.
Each department has read-only access to system-calculated statistics for financial and operating
results and is responsible for using the information to control its area and to recommend changes
with the potential to improve any aspect of the airline’s operation. For example, supervisors are
responsible for investigating excessive numbers of accounts that fail to be reconciled within one day
and recommending corrective action. Marketing personnel are responsible for evaluating the effectiveness of the fare structure and recommending changes to it. Together, flight operations and
marketing personnel are responsible for evaluating the effectiveness of the flight schedule and
recording changes to it. Executives also have access to the financial and operating results, which
prompt them to suggest changes to be evaluated by one or more departments. Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 283 Maintaining System Integrity and Continuity
Controlling System Development through Change Control
The airline uses a proprietary program library management system to ensure that all program
code and system changes are authorized and documented. A quality assurance (QA) group provides
test data to programmers and migrates programs from development libraries to test libraries to
production libraries after users have authorized changes. Change approvals are documented with
electronic signatures. For emergency program changes made in response to system failures, QA
personnel monitor subsequent authorization and documentation. Program development and testing
are done on servers that are independent of the production system and large enough to conduct
Attaining System Reliability and Access Control
The airline uses a proprietary system to monitor and manage its information technology (IT)
infrastructure. From an operations center control room, technicians monitor processes whose degradation or failure would threaten system operability. Aspects subject to monitoring include application availability, application performance, file availability, application interfaces, data transfers, and
response levels. For customer-facing applications, the service goal is to detect and correct problems
before customers notice them. From their desks, technicians investigate problem situations, summon
hardware, software, and network specialists, and reconfigure the network and servers to avoid
problem areas until full capabilities can be restored. For example, if particular network paths seem
prone to failures, technicians shift network traffic to other paths.
Through the use of software and hardware monitors, some of the technicians specialize in
analyzing unusual activity on the network that might be indicative of hacker penetration, denial-ofservice attacks, or laxity in administration of passwords or access privileges. These technicians are
also responsible for detecting security lapses in the way hardware, software, and network resources
are configured and proposing system parameter changes and security patches to correct security
lapses. Once management authorizes the changes and patches, QA personnel implement them on the
Recovering from Processing Interruptions
All the groups with a role in the IT infrastructure are responsible for recommending changes to
the airline’s business continuity plan. Because the online systems require 24 hours per day, 7 days a
week availability, the continuity plan has never been tested in its entirety at one time. Some aspect of
the plan is executed every time a component fails or a component is replaced or added. Individual
components are occasionally disabled to test specific functions. For example, some servers might be
varied offline at a nonpeak time to enable operating personnel to practice planned recovery efforts.
Maximizing Revenue per Seat-Mile
Because of fierce competition and large fixed costs, a significant risk to the airline is the
inability to maintain profit margins. The airline’s approach to managing this risk is to use a load
forecasting model and data mining software to maximize flight profitability. The airline’s flight
history data warehouse contains the number of passengers in each fare category for each flight for
each day. The forecasting model incorporates factors such as day of the week, holiday occurrence,
time of the year, fuel cost by location, and competitors’ flights and fares. Analysts investigate flights
whose actual loads are outside the forecasted load ranges, and recommend changes to flight schedules and fares and abandonment of unprofitable flights.
In addition to using the load-forecasting model, the marketing department looks for revenue
enhancement opportunities with proprietary data mining software. Yield-management analysts make
recommendations for allocating seats between cheap leisure travel (off-peak times and advance Issues in Accounting Education, August 2003 284 Borthick and Kiger purchases) and on-demand business travel (peak times and regular purchases). Based on load forecasting and data mining results, marketing personnel change fares and flights to maximize revenue
per seat-mile. After each set of flight and fare changes, the marketing department evaluates whether
the changes had the intended effect on revenue.
Another significant risk to the airline is unanticipated escalation of fuel costs. The airline
manages this risk by placing forward contracts for fuel and minimizing fuel purchases in the highestcost areas.
Other risks for the airline are that it will miss deadlines for implementing mandated security
checking of passengers and luggage and be sluggish relative to its peers in using information
technology to enable effective operations or revenue management. In addition to the uses already
cited, information technology could be important in the following ways: matching airport employee
schedules to flight arrivals and departures, routing and tracking baggage and freight to minimize
handling and lost item recovery, expediting passenger boarding to minimize ground time and employee staffing, and rerouting flights and passengers when weather or other conditions disrupt flight
schedules to minimize losses. The airline manages this risk by charging its chief technology officer
with the responsibility of recommending new uses and enhancements to existing information systems
on a monthly basis and evaluating the success of each technology implementation project.
Develop an audit program for Fly Airline’s e-ticket revenue:
A. Identify controls for e-ticket revenue and explain the objective of each control, i.e., what the
control is intended to accomplish with respect to financial reporting. Show the controls and
objectives in the following format, adding rows as needed. The first row, containing a
control and its objective, illustrates the appropriate level of detail for the entries. 1 C ontr ols and O b jec ti ves : e-T ic ke t Re ven ue
O b jec tive: W h at the Co ntrol
C ontr ol
ach ie ves for Fin an cial Re por tin g
S upervis ors m onit or the dai ly Ens ures that ticke t s ales or cha nge
reconc ili ati on of credi t ca rd
fee t rans act ions aris ing fr om credi t
cha rge s b y i ss uer b y da y wi th ca rd t rans act ions exis t (a nd hence
s ubse quent bank a ccount
are not fict iti ous)
rece ipts 2
5 Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 285 B. Group the controls by financial statement assertion and develop a test of each control. Show
your groupings and tests of controls in the following format, adding rows as needed. The entry
in the first row illustrates the appropriate level of detail for the entries.
C on trols and Tes ts b y Ass ertion: e-Ti ck et Revenue
A ss ertion
E xis tence or
occu rren ce 1 Control
S upervisors m onito r the
dai ly reconciliation of
credit card charges by
iss uer by day with
subs equent bank account
recei pts T es t of Control
1. Verify that the system
perform s a valid dail y
reconciliation of credit card
charges by issuer by day
with subsequent bank
2. R eview the reconciliati on
logs to confirm that
supervisors daily moni tor
the cont rol C ompleteness
R ights or
dis clos ure 2
1 C. Develop one or more substantive tests for each financial statement assertion in the following
format, adding rows as needed. S ub st an tiv e T es ts o f A sse r tio n s: e -T ic ke t R e v e n ue
A sse r t ion
E x iste n c e o r
o c c ur r e n c e
C o m ple t e ne s s
R igh ts o r
o blig a tio ns
V a lu a tio n
P r e s en t at ion
d is c lo s ur e 1 S ub st an tiv e T es t 1
1 Issues in Accounting Education, August 2003 286 Borthick and Kiger D. Using the tests of controls and substantive tests in B and C, prepare an audit program that
organizes the procedures an auditor would perform to test e-ticket revenue into groups that
would enable the work to be done efficiently. Show the audit program in the following format,
adding rows as needed.
A u d it P r o gr a m : e - T ic k e t R e v e n u e
A u d it P r o gr a m
G ro up
a n a ly tic a l
p r oc e d u r e s a s
p a r t of p la n n in g
V e r if y c o rr e c t
s ys te m op e r a ti on
su s ta in a b ilit y o f
p r oc e s si ng
P e r f o r m t e sts of
c o n tr ols
in c lu d in g te s tin g
th e e f f e c tiv e n e ss
o f a p p lic a t io n
m o ni to ri ng
p r oc e d u r e s
su b st a nt iv e t e sts 2. A u d it P r o c e d u r e A s se r t io n 1
2 Explain the significance of the following risks to the financial statements and explain tests that
an auditor might perform to assess the risks using data from Fly Airline’s information system.
While current auditing standards require auditors to have an understanding of the client’s
business, auditors are placing increased emphasis on business risks because they are concerned
about the potential of risks to result in misstatements in the financial statements.
A. The risk of impaired assets
B. The risk of inadequate yield management Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 287 LEARNING OBJECTIVES
The objective of the Fly Airline case is for students to learn to develop an audit program in a
context, e-ticket revenue, in which most of the evidence is available electronically and in which tests
of controls and substantive tests can be performed using data available in electronic form. In this
situation, auditors would normally assess control risk below the maximum, and hence perform tests
of controls and substantive tests. In sequence, students:
1. Develop an audit program by:
A. Identifying controls and their objectives;
B. Matching controls to financial statement assertions for revenue and developing tests of
C. Developing substantive tests by assertion; and
D. Organizing the audit procedures in B and C into an efficient program that an auditor might
follow to perform the audit work.
2. Explain tests for assessing risks using data from the client’s information system.
Although missing some of the complexity of an airline’s actual operations, the case narrative
presents a realistic representation of airline operations with respect to e-ticketing and related processes quickly. This simplification is helpful because it permits students to grasp the essential
processes quickly. Because many auditing assignments concern products rather than services, this
case likely represents a new context for many students. Furthermore, the pervasiveness of information technology embodied in the e-ticket revenue processes is intended to give students experience in
thinking through the implications of auditing in situations where controls can be tested and relied
More important than students achieving the specific audit program provided in the solution is
their learning to develop effective and efficient audit programs in a new context. That is, the
objective is not for students to reproduce the suggested solution, but to let their efforts preparing an
audit program for e-ticket revenue constitute learning for preparing audit programs for the next
situations they encounter (Kozulin 1998; Sfard 1998). For this purpose, it is helpful for students to
have the opportunity to defend their choices of audit procedures and to ask other students to justify
their choices. This approach helps prepare students for auditing in situations featuring new business
processes, especially those relying heavily on new uses of information technology.
Configuring the Case for Specific Learners
The case is appropriate for students that have completed an introduction to auditing revenue and
are familiar with information systems, e.g., by having taken an accounting information systems
course. Hence, the case may be used late in a first course in auditing or in a subsequent auditing
course, including an information systems auditing/assurance course.
The requirements as presented are configured for students in a first auditing course. The suggested formats for Requirements 1.A and 1.B include one entry to reduce students’ uncertainty about
what they are to do and at what level of explanation. Depending on students’ backgrounds, it may be
helpful to include an entry for Requirement 1.C. First-course students would benefit from class
discussion about outcomes from individual requirements, e.g., the first requirement (1.A) is to
identify controls and their objectives, before proceeding with subsequent requirements. If students
lack knowledge about preparing audit programs, then Requirement 1.D could be omitted. Configured as presented, students, depending on their backgrounds, need about four to ten hours to complete the case.
In a second auditing course with more advanced students, some or all of the sample entries Issues in Accounting Education, August 2003 288 Borthick and Kiger might be omitted. For truly advanced learners that do not need the scaffolding afforded by the
individual requirements (A–D in Requirement 1), Requirement 1 could be stated simply as “Develop
an audit program for Fly Airline’s e-ticket revenue” without the A–E subrequirements. In an information systems auditing/assurance course in which there might be students with strong information
systems background but minimal auditing background, it is helpful to retain the subrequirements of 1
(A–D), even if other students might not need them. Regardless of how the case is configured for
students, the objective is to provide the scaffolding learners need to complete the task, simplifying
the learner’s role if needed, but not the task itself (Daniels 2001).
Staging Collaborative Learning in Groups
To maximize learning, it is helpful for students to work collaboratively on the case in groups of
three to five members, which affords students opportunities to learn from each other (Rogoff 1998).
The learning opportunities can be maximized by making the groups as heterogeneous as the enrollment permits. Working with each other to take advantage of the knowledge that each member
already possesses has the potential to enable the groups to achieve outcomes that no member could
achieve alone (Hansen et al. 1999).
With respect to group composition, it is ideal for the information systems expertise to be
distributed across all the groups so that each group has at least one member conversant with how an
auditor might obtain evidence about the effectiveness of a control in an information system sufficient
to rely on it. Such controls might be associated with a specific application or constitute a general
control such as: (1) change control over modifications to application programs or (2) referential
integrity in a database enforcing business rules. These information systems experts can explain
technical aspects to other group members. Similarly, it is ideal for auditing expertise to be distributed
across all the groups. In this case, the student expert’s role is to help other students make the logic
leaps: (1) from control to financial statement assertion, (2) from assertions to tests of controls, (3)
from tests of controls to putting tests of controls and substantive tests together to obtain sufficient
evidence for each assertion. Students that are about average with respect to expertise in information
systems and auditing can keep the student experts honest by asking them to explain and justify their
reasoning in language that is accessible to everyone in the group.
Although making the initially unshared knowledge of each group member available to all group
members is essential (Stasser and Titus 1985, 1987), collaboration involves more than merely
sharing knowledge. Collaboration sets the stage for group members to be confronted with the fact
that members hold different beliefs. For example, although they might readily agree on what controls
appear in the narrative and how to test each control, group members are unlikely to agree initially on
what each control contributes to financial statement reporting and what substantive tests are needed
to generate sufficient evidence. The benefit of collaboration is that students, in the process of being
confronted with and coping with peers that do not hold the beliefs that they hold, can develop their
ability to think critically about problems (Bruffee 1999). In essence, students learn “to discriminate
better between facts and conclusions, to draw fewer false conclusions, to consider more than one
solution to a problem, and to be less adversely influenced in their approach to a problem by their
experience of a preceding one” (see Abercrombie 1960, 18).
One of the sources of the power of collaborative learning appears to be a function of one’s
reasoning about ideas that are ultimately rejected. In this framework, learning occurs in the activity
of tearing apart inferior solutions rather than in the creation of an acceptable solution (Kruger 1993).
Developing judgment this way requires interacting with peers, who push each other to justify their
beliefs or abandon them (Abercrombie 1960).
The overall objective of collaborative learning is to enable learners to go beyond simply learning a solution to the current problem. Instead, the objective is for learners to internalize reasoning Issues in Accounting Education, August 2003 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue 289 strategies that enable them to develop effective approaches to the next new problem they encounter
(Kozulin 1998; Sfard 1998). In terms of developing auditing expertise, this means not only learning
to think like an auditor, but also to be able to design audit programs for business processes that have
not yet been developed that will be implemented with technology that has not yet been invented.
Working together in collaborative groups also lets students experience the kinds of collaboration that
are expected of business professionals working on new problems for which new approaches or
solutions are required (Schrage 1990; Raelin 1997).
Student Feedback on Learning
Students have found the case both challenging and engaging. It is challenging because it prompts
students to apply what they have learned about auditing revenue in a new context and there is no one
right answer. It is engaging because it features technologically enabled business processes like ones
that many organizations are developing, and the interplay between tests of controls and substantive
tests is inherently interesting. Another benefit of the case is that the airline’s reliance on processes
implemented with technology prompts students that are reluctant to master the nuances of information technology to experience a need for doing so.
The case has been used in different configurations with undergraduate and graduate students at
two universities over a several-year period. For example, in a first auditing course, after students had
been introduced to internal control and tests of controls, students identified controls in Fly’s system
and their relationship to the financial statement assertions related to revenue. The exercise enabled
students to see the relationships between controls and financial statement assertions.
While most textbooks introduce monitoring as a component of internal control, materials for
student use that emphasize the ramifications of effective monitoring for audit programs are scarce. In
Fly’s system, monitoring is so pervasive that auditors’ tests of internal control become tests to
evaluate the effectiveness of monitoring. If they have not discussed the impact of monitoring on tests
of controls, students are likely to develop audit programs that merely test individual controls rather
than the effectiveness of the monitoring. Without this discussion, students may not realize that
testing the monitoring is a very efficient means of gathering evidence about the effectiveness of
controls. A way to help students having difficulty understanding the role of individual monitoring
activities is to have them think through how the revenue process might fail, and how the failure might
go undetected in the absence of each of the monitoring activities.
In a graduate auditing course, students liked the fact that preparing the audit program afforded
them an opportunity to apply their knowledge of state-of-the-art information systems. The case is
particularly appealing to students with a strong interest in information systems. The case also enables
students to see that designing an audit program is a much more interesting intellectual endeavor than
simply performing audit program steps.
The first version of the case had just one part, i.e., “Design an audit program for e-ticket
revenue.” Because of their lack of experience in designing audit programs, the first students completing the case found it difficult. Subsequently, the one-part “Design an audit program” direction
was expanded into its component parts, i.e., identify the controls and their objectives, match controls
to assertions, develop tests of controls, develop substantive tests, and organize the tests into an audit
program. Following the steps in sequence enables students to see the relationships among the
controls, financial statement assertions, the tests of controls, and the substantive tests, which enables
students to develop more effective audit programs.
After completing the case, student teams developed a narrative for the revenue cycle of another
company that relies on technology for essential business processes and prepared an audit program
for that company’s revenue. Given the experience of preparing the audit program for Fly Airline,
students were able to design well-controlled processes for which they could develop an audit program that relied on testing the effectiveness of monitoring. Preparing the narrative and corresponding audit program enabled students to demonstrate that they had learned to audit revenue in a highly
automated context rather than just learned the Fly case.
Issues in Accounting Education, August 2003 290 Borthick and Kiger Extensions
When discussing the audit program in class, the instructor might ask students about the implications of testing a control and finding that it is not effective. In such instances, students can be
prompted to develop additional substantive tests for the relevant financial statement assertion.
The case can be used as a model for students to develop an audit program for another technology-intensive business. After completing the Fly case, teams of students can be assigned to select a
business in which the system could be as technology-enabled as Fly’s system. Some possibilities
include a make-to-order company such as Dell Computer Corp. or a company with extensive
outsourcing such as Cisco Systems Inc. From published accounts and their own experience, students
write a description of the system the business could have. After revising the description based on the
instructor’s recommendations, students design an audit program for the revenue of that business.
This project enables students to transfer their understanding of an accounting system in one industry
to another similar but different business. The electronic systems in these businesses are easy to audit
because the teams have been sensitized to the need to build in monitoring that can be tested. Lest
students be tempted to model their companies too closely on Fly Airline’s revenue processes,
instructors could require students to select a different cycle, e.g., procurement.
Teaching Notes are available through the American Accounting Association’s new electronic publications system at http://aaahq.org/ic/browse.htm. Full members can use their personalized usernames
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If you are a full member of AAA and have any trouble accessing this material please contact the
AAA headquarters office at email@example.com or (941) 921-7747. REFERENCES
Abercrombie, M. L. J. 1960. The Anatomy of Judgment. New York, NY: Basic Books.
Bruffee, K. A. 1999. Collaborative Learning: Higher Education, Interdependence, and the Authority of
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Daniels, H. 2001. Vygotsky and Pedagogy. London, U.K.: Routledge.
Hansen, T., L. Dirckinck-Holmfeld, R. Lewis, and J. Rugelj. 1999. Using telematics for collaborative knowledge construction. In Collaborative Learning: Cognitive and Computational Approaches, edited by P.
Dillenbourg, 169–196. Amsterdam, The Netherlands: Pergamon.
Kozulin, A. 1998. Psychological Tools: A Sociocultural Approach to Education. Cambridge, MA: Harvard
Kruger, A. C. 1993. Peer collaboration: Conflict, cooperation, or both? Social Development 2 (3): 165–182.
Raelin, J. A. 1997. A model of work-based learning. Organization Science 8 (6): 563–578.
Rogoff, B. 1998. Cognition as a collaborative process. In Handbook of Child Psychology, Volume 2: Cognition, Perception, and Language, edited by D. Kuhn, and R. S. Siegler, 679–744. New York, NY: Wiley.
Schrage, M. 1990. Shared Minds: The New Technologies of Collaboration. New York, NY: Random House.
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This note was uploaded on 01/23/2011 for the course LAW 3200 taught by Professor Staff during the Spring '10 term at Georgia State University, Atlanta.
- Spring '10