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AUDITING SP 2008 CH 12 SOLUTIONS IT

Auditing and Assurance Services (12th Edition)

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1 Chapter 12 The Impact of Information Technology on the Audit Process Review Questions 12-1 The proper installation of IT can lead to internal control enhancements by replacing manually-performed controls with computer-performed controls. IT- based accounting systems have the ability to handle tremendous volumes of complex business transactions cost effectively. Computer-performed controls can reduce the potential for human error by replacing manual controls with programmed controls that apply checks and balances to each transaction processed. The systematic nature of IT offers greater potential to reduce the risk of material misstatements resulting from random, human errors in processing. The use of IT based accounting systems also offers the potential for improved management decisions by providing more and higher quality information on a more timely basis than traditional manual systems. IT-based systems are usually administered effectively because the complexity requires effective organization, procedures, and documentation. That in turn enhances internal control. 12-2 When entities rely heavily on IT systems to process financial information, there are new risks specific to IT environments that must be considered. Key risks include the following: Reliance on the functioning capabilities of hardware and software. The risk of system crashes due to hardware or software failures must be evaluated when entities rely on IT to produce financial statement information. Systematic versus random errors. Due to the uniformity of processing performed by IT based systems, errors in computer software can result in incorrect processing for all transactions processed. This increases the risk of many significant misstatements. Unauthorized access. The centralized storage of key records and files in electronic form increases the potential for unauthorized on- line access from remote locations. Loss of data. The centralized storage of data in electronic form increases the risk of data loss in the event the data file is altered or destroyed. Visibility of audit trail . The use of IT often converts the traditional paper trail to an electronic audit trail, eliminating source documents and paper-based journals and records. Reduced human involvement. The replacement of traditional manual processes with computer-performed processes reduces 12-1
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opportunities for employees to recognize misstatements resulting from transactions that might have appeared unusual to experienced employees. Lack of traditional authorization. IT-based systems can be programmed to initiate certain types of transactions automatically without obtaining traditional manual approvals. Reduced segregation of duties. The installation of IT-based accounting systems centralizes many of the traditionally segregated manual tasks into one IT function.
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