IT Auditing and Application Controls for Small and Mid-Sized Enterprises

Essential guidance for the financial auditor in need of a working knowledge of IT

If you're a financial auditor needing working knowledge of IT and application controls, Automated Auditing Financial Applications for Small and Mid-Sized Businesses provides you with the guidance you need. Conceptual overviews of key IT auditing issues are included, as well as concrete hands-on tips and techniques. Inside, you'll find background and guidance with appropriate reference to material published by ISACA, AICPA, organized to show the increasing complexity of systems, starting with general principles and progressing through greater levels of functionality.

• Provides straightforward IT guidance to financial auditors seeking to develop quality and efficacy of software controls
• Offers small- and middle-market business auditors relevant IT coverage
• Covers relevant applications, including MS Excel, Quickbooks, and report writers
• Written for financial auditors practicing in the small to midsized business space

The largest market segment in the United States in quantity and scope is the small and middle market business, which continues to be the source of economic growth and expansion. Uniquely focused on the IT needs of auditors serving the small to medium sized business, Automated Auditing Financial Applications for Small and Mid-Sized Businesses delivers the kind of IT coverage you need for your organization.

Preface xi

Acknowledgments xiii

Chapter 1: Why Is IT Auditing Important to the Financial Auditor and the Financial Statement Audit? 1

Management’s Assertions and the IT Audit 2

Objectives of Data Processing for Small and Medium‐Sized Enterprises (SMEs) 5

Special Challenges Facing SMEs 8

Research Confirming the Risks Associated with SMEs 13

A Framework for Evaluating Risks and Controls, Compensatory Controls, and Reporting Deficiencies 16

Summary: The Road Ahead 20

Chapter 2: General Controls for the SME 21

General Controls: Scope and Outcomes 22

The “COSO Process”—Putting It All Together: Financial Statements, Assertions, Risks, Control Objectives, and Controls 30

Summary 35

Chapter 3: Application‐Level Security 37

Key Considerations 37

Initial Security Setup 40

Security Role Design 42

Password Configuration 44

Segregation of Duties 48

Personnel, Roles, and Tasks 49

Access Reviews 56

Human Error 58

Summary 58

Chapter 4: General Ledger and the IT Audit 59

The General Ledger: A Clearinghouse of Financial Information 60

Chart of Accounts for QuickBooks 62

SME Risks Specific to the General Ledger and the Chart of Accounts 65

Assertions Underlying the Financial Statements and General Ledger Controls 66

IT Controls, the Transaction Level, and the General Ledger 66

Summary 78

Chapter 5: The Revenue Cycle 81

Risk Exposures and Subprocesses 81

Application Controls, Revenue Cycle Risks, and Related Audit Procedures 84

Summary 105

Chapter 6: The Expenditure Cycle 107

Risk Exposures and Subprocesses 107

Application Controls, Expenditure Cycle Risks, and Related Audit Procedures 111

Summary 133

Chapter 7: The Inventory Cycle 135

Risk Exposures and Subprocesses 136

Application Controls, Inventory Cycle Risks, and Related Audit Procedures 143

Summary 157

Chapter 8: The Payroll Cycle 159

Risk Exposures and Subprocesses 159

Application Controls, Payroll Cycle Risks, and Related Audit Procedures 163

Summary 248

Chapter 9: Risk, Controls, Financial Reporting, and an Overlay of COSO on COBIT 249

PCAOB Warnings: Insufficient Evidence to Support Opinions 250

How We Got Here: A Historical Perspective 251

Risk 260

Risk and Fraud 261

Controls 262

Financial Reporting 269

PCAOB Guidance on IT Controls 279

Integrating COSO, COBIT, and the PCAOB 280

Summary 286

Chapter 10: Integrating the IT Audit into the Financial Audit 289

Risks, Maturity, and Assessments 290

Cross‐Referencing COBIT to the PCAOB and COSO 295

Plan and Organize 303

Program Development and Change 311

Computer Operations and Access to Programs and Data 317

Monitor and Evaluate 330

Summary 334

Chapter 11: Spreadsheet and Desktop Tool Risk Exposures 337

Specific Types of Risks and Exposures 338

Research on Errors in Spreadsheets 339

Compliance Dimensions of Spreadsheet Risk Exposures 344

Spreadsheet Auditing Tools 348

Governance of Spreadsheets and Desktop Tools 352

Control Considerations 355

Auditing Controls and Creating a Baseline 356

Life after the Baseline: Maintaining Spreadsheets and Desktop Tools 368

Summary 369

Chapter 12: Key Reports and Report Writers Risk Exposures 371

How Reports Are Used 371

Original Reports within the Application 372

Modified or Customized Reports within the Application 376

Reports Using Third‐Party Packages 378

Analyzing and Validating Reports 382

Summary 383

Chapter 13: IT Audit Deficiencies: Defining and Evaluating IT Audit Deficiencies 385

A Framework for Audit Deficiencies 385

Types of IT Audit Failures and Illustrative Cases 388

Use of Compensatory Controls 388

Ideas for Addressing Segregation‐of‐Duties Issues 388

Summary 398

References 399

About the Authors 405

Index 407

JASON WOOD, CPA, CITP, CIS, CIA, CFF, MBA, is President of WoodCPA???Plus, a certified public accounting firm that focuses on IT auditing, consulting, and training. Mr. Wood has over seventeen years of international business experience in IT auditing, helping middle market and global Fortune 500 companies. He is an alumnus of the Big Four accounting firms—Deloitte, E&Y, and PwC.

WILLIAM BROWN, PHD, CPA, CISA, CITP, is Chair of Accounting at Minnesota State University, Mankato, where he has taught accounting and management information systems. He has over twenty years of business experience including roles as vice president, controller, and CFO of several publicly traded companies and the CIO of an IT intensive high-growth SME.

HARRY HOWE, PHD, is Professor of Accounting and Director of the MS in Accounting Program at SUNY-Geneseo. Howe has coauthored two volumes in the BNA Policy and Practice series and published numerous articles in scholarly and practitioner journals.

Risk is inevitable. As an auditor, you must help your clients not only manage their risk by performing audits and other assessments but also help them understand the nature and extent of risks that exist in the control environment. Information technology (IT) controls are a key aspect of that control environment. Written to help financial auditors provide better service to their clients in the context of application controls, IT Auditing and Application Controls for Small and Mid-Sized Enterprises illustrates and explains many of the basic IT controls common to the types of reporting systems used by small and medium-sized enterprises (SMEs).

Sharing their collective decades of experience practicing and teaching in the field, authors Jason Wood, William Brown, and Harry Howe provide you with the tools, guidance, and working knowledge to get started in IT auditing. The authors highlight conceptual and practical topics that are immediately relevant to understanding applications typically used by these businesses, such as MS Excel, QuickBooks, and FRx (Microsoft Dynamics) report writer.

Organized to illustrate the increasing complexity of systems, the book begins with general principles and progresses through greater levels of functionality in subsequent modules. Featuring conceptual overviews of key IT auditing issues as well as concrete, hands-on tips and techniques, IT Auditing and Application Controls for Small and Mid-Sized Enterprises examines:

• Special challenges facing SMEs
• The COSO process
• Application-level security
• General ledger and the IT audit
• The revenue, expenditure, inventory, and payroll cycles
• PCAOB warnings
• Integrating the IT audit into the financial audit
• Spreadsheet auditing tools
• Maintaining spreadsheets and desktop tools
• Analyzing and validating reports
• IT audit deficiencies

IT Auditing and Application Controls for Small and Mid-Sized Enterprises empowers you with the skills and knowledge to provide better, more accurate service to your clients.

IT AUDITING AND APPLICATION CONTROLS FOR SMALL AND MID-SIZED ENTERPRISES Revenue, Expenditure, Inventory, Payroll, and More

Risk is inevitable. As an auditor, you must help your clients not only manage their risk by performing audits and other assessments but also help them understand the nature and extent of risks that exist in the control environment. Information technology (IT) controls are a key aspect of that control environment. Written to help financial auditors provide better service to their clients in the context of application controls, IT Auditing and Application Controls for Small and Mid-Sized Enterprises illustrates and explains many of the basic IT controls common to the types of reporting systems used by small and medium-sized enterprises (SMEs).

Sharing their collective decades of experience practicing and teaching in the field, authors Jason Wood, William Brown, and Harry Howe provide you with the tools, guidance, and working knowledge to get started in IT auditing. The authors highlight conceptual and practical topics that are immediately relevant to understanding applications typically used by these businesses, such as MS Excel, QuickBooks, and FRx (Microsoft Dynamics) report writer.

Organized to illustrate the increasing complexity of systems, the book begins with general principles and progresses through greater levels of functionality in subsequent modules. Featuring conceptual overviews of key IT auditing issues as well as concrete, hands-on tips and techniques, IT Auditing and Application Controls for Small and Mid-Sized Enterprises examines:

• Special challenges facing SMEs
• The COSO process
• Application-level security
• General ledger and the IT audit
• The revenue, expenditure, inventory, and payroll cycles
• PCAOB warnings
• Integrating the IT audit into the financial audit
• Spreadsheet auditing tools
• Maintaining spreadsheets and desktop tools
• Analyzing and validating reports
• IT audit deficiencies

IT Auditing and Application Controls for Small and Mid-Sized Enterprises empowers you with the skills and knowledge to provide better, more accurate service to your clients.