University of San Jose – RecoletosCollege of Commerce

Department of Accountancy and Finance

Auditing in an IT Environment Marjurie Lourince E. Zanoria, CPA

Instructions: As a group of three, read the following cases carefully. Answers should be encoded in the computer, using Microsoft Powerpoint. Make sure that your answers are brief and concise. This is worth 100 points broken down as: Case 1 – (14 points + 1) x 4 = 60 points; Case 2 – (12 points + 8) x 2 = 40 points. Furthermore, points shall be accumulated and recorded as follows: 40% skills, 30% meaning and 30% output.

Case 1: Alpha Inc., an audit client, recently installed a new computer system to process more efficiently the shipping, billing, and accounts receivable records. During interim work, an assistant completed the review of internal control. The assistant determined the following information concerning the new computer system and the processing and control of shipping notices and customer invoices.

Each major computerized function (i.e., shipping, billing, accounts receivable, etc.) is permanently assigned to a specific computer operator who is responsible for making program changes, running the program, and reconciling the computer log. Responsibility for the custody and control over the magnetic tapes and system documentation is randomly rotated among the computer operators on a monthly basis to prevent any one person from having access to the tapes and documentation at all times. Each computer programmer and computer operator has access to the computer room via a magnetic card and a digital code that is different for each card. The systems analyst and the supervisor of the computer operators do not have access to the computer room.

The computer system documentation consists of the following items: program listing, error listing, logs, and record layout. To increase efficiency, batch totals and processing controls are omitted from the system.

Alpha ships its products directly from two warehouses which forward shipping notices to general accounting. There, the billing clerk enters the price of the item and accounts for the numerical sequence of the shipping notices. The billing clerk also prepares daily adding machine tapes of the units shipped and the sales amount. Shipping notices and adding machine tapes are forwarded to the computer department for processing. The computer output consists of: a three-copy invoice that is forwarded to the billing clerk and a daily sales register showing the aggregate totals of units shipped and sales amounts that the computer operator compares to the adding machine tapes.

The billing clerk mails two copies of each invoice to the customer and retains the third copy in an open invoice file that serves as a detail accounts receivable record.

Required:Describe one specific recommendation for correcting each reportable condition in internal

control in the new computer system and for correcting each condition or inefficiency in the procedures for processing and controlling shipping notices and customer invoices. The first one is done for you.

The functions of programming, machine operations, and control should be assigned to different employees.

Case 2: The Big Company has replaced its traditional file system for processing of acquisitions and disbursements with a database system that stores purchasing and payment information. The company is now planning to provide various employees with terminals that have online access to the central computer facility.

Required:a. Give five advantages of having a database.b. Describe four security measures to safeguard the database system from improper access

through the terminals.c. Describe three methods of backup and recovery control an auditor might expect in a system

such as this.