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IT Controls Part I: Sarbanes-Oxley & IT Governance

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1 IT Controls Part I: Sarbanes-Oxley & IT Governance
Chapter 15 IT Controls Part I: Sarbanes-Oxley & IT Governance Accounting Information Systems, 5th edition James A. Hall 1

2 Objectives for Chapter 15
Key features of Sections 302 and 404 of Sarbanes-Oxley Act Management and auditor responsibilities under Sections 302 and 404 Risks of incompatible functions and how to structure IT function Controls and security of organization’s computer facilities Key elements of disaster recovery plan

3 Sarbanes-Oxley Act The 2002 Sarbanes-Oxley (SOX) Act established new corporate governance rules Created company accounting oversight board Increased accountability for company officers and board of directors Increased white collar crime penalties Prohibits a company’s external audit firms from providing financial information systems

4 SOX Section 302 Section 302—in quarterly and annual financial statements, management must: certify the internal controls over financial reporting state responsibility for internal control design provide reasonable assurance as to the reliability of the financial reporting process disclose any recent material changes in internal controls

5 SOX Section 404 Section 404—in annual report on internal control effectiveness, management must: state responsibility for establishing /maintaining adequate financial reporting internal control assess internal control effectiveness Refer to the external auditors’ attestation report on management’s internal control assessment provide explicit conclusions on the effectiveness of financial reporting internal control Identify the framework management used to conduct their internal control assessment Examples – COSO or COBIT


7 IT Controls & Financial Reporting
Modern financial reporting is driven by information technology (IT) IT initiates, authorizes, records, and reports the effects of financial transactions. Financial reporting internal controls are inextricably integrated to IT. COSO identifies two groups of IT controls: application controls – apply to specific applications and programs, and ensure data validity, completeness and accuracy general controls – apply to all systems and address IT governance and infrastructure, security of operating systems and databases, and application and program acquisition and development

8 SOX Audit Implications
Pre-SOX, audits did not require internal control tests. Only required to be familiar with client’s internal control Audit consisted primarily of substantive tests (tests of account balances) SOX – radically expanded scope of audit Issue new audit opinion on management’s internal control assessment Required to test internal control affecting financial information, especially internal control to prevent fraud Collect documentation of management’s internal control tests and interview management on internal control changes

9 Types of Audit Tests Tests of controls – tests to determine if appropriate internal controls are in place and functioning effectively Substantive testing – detailed examination of account balances and transactions

10 Organizational Structure IC
Audit objective – verify that individuals in incompatible areas are segregated to minimize risk while promoting operational efficiency internal controls, especially segregation of duties, are affected by the type of organizational structure: Centralized model Distributed model 25 25

11 President VP Marketing VP Computer Services VP Operations VP Finance
CENTRALIZED COMPUTER SERVICES FUNCTION VP Marketing VP Computer Services VP Operations VP Finance Systems Development Database Administration Data Processing New Systems Development Data Control Data Preparation Data Library Systems Maintenance Computer Operations DISTRIBUTED ORGANIZATIONAL STRUCTURE President VP Marketing VP Finance VP Administration VP Operations Manager Plant X Manager Plant Y Treasurer Controller Work station Work station Work station Work station Work station Work station

12 Centralized DP Organizational Controls
Need to separate: systems development from computer operations/processing database administrator and other computer service functions especially database administrator (DBA) and systems development DBA authorizes access maintenance and new systems development data library and operations (assumes internally developed software) 26

13 Distributed DP Organizational Controls
Many advantages to using DDP, yet there are control implications: incompatible software among various work centers data redundancy may result consolidation of incompatible tasks lack of standards 28 28

14 Organizational Structure Controls
Corporate computer services function/information center may help to alleviate potential problems associated with DDP by providing: central testing of commercial hardware and software user services staff standards setting body reviewing technical credentials of prospective systems professionals 29

15 General Control Framework for CBIS Exposures
Organizational Structure Internet & Intranet Data Management Internet & Intranet Operating System Systems Development Systems Maintenance Personal Computers EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Exposures

16 Computer Center Internal Controls
Audit objectives: physical security internal control protects the computer center from physical exposures insurance coverage compensates the organization for damage to the computer center operator documentation addresses routine operations as well as system failures (centralized or DDP) 18

17 Computer Center Controls (assumes centralized processing)
Considerations: location away from human-made and natural hazards utility and communications lines underground keep windows closed – use air filtration systems access limited to operators and other necessary workers; others required to sign in and out fire suppression systems should be installed backup power supplies (centralized or DDP) 36

18 Segregation of Duties Transaction authorization is separate from transaction processing. Asset custody is separate from record- keeping responsibilities. The tasks needed to process the transactions are subdivided so that fraud requires collusion. 3

19 Audit Procedures Review corporate policy on computer security
Verify that security policy is communicated to employees Review documentation to determine if individuals or groups are performing incompatible functions Review systems documentation and maintenance records Verify that maintenance programmers are not also design programmers Observe if segregation policies are followed in practice. Example: check operations room access logs to determine if programmers enter for reasons other than system failures Review user rights and privileges Verify that programmers have access privileges consistent with their job descriptions

20 Audit Procedures Review insurance coverage on hardware, software, and physical facility Review operator documentation, run manuals, for completeness and accuracy Verify that operational details of a system’s internal logic are not in the operator’s documentation

21 Disaster Recovery Planning
Disaster recovery plans (DRP) identify: actions before, during, and after the disaster disaster recovery team priorities for restoring critical applications Audit objective – verify that DRP is adequate and feasible for dealing with disasters 37

22 Disaster Recovery Planning
Major IC concerns: second-site backups critical applications and databases including supplies and documentation back-up and off-site storage procedures disaster recovery team testing the DRP regularly 37

23 Disaster Recovery Planning (DRP)
Include all actions to be taken before, during, and after disaster Disaster Recovery Team identified critical applications (modules/programs) must be identified restore these applications first Backups and off-site storage procedures databases and applications documentation supplies 37

24 Second-Site Disaster Backups
Mutual Aid Pact - agreement between two or more organizations (with compatible computer facilities) to aid each other with their data processing needs Empty Shell/Cold Site - involves two or more user organizations that buy or lease building and remodel it into computer site, but without computer equipment Recovery Operations Center/Hot Site - completely equipped site; very costly and typically shared among many companies Internally Provided Backup - companies with multiple data processing centers may create internal excess capacity 38

25 Audit Procedures Evaluate adequacy of second-site backup arrangements
Review list of critical applications for completeness and currency Verify procedures are in place for storing off-site copies of applications/ data Check currency back-ups and copies Verify that documentation, supplies, etc., are stored off-site Verify that disaster recovery team knows its responsibilities Check frequency of testing DRP

26 The End

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