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

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Presentation on theme: "IT Controls Part I: Sarbanes-Oxley & IT Governance Accounting Information Systems, 5 th edition James A. Hall."— Presentation transcript:

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

2  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 2

3  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 3

4  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 4

5  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 5

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7  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 7

8  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 8

9  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 9

10  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 10

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

12  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) 12

13  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 13

14  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 14

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

16 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) 16

17 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 17 (centralized or DDP)

18  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. 18

19  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 19

20  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 20

21  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 21

22  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 22

23  Disaster recovery plan ◦ 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 23

24  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 24

25  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 25

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