Chapter 12: Computer Controls Introduction General Controls for Organizations General Controls for Information Technology Application Controls for Transaction Processing

Reasons Why Computers Can Cause Control Problems Effects or errors may be magnified. Computers can complicate proper separation of duties Audit trails may be reduced, eliminated, or exist only for a brief time. Changes to data and programs may be made by individuals lacking knowledge or authorization. More individuals may have access to accounting data.

Computer Control Procedures Computer controls are frequently classified into two categories: General controls ensure that a company’s control environment is stable and well managed in order to strengthen the effectiveness of application controls. Applies to all IT systems. Application controls are designed to prevent, detect, and correct errors and irregularities in transactions as they flow through the input, processing, and output stages of data processing.

General Controls within IT Environments Personnel Controls Contingency Planning, Fault-Tolerant Systems, Backup Physical & Logical Security Controls Computer Facility Controls Access to Computer Files Controls Over Micro-Devices

1. Personnel Controls - Separation of Duties Effective separation of duties is important: Over 36% of fraud cases involve collusion. The median loss in these cases is $500k, vs. $115k in fraud cases involving one person. (See Case 10.6, p 318) In IT, separation of duties should include: Accounting separate from IT and from other subsystems Programmers should not have access to live data (e.g. bank programmer lapping accounts or giving himself a “loan”) Systems analysts should not do programming Data control group should be independent of computer operations Computer operators should not have access to code and should be rotated Librarian should not have computer access

More Personnel Controls Use separate computer accounts assigned to users on either a group or individual basis. Accounts allow access only to authorized portions of the program (e.g. QuickBooks, create user ID) Passwords are checked against a master list. Call-back procedures restrict access from remote terminals (access only granted to known terminals) Have an informal knowledge of employees 69% of fraud is done by insiders. 38% of fraudsters have financial troubles at home, 20% have wheeler-dealer attitudes, 19% are unwilling to share duties, 17% are in the middle of a divorce, 29% worked in the accounting dept.

2. Contingency Planning Contingency planning includes the development of a formal disaster recovery plan. This plan describes procedures to be followed in the case of an emergency as well as the role of each member of the disaster recovery team. The goal is to recover processing capability as soon as possible. A disaster recovery site can either be a: Cold site (have space set up to install computers quickly) Hot site (have computers set up and ready to process) Flying-start site (have computers plus up-to-date backup and software ready to go). On 9/11, two offices in the WTC were destroyed Dean Witter had cold site; it took 2 days to get up to speed again Visa had a flying-start site; it took 3 min. to get up to speed

Fault-Tolerant Systems Fault-tolerant systems are designed to tolerate faults or errors and are based on the concept of redundancy (having two of the same thing). Two major approaches to redundant CPU processing are: consensus-based protocols (odd # of processors, if one disagrees it is ignored) and watchdog protocols (a 2nd processor will take over if the 1st one fails) Disk mirroring (disk shadowing) is when data is saved to two disks simultaneously Under roll-back processing transactions are never saved until they are complete (so if there’s a power outage, it rolls back to its original state; e.g. deep freeze)

3. Physical & Logical Security

4. Computer Facility Controls Locate the Data Processing Center in a safe location, away from windows. Limit employee access with electronic security, badges and a mantrap. Use biometric ID. Buy insurance to compensate for loss.

5. Access to Computer Files Strong password - at least 8 digits that include numbers, letters (lower & uppercase), symbols. Note that a 15-character password is 33k times stronger than a 8-character one. Biometric identification devices identify distinctive user physical characteristics such as voice patterns, fingerprints, facial patterns, odor, vein pattern, gait and retina prints.

File Security Controls The purpose of file security controls is to protect computer files from either accidental or intentional abuse. Examples: External file labels Internal file labels Lock-out procedures (3 tries to login and you’re out!) Read-only file designations

Backup All companies should backup their vital documents, files and programs. Grandfather-parent-child procedure is used during batch processing. For real-time processing -- through electronic vaulting, data on backup tapes can be electronically transmitted to remote sites. An uninterruptible power system (UPS) is an auxiliary power supply that can prevent the loss of data due to momentary surges or dips in power.

Security Controls Security for wireless technology Virtual Private Networks (VPNs) Data encryption Controls for hard-wired network systems Checkpoint, routing verification, and message acknowledgement procedures ISO 17799 certification, assures that systems are in place to safeguard data

6. Control Procedures for Microcomputers Take inventory Keyboard locks or cable locks Passwords Anti-virus software Back-up files Laptops (encryption, authentication, GPS, exit inspections) USB drives

Application Controls within IT Environments Application controls pertain directly to the transaction processing systems. The objectives of application controls are to prevent, detect and correct errors and irregularities in transactions that are processed in an IT environment. Application controls are subdivided into input, processing and output controls.

Application Controls for Transaction Processing

Input Controls Input controls attempt to ensure the validity, accuracy and completeness of the data entered into an AIS. The categories of input controls include 1) data observation and recording 2) data transcription (input forms and masks) 3) edit tests 4) unfound record test 5) check digits (Modus 11)

Data Observation and Recording Controls Feedback mechanism Dual observation (video cameras!) Point-of-sale (POS) devices Preprinted recording forms

Data Transcription Data transcription refers to the preparation of data for computerized processing. Preformatted screens that use input “masks” are an important control procedure.

Edit Tests Input validation routines (edit programs) check the validity and accuracy of input data after the data have been entered and recorded on a machine-readable file. Edit tests examine selected fields of input data and reject those transactions whose data fields do not meet the pre-established standards of data quality. Real-time systems use edit checks during data-entry. In QB try to create a check for $100m or a negative amount. Try to create two identical accounts

Examples of Edit Tests Tests for: Numeric field Alphabetic field Alphanumeric field Valid code Reasonableness Sign Completeness Sequence Consistency

Additional Input Controls Unfound-Record Test Transactions matched with master data files Transactions lacking a match are rejected Check-Digit Control Procedure

Processing Controls Processing controls focus on the manipulation of accounting data after they are input to the computer system. Two kinds: 1) Data-access controls (e.g. batch control total, hash total, record count) 2) Data manipulation controls (e.g. test data)

Data-Access Control Totals Batch control total Financial control total Non-financial control total Hash total Record count

Data Manipulation Controls Once data has been validated by earlier portions of data processing, they usually must be manipulated in some way to produce useful output. Data manipulation controls include: Software documentation Compiler Test Data (or test deck) System testing (e.g. parallel simulation)

Output Controls The objective of output controls is to assure the output’s validity, accuracy and completeness. Activity (or proof) listings provide complete, detailed information about all changes to master files. Forms control is vital for forms associated with check-writing. Prenumbered forms are the most common type of control utilized with computer- generated check-writing procedures. Shred sensitive documents (security companies will pick up paper and shred for you.)