Systems Techniques in Auditing

Systems Techniques

• Systems techniques refers to tools used to analyze, design, and document system and subsystem relationships.
• These techniques are largely graphic or pictorial and useful for auditors and system developers.
• Accountants may use systems techniques when doing systems work.

Use of Systems Techniques in Auditing

• Audits have two main components, interim and financial statement.
• The interim audit seeks to establish how much the organization's internal controls can be relied upon, that usually requires compliance testing.
• Compliance testing confirms the existence and effectiveness of internal controls
• Financial statement audit, entails substantive testing.
• Substantive testing is the direct verification of financial statement figures, which relies on internal controls based on interim audit results.
• Substantive testing of cash involves direct confirmation of bank balances and receivables would involve direct confirmation of balances with customers.
• Auditors evaluate internal controls, focusing on the flow, processing, and distribution of documents in an application system.
• Segregation and division of duties which is an important aspect of internal control can use analytical flowcharts, document flowcharts, and/or forms distribution charts.
• Several techniques, like questionnaires and matrix methods, are use to evaluate internal controls; which can be organized into columns to group processing functions performed by each entity.
• Compliance testing confirms existence, assess effectiveness, and check the continuity of internal controls.
• Understanding systems techniques, like IPO, HIPO, program flowcharts, DFDs, branching/decision tables, and matrix methods, is vital for auditors to test controls and review system documentation.
• Auditors document and analyze working papers using systems techniques, particularly internal control questionnaires, analytic flowcharts, and system flowcharts for internal control evaluation.
• DFDs, HIPO charts, program flowcharts, branching/decision tables occur in auditing when they are part of systems documentation.
• An auditor usually reviews an existing system rather than design a new one

Use of Systems Techniques in Systems Development

• The systems development project includes analysis, design, and implementation stages.
• Systems analysis involves formulating and evaluating solutions to systems problems.
• Systems design specifies solution details with evaluation of system design alternatives.
• Systems implementation involves placing revised procedures into operation with testing, documentation, and review to verify design-specification function.
• Systems analysts collect facts using interviews, questionnaires, document reviews, and observation
• Techniques for organizing facts include work measurement and distribution analysis, and matrix methods.
• Information flow analysis and systems techniques, including DFDs and analytic flowcharts, are helpful for overall transaction processing views within an organization.
• Systems design creates a blueprint, employing input/output matrix analysis, systems flowcharting, and DFDs.
• Common design problems concern information systems, like forms or database design.
• IPO and HIP charts, program flowcharts, branching/decision tables document design in information systems, extensively.
• Systems implementation executes the design plan, encompassing personnel selection and training, equipment installation, systems design, program creation and testing, system testing, standards creation, documentation, and file conversion.
• Documentation is a critical part of systems implementation.
• Program flowcharts and decision tables serve as both documentation and analysis tools for programmers
• Effective documentation results from system techniques, assisting training, and ensuring adherence to system specifications.

Sarbanes-Oxley Act (SOX) Compliance

• System documentation underpins internal control and process documentation required by SOX.
• Section 404 of SOX mandates annual reports from publicly traded firms, which entails management's responsibility for internal control structures and procedures for financial reporting and its effectiveness.
• Organization's external auditors must attest to and report on management’s assessment of internal controls.
• Organizations use diagrams like the "Flowchart for Fraud & Corruption Referrals” to outline response protocols if authorities suspect fraud, like Bedfordshire and Hertfordshire Strategic Health Authority.
• Organizations are adopting systems documentation for information systems and the accompanying internal controls, data flows, and information flows related to vital business processes under SOX scrutiny.
• Participants, such as management, auditors, accountants, information systems personnel, and SEC personnel, are involved with the preparation and/or review of the Act's internal control and process documentation.
• Compliance demands interpretable and easily prepared systems documentation from all participants to fulfill commitments associated with SOX compliance.
• Specially designed software applications are used, which automate SOX compliance needs and support continuous business process documentation upgrades.
• A SOX analyst role includes duties in documentation, testing, remediation, flowcharting, and narratives, as described by Robert Half Management Resources.

Flowcharts

• Are symbolic diagrams that display the sequence of operations and data flow in a system
• Are commonly used by both auditors and systems personnel
• Became widely due to computerizing business data processing, making standardization of symbols and usage conventions
• In the United States, the ANSI X3.5 from 1970 serves as the source of standard symbols and usage conventions

Flowcharting Symbols - ANSI X3.5:

• It defines four flowchart symbol groups: basic, specialized input/output, specialized process, and additional
• Defines symbol shapes, and illustrates use conventions without defining size
• The basic symbols include the input/output, process, flowline, and the annotation (or comment) symbol.
• They correspond to standard data processing, and represent basic functions but specialized symbols are allowed to give added clarity.
• Input/output symbol signifies making data available for processing or recording processed information
• The process symbol signifies change of value, form, or location of information, or which of several flow directions is to be followed.
• The flowline symbol links symbols, indicating sequence and executable operations, which can cross or join, requiring arrowheads near junction point if the flowline is not standard direction
• Annotation adds descriptive comments or explanatory notes.
• Specialized Input/Output symbols denote the medium in which information is handled or recorded, otherwise the basic symbol is used
• the punched card symbol represents punched cards medium including mark-sense cards and stub cards, the online storage represents magnetic or optical disks
• The magnetic tape, drum, and disk symbols represent the function for medium, the manual input symbol represents input manually at time of processing
• The display symbol displays for human use, the signal link symbol represents information transmission by telecommunication, and offline storage stores offline regardless of medium
• Specialized process symbols can identify specific processing or basic process symbol is used.
• The decision symbol represents selection or switching, predefined indicates a named procedure not specified
• The preparation symbol represents modification of program (setting switches, modifying index registers, or initializing a routine)
• A manual operation symbol represents operation geared to human without mechanical aid, whereas auxiliary operation equipment is not under central control
• The merge, extract, sort, and collate symbols represent specific types of processing function
• The additional symbols can clarify or make chart more convenient
• The connector symbol can represent an exit to another part or sheet
• The continuation connector is used to show flow is continued or broken by a margin
• The terminal symbol is a terminal point i.e. start/stop
• The parallel mode symbol notes the beginning or end of 2 more simultaneous operations, and the tape total is a manual batch control total
• Breeze Tree Software recognizes several standards in the regulatory field. It is useful and in certain clauses of ISO 9000 it is mandated

Flowchart Symbol Usage

• Flow direction symbolized with lines between symbols; normal direction is left-to-right or top-to-bottom
• Arrows show flow direction is reversed or when increase clarity
• Connector symbols used for flows broken by page limits
• Bidirectional flows shown by single or double lines with arrows indicating direction

IPO and HIPO Charts

• Are mainly use by systems development personnel, and show the level of detail described
• IPO are a general view of system, showing the input to achieve the output, with little detail concerning the processing function
• The other end consist is HIPO, it consist of series of charts at various levels of detail, and it contains 2 segments
• Hierarchy factors charts in the various modules that require testing, including an IPO cart
• The HIPO chart itself is a narrative chart of what is descriptive techniques may be used
• In a complex system, the IPO is factored into HIPO.
• HIPO provides a top-down strategy to systems analysis and design that is useful for identifying what is to be done in a problem but has limited when or how to accomplish processes.
• Flowcharts with these mentioned symbol are better suited
• For Example: A System: Payroll with an Input of job records/payroll master file, The process is to accumulate hours worked, rate, and compute The output is Records for gross pay, Payroll master file, and Error messages

Systems and Program Flowcharts

• Are used by auditors and systems personnel. A systems flowchart identifies the broad operations in a system. Where inputs come from, sequence, type and result.
• The program version are used by personnel in program design and indicates processing functions
• Each processing function on system chart is detailed in the program flowchart by various layerings
• The systems version chart is associated in project analysis, and program version is associated in design and development
• Flowcharts are the starting process for data processing

Logical Data Flow Diagrams (DFD)

• Are used by systems analyst in systems analysis
• Connects user and staff to be the base of a system to meet their needs, documented through analyst interference which is an aspect of system-development-control
• DFD provides the user with an analysts understanding of the users issue that separates logical and physical process
• Table 2 display the symbol used to be a DFD and although symbology exists the standard does not that includes: Terminator, Task Process, Data Store, and Data Flow
• Similar to the 4 types of flowcharting symbol yet more defined for the process with the goal focus on data flow rather than physical
• As part of construction and structured analyzed. Has a top down design for payroll which process payroll Data time and creates checks for the user

Analytic, Document, and Forms Distribution Flowcharts

• Auditors focus on the distribution of document within the system. Because division is important for auditors for proper flow
• Includes flowcharts that are analytic, distribution, ect. that organize the columns to group function between entity which highlight interface within control
• Analytic charts and flowcharts have similar levels to technique that are linked by symbols, however is similar to a system version chart