Chapter 1:

Auditing, Assurance, and

Internal Control

Syllabus
Course Description
Textbooks
Course Objectives
Exams
Research Papers
Assignments
Class Schedule
Performance Evaluation

Syllabus (cont.)

Class Format
Lecture

and Discussion
In-Class Assignments
Short Presentations

Blackboard and Class Website

stpt.usf.edu/gkearns/acg6936

Academic Dishonesty
Disruption of the Academic Process

IT AUDITS

IT audits: provide audit services where

processes or data, or both, are embedded in
technologies.

Subject to ethics, guidelines, and standards of the

profession (if certified)
CISA
Most closely associated with ISACA
Joint with internal, external, and fraud audits
Scope of IT audit coverage is increasing
Characterized by CAATTs
IT governance as part of corporate governance
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FRAUD AUDITS

Fraud audits: provide investigation services

where anomalies are suspected, to develop
evidence to support or deny fraudulent
activities.

Auditor is more like a detective

No materiality
Goal is conviction, if sufficient evidence of fraud
exists
CFE
ACFE
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EXTERNAL AUDITS

External auditing: Objective is that in all material

respects, financial statements are a fair
representation of organizations transactions
and account balances.

SECs role
Sarbanes-Oxley Act
FASB - PCAOB
CPA
AICPA
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ATTEST vs. ASSURANCE

ASSURANCE

Professional services that are designed to improve the

quality of information, both financial and non-financial,
used by decision-makers

IT Audit Groups in Big Four (e.g. Final Four)

IT Risk Management
I.S. Risk Management
Operational Systems Risk Management
Technology & Security Risk Services
Typically a division of assurance services

ATTEST definition
Written assertions
Practitioners written report
Formal establishment of measurement criteria
or their description
Limited to:

Examination
Review
Application of agreed-upon procedures

THE IT ENVIRONMENT

There has always been a need for an effective

internal control system.
The design and oversight of that system has
typically been the responsibility of accountants.
The I.T. Environment complicates the paper
systems of the past.
Concentration of data
Expanded access and linkages
Increase in malicious activities in systems vs. paper
Opportunity that can cause management fraud (i.e.,
override)
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IT Investigative and Forensic

Techniques for Auditors
Purpose
To assist auditors in developing the
knowledge, skills, and abilities to provide
reasonable assurance for the security,
availability, integrity and management of
information systems and resources.

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The IT Audit

An IT audit is the process of collecting and

evaluating evidence of an organization's
information systems, practices, and operations.
The evaluation of obtained evidence determines
if the information systems are safeguarding
assets, maintaining data integrity, and operating
effectively and efficiently to achieve the
organization's goals or objectives.
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The IT Audit

These reviews may be performed in conjunction

with a financial statement audit, an internal audit,
or other form of attestation engagement.
External auditors can accept the result of an
internal audit only if the function reports to the
audit committee.
External auditors may use and rely upon a 3 rd
party IT audit firm.
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IT Audit Process: 8 Steps

1.
2.
3.
4.
5.
6.
7.
8.

Plan the audit

Hold kickoff meeting
Gather data/test IT controls
Remediate identified deficiencies (organization)
Test remediated controls
Analyze and report findings
Respond to findings (organization)
Issue final report (auditor)
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INTERNAL CONTROL

is policies, practices, procedures

designed to
safeguard assets
ensure accuracy and reliability
promote efficiency
measure compliance with policies

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BRIEF HISTORY - SEC

SEC acts of 1933 and 1934

All corporations that report to the SEC are

required to maintain a system of internal
control that is evaluated as part of the
annual external audit.

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BRIEF HISTORY - Copyright

Federal Copyright Act 1976
1.
2.
3.
4.

Protects intellectual property in the U.S.

Has been amended numerous times since
Management is legally responsible for violations of
the organization
U.S. government has continually sought
international agreement on terms for protection of
intellectual property globally vs. nationally

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BRIEF HISTORY - FCPA

Foreign Corrupt Practices Act 1977
1.

Accounting provisions

FCPA requires SEC registrants to establish and maintain books,

records, and accounts.
It also requires establishment of internal accounting controls sufficient
to meet objectives.
1.

2.

3.

4.

2.

Transactions are executed in accordance with managements general or

specific authorization.
Transactions are recorded as necessary to prepare financial statements
(i.e., GAAP), and to maintain accountability.
Access to assets is permitted only in accordance with management
authorization.
The recorded assets are compared with existing assets at reasonable
intervals.

Illegal foreign payments

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BRIEF HISTORY - COSO

Committee on Sponsoring Organizations - 1992
1.

AICPA, AAA, FEI, IMA, IIA

2.

Developed a management perspective model

for internal controls over a number of years

3.

Is widely adopted

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BRIEF HISTORY S-OX

Sarbanes-Oxley Act - 2002
1.

Section 404: Management Assessment of Internal

Control

2.

Management is responsible for establishing and maintaining

internal control structure and procedures.
Must certify by report on the effectiveness of internal control
each year, with other annual reports.

Section 302: Corporate Responsibility for Incident

Reports

Financial executives must disclose deficiencies in internal

control, and fraud (whether fraud is material or not).

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EXPOSURES AND RISK

Exposure (definition)
Risks (definition)
Types

of risk

Destruction

of assets
Theft of assets
Corruption of information or the I.S.
Disruption of the I.S.
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THE P-D-C MODEL

Preventive

controls
Detective controls
Corrective controls
Which

is most cost effective?

Which one tends to be proactive measures?
Can you give an example of each?
Predictive

controls
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COSO (Treadway Commission)

The five components of internal control are:

The

control environment
Risk assessment
Information & communication
Monitoring
Control activities
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SAS 78

The Auditing Standards Board of the

American Institute of Certified Public
Accountants (AICPA) incorporated the
components of internal control presented
in the COSO Report in its Statement on
Auditing Standards No. 78 (SAS 78),
entitled Consideration of Internal Control
in a Financial Statement Audit.
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SAS 78
(#1:Control Environment -- elements)

Describe how each one could adversely

affect internal control.

The

integrity and ethical values

Structure of the organization
Participation of audit committee
Managements philosophy and style
Procedures for delegating
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SAS 78
(#1:Control Environment -- elements)
Managements methods of assessing
performance
External influences
Organizations policies and practices for
managing human resources

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SAS 78
(#1:Control Environment -- techniques)

Describe possible activity or tool for each.

Assess the integrity of organizations
management
Conditions conducive to management fraud
Understand clients business and industry
Determine if board and audit committee are
actively involved
Study organization structure
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SAS 78
(#2:Risk Assessment)

Changes in environment
Changes in personnel
Changes in I.S.
New ITs
Significant or rapid growth
New products or services (experience)
Organizational restructuring
Foreign markets
New accounting principles
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SAS 78
(#3:Information & Communication-elements)

Initiate, identify, analyze, classify and record

economic transactions and events.

Identify and record all valid economic

transactions
Provide timely, detailed information
Accurately measure financial values
Accurately record transactions

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SAS 78
(#3:Information & Communication-techniques)

Auditors obtain sufficient knowledge of

I.S.s to understand:
Classes

of transactions that are material

Accounting

records and accounts used

Processing

steps:initiation to inclusion in
financial statements (illustrate)

Financial

reporting process (including

disclosures)
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SAS 78
(#4: Monitoring)

By separate procedures (e.g., tests of

controls)

By ongoing activities (Embedded Audit

Modules EAMs and Continuous Online
Auditing - COA)

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SAS 94
The Effect of Information Technology on the Auditors Consideration of
Internal Control in a Financial Statement Audit

Provides auditors with guidance on ITs effect on internal

control and on the auditors understanding of internal control
and the assessment of control risk.
Requires the auditor to consider how an organizations IT
use affects his or her audit strategy.
Where a significant amount of information is electronic, the
auditor may decide it is not practical or possible to limit
detection risk to an acceptable level by performing only
substantive tests for one or more financial statement
assertions. In such cases, the auditor should gather
evidence about the effectiveness of both the design and
operation of controls intended to reduce the assessed level
of control risk.

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SAS 78
(#5: Control Activities)

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Physical Controls (1-3)

Transaction authorization

Sales only to authorized customer

Sales only if available credit limit

Segregation of duties

Example:

Examples of incompatible duties:

Authorization vs. processing [e.g., Sales vs. Auth. Cust.]

Custody vs. recordkeeping [e.g., custody of inventory vs. DP of

inventory]

Fraud requires collusion [e.g., separate various steps in

process]

Supervision

Serves as compensating control when lack of segregation of

duties exists by necessity

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Physical Controls (4-6)

Accounting records (audit trails; examples)

Access controls

Direct (the assets)

Indirect (documents that control the assets)

Fraud

Disaster Recovery

Independent verification

Management can assess:

The performance of individuals

The integrity of the AIS

The integrity of the data in the records

Examples

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IT Risks Model
Operations
Data

management systems
New systems development
Systems maintenance
Electronic commerce (The Internet)
Computer applications
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End Ch. 1

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