Auditing and Assurance Services, 15e (Arens)

Chapter 12 The Impact of Information Technology on the Audit Process

1) The continued integration of IT in accounting systems can impact a company by:

A) increasing the costs of handling a large amount of data.
B) increasing the number of manual controls needed.
C.) giving management higher-quality information more quickly than a manual system, thus
helping management in their decision making process.
D) decreasing the segregation of duties.

2) Which of the following is not a benefit of using IT-based controls?

A) Ability to process large volumes of transactions
B) Ability to replace manual controls with computer-based controls
C) Reduction in misstatements due to consistent processing of transactions
D.) Reduction in internal control evaluation in setting control risk

3) Discuss how the integration of IT into accounting systems enhances internal control.
Answer: Enhancements to internal control resulting from the integration of IT into accounting
systems include:
Computer controls replace manual controls. Replacing manual procedures with programmed
controls that apply checks and balances to each processed transaction and that process
information consistently can reduce human error that is likely to occur in traditional manual
environments.
Higher quality information is available. IT systems typically provide management with more
and higher quality information faster than most manual systems.
Terms: Integration of IT into accounting systems enhances internal control
Diff: Moderate
Objective: LO 12-1
AACSB: Reflective thinking skills

4) Control risk may be reduced for a company with a complex IT system when compared to a
company that relies primarily on manual controls.
A.) True
B) False

1) One of the unique risks of protecting hardware and data is:

A) lack of traditional authorization.
B) the decreased risk of loss or destruction of data files if data is stored in a centralized location.
C) the ease at which the IT system can be installed and maintained.
D.) the unauthorized access to the IT system resulting in improper changes in software programs
and master files.

2) ________ is not a risk specific to the IT environments.

A) Reliance on the functioning capabilities of hardware and software
B.) Increased human involvement
C) Loss of data due to insufficient backup

1
D) Unauthorized access

3) Which of the following is not a risk in an IT system?

A) Need for IT experienced staff
B) Separation of IT duties from accounting functions
C.) Improved audit trail
D) Hardware and data vulnerability

4) Misstatements in the financial statement may not be detected with the increased use of IT due
to:
I. the loss of a visible audit trail.
II. reduced human involvement.
A.) I only
B) II only
C) both I and II
D) neither I or II

5) Computers process information consistently for all transactions. This creates a risk that:
A) auditors will not be able to access data quickly.
B) auditors will not be able to determine if data is processed consistently.
C.) erroneous processing can result in the accumulation of a great number of misstatements in a
short period of time.
D) all of the above.

6) What are three specific risks to IT systems?

Answer: The three specific risks to IT systems include risks to hardware and data, a reduced
audit trail, and the need for IT experience and separation of IT duties.

7) Since IT systems can often initiate transactions automatically, proper authorization depends on
software procedures and accurate master files used to make the authorization decision.
A.) True
B) False

8) One potential disadvantage of IT systems is the reduction or elimination of source documents,

which reduces the visibility of the audit trail.
A.) True
B) False

1) Old and new systems operating simultaneously in all locations is a test approach known as:
A) pilot testing.
B) horizontal testing.
C) integrative testing.
D.) parallel testing.

2) Which of the following is a component of general controls?

A) Processing controls
B) Output controls

2
C.) Back-up and contingency planning
D) Input controls

3) Which of the following statements related to application controls is correct?

A) Application controls relate to various aspects of the IT function including software acquisition
and the processing of transactions.
B) Application controls relate to various aspects of the IT function including physical security
and the processing of transactions in various cycles.
C) Application controls relate to all aspects of the IT function.
D.) Application controls relate to the processing of individual transactions.

4) General controls include all of the following except:

A) systems development.
B) online security.
C.) processing controls.
D) hardware controls.

5) Which of the following describes the process of implementing a new system in one part of the
organization, while other locations continue to use the current system?
A) Parallel testing
B) Online testing
C.) Pilot testing
D) Control testing

6) A ________ is responsible for controlling the use of computer programs, transaction files and
other computer records and documentation and releases them to the operators only when
authorized.
A) software engineer
B) chief computer operator
C.) librarian
D) data control operator

7) Security controls should require that users enter a(n) ________ before being allowed access to
software and other related data files.
A) echo check
B) parity check
C) self-diagnosis test
D.) authorized password

8) Typical controls developed for manual systems which are still important in IT systems
include:
A) management's authorization of transactions.
B) competent personnel.
C) adequate preparation of input source documents.
D.) all of the above.

9) Which of the following controls prevent and detect errors while transaction data are

3
processed?
A) Software
B) Application
C.) Processing
D) Transaction

10) When purchasing software or developing in-house software:

A) cost should be the only factor.
B) extensive testing of the software is generally not required.
C.) a team of both IT and non-IT personnel should be involved in the decision process.
D) the librarian and the IT manager should be the only ones involved in the decision process.

11) Output controls need to be designed for which of the following data integrity objectives?
A.) Detecting errors after the processing is completed
B) Preventing errors before the processing is completed
C) Detecting errors in the general ledger adjustment process
D) Preventing errors in separation of duties for IT personnel

12) A control that relates to all parts of the IT system is called a(n):
A.) general control.
B) systems control.
C) universal control.
D) applications control.

13) Controls that are designed for each software application and are intended to help a company
satisfy the
transaction-related audit objectives are:
A) user controls.
B) general controls.
C) audit controls.
D.) application controls.

14) Which of the following is not an example of an applications control?

A.) Back-up of data is made to a remote site for data security.
B) There is a preprocessing authorization of the sales transactions.
C) There are reasonableness tests for the unit selling price of a sale.
D) After processing, all sales transactions are reviewed by the sales department.

15) Which of the following is not a general control?

A.) Computer performed validation tests of input accuracy.
B) Equipment failure causes error messages on monitor.
C) There is a separation of duties between programmer and operators.
D) There are adequate program run instructions for operating the computer.

16) Controls which are built in by the manufacturer to detect equipment failure are called:
A) input controls.
B) data integrity controls.

4
C.) hardware controls.
D) manufacturer's controls.

17) Controls which are designed to assure that the information processed by the computer is
authorized, complete, and accurate are called:
A.) input controls.
B) processing controls.
C) output controls.
D) general controls.

18) Programmers should be allowed access to:

A) user controls.
B) general controls.
C) systems controls.
D.) applications controls.

19) Which of the following tests determines that every field in a record has been completed?
A) Validation
B) Sequence
C.) Completeness
D) Programming

20) An example of a physical control is:

A) a hash total.
B) a parallel test.
C.) the matching of employee fingerprints to a database before access to the system is allowed.
D) the use of backup generators to prevent data loss during power outages.

21) Controls specific to IT include all of the following except for:

A) adequately designed input screens.
B) pull-down menu lists.
C) validation tests of input accuracy.
D.) separation of duties.

22) An internal control deficiency occurs when computer personnel:

A) participate in computer software acquisition decisions.
B) design flowcharts and narratives for computerized systems.
C.) originate changes in customer master files.
D) provide physical security over program files.

23) Which of the following best explains the relationship between general controls and
application controls?
A) Application controls are effective even if general controls are extremely weak.
B.) Application controls are likely to be effective only when general controls are effective.
C) General controls have no impact on application controls.
D) None of the above.

5
24) A ________ total represents the summary total of codes from all records in a batch that do
not represent a meaningful total.
A) record
B.) hash
C) output
D) financial

25) In an IT system, automated equipment controls or hardware controls are designed to:
A) correct errors in the computer programs.
B) monitor and detect errors in source documents.
C.) detect and control errors arising from the use of equipment.
D) arrange data in a logical sequential manner for processing purposes.

26) If a control total were to be computed on each of the following data items, which would best
be identified as a hash total for a payroll IT application?
A) Gross wages earned
B.) Employee numbers
C) Total hours worked
D) Total debit amounts and total credit amounts

27) Which of the following is not an application control?

A) Preprocessing authorization of sales transactions
B) Reasonableness test for unit selling price of sale
C) Post-processing review of sales transactions by the sales department
D.) Logging in to the company's information systems via a password

28) Which of the following is not a general control?

A) Separation of IT duties
B) Systems development
C.) Processing controls
D) Hardware controls

29) In comparing (1) the adequacy of the hardware controls in the system with (2) the
organization's methods of handling the errors that the computer identifies, the independent
auditor is:
A) unconcerned with both (1) and (2).
B) equally concerned with (1) and (2).
C.) less concerned with (1) than with (2).
D) more concerned with (1) than with (2).

30) The most important output control is:

A) distribution control, which assures that only authorized personnel receive the reports
generated by the system.
B.) review of data for reasonableness by someone who knows what the output should look like.
C) control totals, which are used to verify that the computer's results are correct.
D) logic tests, which verify that no mistakes were made in processing.

6
31) Define control for general controls and application controls. Also list the categories of
controls included under general controls and application controls.
Answer: General controls are those that relate to all aspects of the IT function. They include
controls related to administration, separation of IT duties, systems development, physical and on-
line security, backup and contingency planning, and hardware controls.

Application controls relate to the processing of individual transactions. Application controls are
specific to certain software applications and typically do not affect all IT functions. They include
input controls, processing controls, and output controls.

32) Identify the three categories of application controls, and give one example of each.
Answer: Application controls fall into three categories:
Input controls - preformatted screens which prompt the data input personnel for the
information to be entered
Processing controls - a reasonableness test for the unit selling price of a sale.
Output controls - postprocessing review of sales transactions by the sales department.

33) One category of general controls is physical and online access controls. Describe the control
and give at two examples of implementation of the control.
Answer: Physical controls over computer equipment restrict access to hardware, software, and
backup data files on magnetic tapes or disks, hard drives, CDs, and external disks. Examples of
physical controls include:
keypad entrances
badge-entry systems
security cameras and security personnel
employee fingerprints or retinas scanning and matching to database before access is allowed
monitoring of cooling and humidity
installing fire-extinguishing equipment.

Online access controls restrict access to software and related data files, reducing the likelihood
that unauthorized changes are made to software applications and data files. Examples include:
proper user IDs and passwords
separate add-on security software packages
firewalls
encryption programs.

34) Processing controls include the following tests:

Validation
Sequence
Data Reasonableness
Completeness

Describe what each control is designed to do:

Answer: Validation: ensures that a particular type of transaction is appropriate for processing
Sequence: determines that the data submitted for processing are in the correct order
Data Reasonableness: determines whether the data exceeds prespecified amounts

7
Completeness: determines that every field in a record has been completed

35) What are the two software testing strategies that companies typically use? Which strategy is
more expensive?
Answer: Companies may use pilot testing and parallel testing to test new software. Pilot testing
involves operating the new software at a limited number of facilities, while continuing to operate
the old software at all other locations. Parallel testing involves operating the new and old
software simultaneously. Parallel testing is more expensive than pilot testing.

36) Discuss the four areas of responsibility under the IT function that should be segregated in
large companies.
Answer: The responsibilities for IT management, systems development, operations, and data
control should be separated:
IT Management. Oversight of the IT function should be segregated from the systems
development, operations, and data control functions. Oversight of IT should be the responsibility
of the Chief Information Officer or IT manager.
Systems development. Systems analysts are responsible for the overall design of each
application system. Programmers develop, test, and document applications software.
Programmers and analysts should not have access to input data or computer operations.
Operations. Computer operators are responsible for the day-to-day operations of the
computer.
Data control. Data control personnel independently verify the quality of input and the
reasonableness of output.

37) Identify the six categories of general controls and give one example of each.
Answer: General controls fall into the following six categories:
Administration of the IT function. The chief information officer (CIO) should report to senior
management and board of directors.
Segregation of IT duties. There should be separation of duties between the computer
programmers, operators, and the data control group.
Systems development. Users, analysts, and programmers develop and test software.
Physical and online security. Access to hardware is restricted, passwords and user IDs limit
access to software and data files, and encryption and firewalls protect data and programs from
external parties.
Backup and contingency planning. Written backup plans should be prepared and tested on a
regular basis throughout the year.
Hardware controls. Uninterruptible power supplies should be used to avoid loss of data in the
event of a power blackout.

38) Parallel testing is used when old and new systems are operated simultaneously in all
locations.
A.) True
B) False

39) Programmers should only be allowed to work with test copies of programs and data.
A.) True
B) False

8
40) In IT systems, if general controls are effective, it increases the auditor's ability to rely on
application controls to reduce control risk.
A.) True
B) False

41) Parallel testing is more expensive than pilot testing.

A.) True
B) False

42) The effectiveness of automated controls depends solely on the competence of the personnel
performing the controls.
A) True
B.) False

43) Knowledge of both general and application controls is crucial for auditors in understanding
how accounting information is recorded and reported.
A.) True
B) False

44) A large portion of errors in IT systems result from data entry errors.
A.) True
B) False

45) Output controls focus on preventing errors during processing.

A) True
B.) False

46) Processing controls are a category of application controls.

A.) True
B) False

47) Controls that relate to a specific use of the IT system, such as the processing of sales or cash
receipts, are called application controls.
A.) True
B) False

48) IT controls are classified as either input controls or output controls.

A) True
B.) False

1) Auditors typically obtain information about general and application controls through all of the
following ways except for:
A) interviews with IT personnel.
B) reviews of detailed questionnaires completed by IT staff.
C) examination of system documentation such as flowcharts.
D.) filings submitted to the PCAOB or SEC.

9
2) When the client uses a computer but the auditor chooses to use only the non-IT segment of
internal control to assess control risk, it is referred to as auditing around the computer. Which
one of the following conditions need not be present to audit around the computer?
A.) Application controls need to be integrated with general controls.
B) The source documents must be available in a non-machine language.
C) The documents must be filed in a manner that makes it possible to locate them.
D) The output must be listed in sufficient detail to enable the auditor to trace individual
transactions.

3) Which of the following is a correct statement regarding general controls?

A) Auditors should evaluate the effectiveness of application controls before evaluating general
controls.
B.) General controls have a pervasive effect on the effectiveness of application controls.
C) Ineffective general controls have no impact on the potential for material misstatements across
all system applications.
D) General controls have no impact on audit testing.

4) Auditors:
A) link controls and deficiencies in general controls to specific transaction-related audit
objectives.
B.) can use a control risk matrix to help identify both manual and automated application controls
and control deficiencies for each related audit objective.
C) can rely on IT-based application controls for all cycles if general controls are ineffective.
D) can use the IT staff to determine how much reliance they can place on general controls.

5) When the client changes the computer software:

A) no additional testing is needed by the auditor.
B) and application controls are effective, the auditor can easily identify when software changes
are made.
C.) and general controls are effective, the auditor can easily identify when software changes are
made.
D) application and general controls can no longer by relied upon by the auditor.

6) The approach to auditing where the auditor does not test automated controls to reduce
assessed control risk is called:
A) the single-stage audit.
B) the test deck approach.
C.) auditing around the computer.
D) generalized audit software (GAS).

7) Companies with non-complex IT environments often rely on desktops and networked servers
to perform accounting system functions. Which of the following is not an audit consideration in
such an environment?
A) Limited reliance on automated controls
B) Unauthorized access to master files
C) Vulnerability to viruses and other risks
D.) Excess reliance on automated controls

10
8) Which of the following statements is correct?
A) Auditors should evaluate application controls before evaluating general controls.
B) Auditors should evaluate application controls and general controls simultaneously.
C.) Auditors should evaluate general controls before evaluating application controls.
D) None of these statements is correct.

9) Auditors should evaluate which of the following before evaluating application controls
because of the potential for pervasive effects?
A) Input controls
B) Control environment
C) Processing controls
D.) General controls

10) Which of the following is least likely to be used in obtaining an understanding of client
general controls?
A) Examination of system documentation
B) Inquiry of key users
C.) Walk through of a sales transaction
D) Reviews of questionnaires completed by client IT personnel

11) Auditors usually obtain information about general and application controls through:
A) interviews with IT personnel.
B) examination of systems documentation.
C) reading program change requests.
D.) all of the above methods.

12) It is important for the auditor to understand both the general controls and the application
controls a company has implemented. Which of the following statements is true about these
controls?
A) Auditors do not link IT controls to audit objectives.
B.) After identifying specific IT-based application controls that can be used to reduce control
risk, auditors can reduce substantive testing.
C) General controls affect audit objectives in only one cycle.
D) The impact of general controls and application controls on audits does not vary depending on
the level of complexity in the IT environment.

13) General controls in smaller companies are usually less effective than in more complex IT
environments.
A.) True
B) False

14) Even in a less sophisticated IT environment, automated controls can often be relied on.
A.) True
B) False

15) "Auditing around the computer" is acceptable only if the auditor has access to the client's
data in a machine-readable language.

11
A) True
B.) False

16) "Auditing around the computer" is most appropriate when the client has not maintained
detailed output or source documents in a form readable by humans.
A) True
B.) False

17) When a client uses desktops and networked servers for the accounting functions, there is a
risk of computer viruses.
A.) True
B) False

18) Auditors normally link controls and deficiencies in general controls to specific transaction-
related audit objectives.
A) True
B.) False

19) Auditors often use their own software to test the client's IT controls.
A.) True
B) False

1) The auditor's objective in determining whether the client's automated controls can correctly
handle valid and invalid transactions as they arise is accomplished through the:
A.) test data approach.
B) generalized audit software approach.
C) microcomputer-aided auditing approach.
D) generally accepted auditing standards.

2) The audit approach in which the auditor runs his or her own program on a controlled basis to
verify the client's data recorded in a machine language is:
A) the test data approach.
B) called auditing around the computer.
C.) the generalized audit software approach.
D) the microcomputer-aided auditing approach.

3) Which of the following is not seen as an advantage to using generalized audit software
(GAS)?
A) Auditors can learn the software in a short period of time.
B.) It can be applied to a variety of clients after detailed customizations.
C) It can be applied to a variety of clients with minimal adjustments to the software.
D) It greatly accelerates audit testing over manual procedures.

4) When using the test data approach:

A.) test data should include data that the client's system should accept or reject.
B) application programs tested must be virtually identical to those used by employees.
C) select data may remain in the client system after testing.

12
D) none of the above statements is correct.

5) An auditor who is testing IT controls in a payroll system would most likely use test data that
contain conditions such as:
A.) time tickets with invalid job numbers.
B) overtime not approved by supervisors.
C) deductions not authorized by employees.
D) payroll checks with unauthorized signatures.

6) Which of the following computer-assisted auditing techniques inserts an audit module in the
client's application system to identify specific types of transactions?
A) Parallel simulation testing
B) Test data approach
C.) Embedded audit module
D) Generalized audit software testing

7) Which of the following best describes the test data approach?

A.) Auditors process their own test data using the client's computer system and application
program.
B) Auditors process their own test data using their own computers that simulate the client's
computer system.
C) Auditors use auditor-controlled software to do the same operations that the client's software
does, using the same data files.
D) Auditors use client-controlled software to do the same operations that the client's software
does, using auditor created data files.

8) Describe three computer auditing techniques available to the auditor.

Answer: Computer auditing techniques available to the auditor are:
Test data approach. Using this approach, the auditor develops different types of transactions
that are processed under his or her own control using the client's computer programs on the
client's IT equipment.
Parallel simulation. Using parallel simulation, the auditor writes a computer program that
replicates some part of the client's application system. The client's data is then processed using
the auditor's computer program. The auditor then compares the output generated by his or her
program with that generated by the client's program to test the correctness of the client's
program. Generalized audit software may be used.
Embedded audit module. Using this approach, the auditor inserts an audit module in the
client's application system to capture transactions with characteristics that are of interest to the
auditor.

9) Discuss the advantages and benefits of using generalized audit software.

Answer: Advantages and benefits of using generalized audit software include:
they are developed in such a manner that most of the audit staff can be trained to use the
program even if they have little formal IT education.
a single program can be applied to a wide range of tasks without having to incur the cost or
inconvenience of developing individualized programs.
generalize audit software can perform tests much faster and in more detail than using

13
traditional manual procedures.

10) Auditors often use Generalized Audit Software during their testing of a client's internal
controls. For the following uses of the software provide a description and an example.

Verify extensions and footings

Print confirmation requests
Compare data on separate files
Answer: Verify extensions and footings: verify accuracy of the clients computations; foot any
subsidiary ledger

Print confirmation requests: print data for sample items selected for testing; randomly select
accounts receivable customer balances for testing

Compare data on separate files: determine that information contained in two or more files agrees;
changes in accounts payable or accounts receivables accounts using purchases/sales journals and
cash disbursement/cash receipts registers.

11) Match eight of the terms (a-n) with the definitions provided below (1-8):

a. Application controls
b. Auditing around the computer
c. Auditing through the computer
d. Error listing
e. General controls
f. Generalized audit software
g. Hardware controls
h. Input controls
i. Output controls
j. Parallel simulation
k. Parallel testing
l. Pilot testing
m. Processing controls
n. Test data approach

________ 1. The new and old systems operate simultaneously in all locations.

________ 2. Controls that relate to all parts of the IT system.

________ 3. Involves the use of a computer program written by the auditor that replicates some
part of a client's application system.

________ 4. A method of auditing IT systems which uses data created by the auditor to
determine whether the client's computer program can correctly process valid and invalid
transactions.

________ 5. Controls such as review of data for reasonableness, designed to assure that data

14
generated by the computer is valid, accurate, complete, and distributed only to authorized people.

________ 6. Controls that apply to processing of transactions.

________ 7. A new system is implemented in one part of the organization while other locations
continue to rely on the old system.

________ 8. Controls such as proper authorization of documents, check digits, and adequate
documentation, designed to assure that the information to be processed by the computer is
authorized, complete, and accurate.

Answer:
1. k
2. e
3. j
4. n
5. i
6. a
7. l
8. h

12) The embedded audit module approach requires the auditor to insert an audit module in the
client's application system to to identify specific types of transactions.
A.) True
B) False

13) The objective of the computer audit technique known as the test data approach is to
determine whether the client's computer programs can correctly process valid and invalid
transactions.
A.) True
B) False

14) Parallel simulation is used primarily to test internal controls over the client's IT systems,
whereas the test data approach is used primarily for substantive testing.
A) True
B.) False

15) Generalized audit software is used to test automated controls.

A.) True
B) False

1) A database management system:

A.) allows clients to create databases that include information that can be shared across multiple
applications.
B) stores data on different files for different purposes, but always knows where they are and how
to retrieve them.
C) allows quick retrieval of data, but at a cost of inefficient use of file space.
D) allows quick retrieval of data, but it needs to update files continually.
15
2) When auditing a client who uses a database management system, the auditor is principally
aware of elevated risk due to the fact that:
A.) multiple users can access and update data files.
B) the accounting information is only in one place.
C) the database administrator may lack appropriate accounting knowledge.
D) multiple users could all access the data simultaneously causing a system shutdown.

3) General controls may include firewalls which are used to protect from:
A) erroneous internal handling of data.
B) insufficient documentation of transactions.
C) illogical programming commands.
D.) unauthorized external users.

4) What tools do companies use to limit access to sensitive company data?

A.)
Encryption techniques Digital signatures Firewall
Yes Yes Yes

B)
Encryption techniques Digital signatures Firewall
Yes No No

C)
Encryption techniques Digital signatures Firewall
No Yes Yes

D)
Encryption techniques Digital signatures Firewall
Yes Yes No

5) Rather than maintain an internal IT center, many companies outsource their basic IT functions
such as payroll to an:
A) external general service provider.
B.) independent computer service center.
C) internal control service provider.
D) internal auditor.

6) When the auditor is obtaining an understanding of the independent computer service center's
internal controls the auditor should:
A.) use the same criteria used to evaluate the client's internal controls.
B) use different criteria because the service center resides outside the company.
C) use the same criteria used to evaluate the client's internal controls but omit tests of
transactions.
D) use different criteria for the service center by including substantive tests of balances.

7) Many clients have outsourced their IT functions. The difficulty the independent auditor faces
16
when a computer service center is used is to:
A) gain the permission of the service center to review their work.
B) find compatible programs that will analyze the service center's programs.
C.) determine the adequacy of the service center's internal controls.
D) try to abide by the Code of Professional Conduct to maintain the security and confidentiality
of client's data.

8) A service center:
A) must have an auditor hired by the PCAOB test the controls of the service center.
B) audit cannot be relied upon by those outside of the firm.
C.) can engage a CPA firm to issue a report on their internal controls for use by all customers and
their independent auditors.
D) must make all of their systems available to any external party.

9) What do auditing standards require when a company outsources some of their IT requirements
to an independent computer service center?
Answer: Auditing standards require the auditor to consider the need to obtain an understanding
and test the service center's controls if the provider's application involves processing significant
financial data.

10) Firewalls can protect company data and software programs.

A.) True
B) False

11) LANs link equipment within a single or small cluster of buildings and are used within a
company .
A.) True
B) False

12) When auditing a client whose information is processed by an outside service provider, it is
not acceptable for the auditor to rely on the audit report of another independent auditor who has
previously tested the internal controls of the service provider, rather than testing the service
provider's controls himself or herself.
A) True
B.) False

17