Question

• Features of computer-based accounting systems which distinguish them from manual or mechanical accounting systems
• Factors for consideration in risk assessment in a computer-based environment Millichamp (2008)
• Ways in which IT benefits an entity’s internal control system
• Risks IT poses to an entity’s internal control system
• Consideration in auditing sales invoicing and sales reporting processes in a manual and a computer-based environment - Auditing to gain assurance on the management assertion of completeness of sales

Answer 1

1.Features of computer-based accounting systems which distinguish them from manual or mechanical accounting systems

Answer:-

A computerized accounting system is a system used by businesses for recording their financial information. Many systems are available and companies look for a system to match their needs.

Components

A computerized accounting system is made up of a computer or group of computers and an accounting software program. Many different types of systems are available to accommodate any type of business.

Transactions

A computerized accounting system is used to record the transactions of a business. Every time a transaction happens, an entry is made into the system. The system records all the information and stores it in the system.

Storage

All information that is entered in the system is stored in the system. Most companies perform back-ups to the system regularly to avoid losing any information.

Reports

A computerized accounting system is designed to record all information and summarize it in the form of financial statements. At the end of every period, the system generates financial statements that are distributed accordingly.

Special Features of Computerized Accounting System:

1. It leads to quick preparation of accounts and makes available the accounting statements and records on time.

2. It ensures control over accounting work and records.

3. Errors and mistakes would be at minimum in computerized accounting.

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4. Maintenance of uniform accounting statements and records is possible.

5. Easy access and reference of accounting information is possible.

6. Flexibility in maintaining accounts is possible.

7. It involves less clerical work and is very neat and more accurate.

8. It adapts to the current and future needs of the business.

9. It generates real-time comprehensive MIS reports and ensures access to complete and critical information instantly.

2)Factors for consideration in risk assessment in a computer-based environment Millichamp (2008)

Answer:-

. Reduction of Manpower:

The introduction of computers in accounting work reduces the number of employees in an organization. Thus, it leads to greater amount of unemployment.

2. High Cost:

A small firm cannot install a computer accounting system because of its high installation and maintenance cost. To be more economical there should be large volume of work. If the system is not used to its full capacity, then it would be highly uneconomical.

3. Require Special Skills:

Computer system calls for highly specialized operators. The availability of such skilled personnel is very scarce and very costly.

4. Other Problems:

Frequent repair and power failure may affect the accounting work very much. Computers are prone to viruses. Often time’s people will assume the computer is doing things correctly and problems will go unchecked for long period of time.

Problems Faced In Computerized Accounting System:

1. User Training:

The user, for using computer accounting software, needs to understand the concepts of the software. Hence, he should undergo proper training. A computer operator must learn the basics of computer, concepts of software, working with the operating system software [such as Windows/DOS] and the accounting software.

2. System Dependency:

Using a computer solution makes the user to depend fully on the com­puter system and necessitates the availability of computer at all times. If the system is not available [due to hardware failure or power cut], it would be difficult to verify the accounts.

3. Hardware Requirements:

A full-fledged computer system with a printer is required to operate the computerized accounting system. Most small organizations may not afford to have such facility with necessary software.

4. System Failure:

When there is a system crash [hard disk crash], there is high risk of losing the data available on the hard disk drive at any point of time. It would be highly painful, if the problem occurs at end of the financial year, when the financial statements should be ready.

5. Backups and Prints:

Backups of the data should be done regularly so that, when the data is lost, it can be restored from floppies [backups]. Regular print outs of the system information would be useful as manual records.

6. Voucher Management:

Accounting software allows easy alteration of data. If a voucher is wrongly placed in a wrong head, it would be very difficult to sort out and bring back the voucher. A good voucher management is very essential.

7. Security:

Additional security has to be provided because improper handling of the system [hardware/software] could be dangerous. Passwords, locks, etc., have to be set so that no unauthor­ized person can handle the system.

3)Risks IT poses to an entity’s internal control system

ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment states that auditors need to understand an entity's internal controls. To assist this process it identifies five components of an internal control system:

the control environment;

the entity's risk assessment process;

the information system;

the control activities; and

the monitoring of controls.

The information system

The information systems relevant to financial reporting objectives include all the procedures and records which are designed to:

Initiate, record, process and report transactions;

Maintain accountability for assets, liabilities and equity;

Resolve incorrect processing of transactions;

Process and account for system overrides;

Transfer information to the general/nominal ledger;

Capture information relevant to financial reporting for other events and conditions; and

Ensure information required to be disclosed is appropriately reported.

Control activities

The control activities include all policies and procedures designed to ensure that management directives are carried out throughout the organisation.

4)Risks IT poses to an entity’s internal control system

Answer:-

Internal controls for your business are policies you put in place to avoid errors, alert you to potential problems and opportunities and deter fraud. Even if you’re the sole person at your business, internal controls can help you operate at maximum efficiency. As you add employees, internal controls become even more important to prevent losses from errors and fraud.

Fraud

The most obvious losses a company can sustain by having weak internal controls arise from fraud. These occur when employees submit questionable or bogus expense reimbursement requests, underreport income or write a large check before leaving for parts unknown. You can minimize theft by having two pairs of eyes on transactions, including requiring two signatures on checks over a certain amount, or requiring department heads or yourself to approve large payments. Institute policies for travel expenses, including having all expenses approved before employees take trips. Instituting opening and closing procedures, taking regular inventory assessments, having board members and key executives sign conflict-of-interest statements and creating an employee handbook can help deter errors and fraud.

Overpayment

Without internal controls to manage your purchasing, you might lose money overpaying for goods and services. For example, if you don’t regularly bid your contracts for services, equipment leases and insurance, you might go years without testing the market for better pricing. Set parameters for reviewing all of your major recurring expenses, including those you might not normally consider, such as utilities, rent or mortgage. This can also help reduce fraud if one of your employees is taking kickbacks from a contractor who is not submitting a competitive bid.

Lack of Quality

Even if you’re paying the lowest price for a good or service, if you’re not getting maximum quality, you lose profits. Part of your purchasing process should be examining the quality of each good or service you’re getting. Discuss with potential vendors your needs, how you use their product or service and what recommendations they can offer to increase your productivity.

Errors

Whether you keep your books by hand or use sophisticated accounting software, people can still make mistakes entering data. In addition to your employees or contractors making errors, your bank, customers and suppliers can err. Conduct a monthly bank reconciliation statement to spot any errors that, if undetected for months, can seriously damage your business.