Question

1. Describe three threats in the general ledger and reporting system and identify corresponding controls for each threat.

2. How is an audit trail used in the general ledger and reporting system?

3. Explain the benefits of XBRL.

Answer 1

1. THREAT 1: Errors in updating the general ledger because of inaccurate/incomplete journal entries or posting of journal entries — Controls: (1) Input, edit, and processing controls over summary entries from subsystems. (a) Validity check over existence of general ledger accounts. (b) Field check over numeric data in amount field. (c) Zero-balance check ensures equality of debits and credits (d) Completeness test — all pertinent data are entered (e) Redundant data check — closed loop verification to see if on account numbers and descriptions, to ensure that the correct general ledger account is being accessed (f) Standard adjusting entry file for recurring entries — improves accuracy of the process (g) Sign check on debit and credit entries (h) Calculation of run-to-run totals can verify the accuracy of journal voucher batch processing (2) Reconciliation and control reports — can detect errors made during updating and processing; trial balances, clearing, and suspense accounts are examples (a) Balancing of control and subsidiary accounts (b) Control reports can help identify the source of errors in the general ledger update process — listings of journal vouchers and general journal entries will show entries posted to the general ledger and ensures equality of debits and credits (3) The audit trail — the path of transactions through the system-should be able to perform the following tasks: (a) Trace any transaction from its original source document to the general ledger; any other document or report using that data (b) Trace any item from a report or an output document to the general ledger and thence to the source document (c) Trace all changes in the general ledger balances from their beginning balance to their ending balance.
THREAT 2: Loss or unauthorized disclosure or alteration of financial data — Controls: (1) User IDs, passwords, and access controls should be used (2) Enforce segregation of duties (3) Adjusting entries only from the controller's area (4) Valid authorization for journal voucher submission.
THREAT 3: Loss or destruction of the general ledger — Controls: (1) Use of internal and external file labels to protect from accidental data loss (2) Make regular backup copies of the general ledger, one copy stored off-site (3) A good disaster recovery plan and (4) access and processing integrity controls to ensure confidentiality and accuracy of data transmitted to branch offices or externally.
THREAT 4: Poor performance — Controls: (1) XBRL, (2) redesign business processes, and (3) redesign metrics used to report results of business activities.
2. An audit trail shows the path of a transaction through the accounting system. It can provide information needed to trace any changes made to the general ledger by tracing either to or from an original source document to the general ledger. It helps in tracing all changes in general ledger accounts from beginning balances to ending balances as well as any adjustments made to the accounts.

3. XBRL (Extensible Business Reporting Language) is a variation of XML, which is designed to communicate the content of data. XML improves upon HTML by being able to describe the content of the data presented. However, XML is limited when communicating financial information. For financial purposes, XBRL identifies each piece of data, along with how the data should be processed and how the data relate to other data items. XBRL may soon become the universal standard computer language for communicating financial data. XBRL enables organizations to publish financial information only once, using standard XBRL tags. XBRL tagged information is interpretable and doesn't need to be re-entered by users.