Chapter 4: Systems Development & Maintenance Activities IT Auditing & Assurance, 2e, Hall & Singleton PARTICIPANTS Systems professionals End users Stakeholders ACCOUNTANTS Internal External Limitations of involvement IT Auditing & Assurance, 2e, Hall & Singleton ACCOUNTANTS/AUDITORS Why are accountants/auditors involved? Experts in financial transaction processes Quality of AIS is determined in SDLC How are accountants involved? Users (e.g., user views and accounting techniques) Members of SDLC development team (e.g., Control Risk being minimized) Auditors (e.g., auditable systems) IT Auditing & Assurance, 2e, Hall & Singleton I.S. AQUISITION In-house development Purchase commercial systems IT Auditing & Assurance, 2e, Hall & Singleton TRENDS IN COMMERCIAL SOFTWARE Trends in commercial software Relatively low cost for general purpose software Industry-specific vendors Businesses too small to have inhouse IS staff Downsizing & DDP IT Auditing & Assurance, 2e, Hall & Singleton TYPES OF COMMERCIAL SYSTEMS Turnkey systems General accounting systems Typically in modules Special-purpose systems Example banking Office automation systems Purpose is to improve productivity Backbone systems (ERP) SAP, Peoplesoft, Baan, Movex Vendor-supported systems Hybrids IT Auditing & Assurance, 2e, Hall & Singleton COMMERCIAL SYSTEMS Advantages Implementation time Cost Reliability Disadvantages Independence Customization needs Maintenance IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS DEVELOPMENT LIFE CYCLE (SDLC) New systems 1. 2. 3. 4. 5. 6. 7. 8. Systems planning Systems analysis Conceptual systems design System evaluation and selection Detailed design System programming and testing System implementation System maintenance SDLC -- Figure 4-1 [p.141] IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS PLANNING– PHASE I PURPOSE: To link individual systems projects to the strategic objectives of the firm. Link individual projects to strategic objectives of the firm - Figure 4-2 [p.142] Who does it? Steering committee CEO, CFO, CIO, senior mgmt., auditors, external parties Ethics and auditing standards limit when auditors can serve on this committee Long-range planning: 3-5 years Allocation of resources - broad IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS PLANNINGPHASE I Level 1 = Strategic systems planning Why? 1. A changing plan is better than no plan 2. Reduces crises in systems development 3. Provides authorization control for SDLC 4. It works! Level 2 = Project planning Project proposal Project schedule IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS PLANNINGPHASE I Auditor’s role in systems planning Auditability Security Controls IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS PLANNINGPHASE I SUMMARY Identify user’s needs Preparing proposals Evaluating proposals Prioritizing individual projects Scheduling work Project Plan – allocates resources to specific project Project Proposal – Go or not Project Schedule – represents mgmt’s commitment IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS ANALYSISPHASE II PURPOSE: Effectively identify and analyze the needs of the users for the new system. Survey step Disadvantages: Tar pit syndrome Thinking inside the box Advantages: • Identify aspects to keep • Forcing analysts to understand the system • Isolating the root of problem symptoms IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS ANALYSISPHASE II Gathering facts Data sources Users Data stores Processes Data flows Controls Transaction volumes Error rates Resource costs Bottlenecks Redundant operations IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS ANALYSISPHASE II Fact-gathering techniques Observation Task participation Personal interviews Reviewing key documents (see list, p. 147) Systems analysis report Figure 4-3 (p.148) Auditor’s role CAATTs (e.g., embedded modules) IT Auditing & Assurance, 2e, Hall & Singleton CONCEPTUAL SYSTEMS DESIGNPHASE III PURPOSE: Develop alternative systems that satisfy system requirements identified during system analysis 1. Top-down (structured design) [see Figure 4-4, p.150] Designs general rather than specific Enough details for design to demonstrate differences Example: Figure 4-5, p. 151 2. Object-oriented approach (OOD) Reusable objects Creation of modules (library, inventory of objects) 3. Auditor’s role special auditability features IT Auditing & Assurance, 2e, Hall & Singleton SYSTEM EVALUATION & SELECTION– PHASE IV PURPOSE: Process that seeks to identify the optimal solution from the alternatives 1. Perform detailed feasibility study Technical feasibility [existing IT or new IT?] Legal feasibility Operational feasibility Degree of compatibility between the firm’s existing procedures and personnel skills, and requirements of the new system Schedule feasibility [implementation] 2. Perform a cost-benefit analysis Identify costs Identify benefits Compare the two IT Auditing & Assurance, 2e, Hall & Singleton SYSTEM EVALUATION & SELECTIONPHASE IV Cost-Benefit Analysis: Costs • • • • • • • • ONE-TIME COSTS: Hardware acquisition Site preparation Software acquisition Systems design Programming Testing Data conversion Training RECURRING COSTS: • Hardware maintenance • Software maintenance • Insurance • Supplies • Personnel • Allocated existing IS IT Auditing & Assurance, 2e, Hall & Singleton SYSTEM EVALUATON & SELECTION– PHASE IV Cost-Benefit Analysis: Benefits TANGIBLE: • Increased revenues • Increased sales in existing markets • Expansion into new markets • Cost Reduction 1 • Labor reduction • Operating cost reduction • Supplies • overhead • Reduced inventories • Less expensive eqpt. • Reduced eqpt. maint. • • • • • • • • INTANGIBLE 2: Increased customer satisfaction Improved employee satisfaction More current information Improved decision making Faster response to competitors’ actions More effective operations Better internal and external communications Improved control environment IT Auditing & Assurance, 2e, Hall & Singleton Cost-Benefit Analysis: Comparison NPV 1 [Table 4-4] Payback 2 [Figures 4-7a, 7b] BE Auditor’s role Managerial accounting techniques 3 • • • • • Escapable costs Reasonable interest rates Identify one-time and recurring costs Realistic useful lives for competing projects Determining financial values for intangible benefits IT Auditing & Assurance, 2e, Hall & Singleton DETAILED DESIGN–PHASE V PURPOSE: Produce a detailed description of the proposed system that satisfies system requirements identified during systems analysis and is in accordance with conceptual design. User views Database tables Processes Controls i.e., a set of “blueprints” IT Auditing & Assurance, 2e, Hall & Singleton DETAILED DESIGN– PHASE V Quality Assurance • “Walkthrough” • Quality assurance IT Auditing & Assurance, 2e, Hall & Singleton DETAILED DESIGN – PHASE V Detailed Design Report Designs for input screens and source documents Designs for screen outputs, reports, operational documents Normalized database Database structures and diagrams Data flow diagrams (DFD’s) Database models (ER, Relational) Data dictionary Processing logic (flow charts) IT Auditing & Assurance, 2e, Hall & Singleton SYSTEM PROGRAMMING & TESTING– PHASE VI Program the Application • • • • • Procedural languages Event-driven languages OO languages Programming the system Test the application {Figure 4-8] – Testing methodology – Testing offline before deploying online – Test data • Why? • Can provide valuable future benefits IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS IMPLEMENTATION– PHASE VII PURPOSE: Database structures are created and populated with data, applications are coded and tested, equipment is purchased and installed, employees are trained, the system is documented, and the new system is installed. Testing the entire system Documenting the system Designer and programmer documentation Operator documentation User documentation • Novices • Occasional users • Frequent light users • Frequent power users • User handbook • Tutorials • Help features IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS IMPLEMENTATION– PHASE VII Conversion Converting the databases Validation Reconciliation Backup Converting the new system Go live … Auditor involvement virtually stops! Cold turkey cutover Phased cutover Parallel operation cutover IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS IMPLEMENTATION– PHASE VII Post-Implementation Review Reviewed by independent team to measure the success of the system Systems design adequacy [see list p. 170] Accuracy of time, cost, and benefit estimates [see list p. 170] Auditor’s role We’re back!! Provide technical expertise Specify documentation standards Verify control adequacy External auditors IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS IMPLEMENTATION– PHASE VII Auditors’ Role We’re back!! Provide technical expertise Specify documentation standards Verify control adequacy AIS: GAAP, GAAS, SEC, IRS Legal Social / behavioral IS/IT (if capable) Effective and efficient ways to limit application testing COSO – SAS No. 78 – PCAOB Standard #1 Impact on scope of external auditors IT Auditing & Assurance, 2e, Hall & Singleton SYSTEMS MAINTENANCE–PHASE VIII PURPOSE: Changing systems to accommodate changes in user needs 80/20 rule 1 Importance of documentation? Facilitate efficient changes Facilitate effective changes (at all!) IT Auditing & Assurance, 2e, Hall & Singleton Preliminary Feasibility Project Authorization Project Proposal Systems Planning Systems Analysis System Analysis Rpt Conceptual Design DFD (general) Systems Selection Detailed Design System Implementation Feasibility Study Detailed Design Rpt Post-Impl. Review DFD (Detail) ER Diagram Program Flowcharts Project Schedule System Cost-Benefit Selection Rpt Analysis Relational Model Documentation IT Auditing & Assurance, 2e, Hall & Singleton Normalized Data User Acceptance Rpt A materially flawed financial application will eventually corrupt financial data, which will then be incorrectly reported in the financial statements. Therefore, the accuracy and integrity of the IS directly affects the accuracy of the client’s financial data. IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Controlling New Systems Development Systems authorization activities User specification activities Technical design activities Documentation is evidence of controls Documentation is a control! Internal audit participation User test and acceptance procedures Audit objectives Audit procedures IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Audit Objectives & Procedures Audit objectives Verify SDLC activities are applied consistently and in accordance with management’s policies Verify original system is free from material errors and fraud Verify system necessary and justified Verify documentation adequate and complete Audit procedures How verify SDLC activities applied consistently? How verify system is free from material errors and fraud? How verify system is necessary? How verify system is justified? How verify documentation is adequate and complete? See page 174 for a list IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Controlling Systems Maintenance Four minimum controls: Formal authorization Technical specifications Retesting Updating the documentation IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Controlling Systems Maintenance Source program library controls Why? What trying to prevent? Unauthorized access Unauthorized program changes SPLMS [Figure 4-13, p. 177] SPLMS Controls Storing programs on the SPL Retrieving programs for maintenance purposes Detecting obsolete programs Documenting program changes (audit trail) IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Controlled SPL Environment Password control On a specific program Separate test libraries Audit trail and management reports Describing software changes Program version numbers Controlling access to maintenance [SPL] commands IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Audit Objectives & Procedures Audit objectives Detect any unauthorized program changes Verify that maintenance procedures protect applications from unauthorized changes Verify applications are free from material errors Verify SPL are protected from unauthorized access IT Auditing & Assurance, 2e, Hall & Singleton CONTROLLING & AUDITING THE SDLC Audit Objectives & Procedures Audit procedures Figure 4-14, p.179 Identify unauthorized changes Reconcile program version numbers Confirm maintenance authorization Identify application errors Reconcile source code [after taking a sample] Review test results Retest the program Testing access to libraries Review programmer authority tables Test authority table IT Auditing & Assurance, 2e, Hall & Singleton Chapter 4: Systems Development & Maintenance Activities IT Auditing & Assurance, 2e, Hall & Singleton