Page 447 - Introduction to Business

CHAPTER 12 Financial Reporting 421

ultimate disposition on the financial statements. Auditors follow the audit trail to
find support for the figures shown on the financial statements.
In computer-based accounting systems, the audit trail is substantially diminished
and much harder for the auditor to follow. In most computerized accounting trans-
action processing systems, the journal is eliminated; transactions are directly posted
into permanent computer files—ledger accounts—when transactions are created
and processed. Further, in online systems, source data is often directly keyed into the
computer; no paper source document exists. Another problem with online systems is
that the balances in ledger accounts are overwritten when they are updated; no
record is maintained of the balance before the transaction was processed, unless the
previous statement of the account is printed out or copied to a computer file.
Computer processing tends to make much of transaction processing invisible;
consequently, an audit trail must be created by forcing the generation of documen-
tation regarding the specific operating steps carried out by a computer program. For
example, an online transaction processing system can be made to generate an error
listing for invalid transactions, rather than merely signaling to the data entry opera-
tor that the transaction is invalid. Thus, the generation of documentation regarding
key steps taken by the computer system during data input, processing, and output
results in an audit trail that permits the tracing of transaction processing.
The quality of information processed and output by computer systems depends
heavily on the quality of the computer programs that process the data input into
transaction processing systems. A computer program replete with errors will
inevitably compromise the integrity of the data within that transaction processing
cycle. This problem is compounded by the inability of the computer to recognize
illogical operations unless programmed to do so. The computer will blindly per-
form whatever functions the software demands of it, regardless of how illogical
those operations might be (e.g., hours worked by one person of 400 for a week
instead of 40). All of this indicates that the auditor must be concerned about veri-
fying the validity of computer programs and of the controls relating to their devel-
opment and modification.
Problems caused by computerization explain why a high degree of computer-
related knowledge is required on the part of the auditor. Information technology
advances have been occurring at a very rapid pace, and keeping up with recent
developments is often a formidable task.
The complexities of computer processing of accounting data often result in greater
difficulty for the auditor examining the computer-based accounting system. However,
information technology advances also allow the auditor to harness the power of the
computer in performing audit procedures. Sophisticated computer audit techniques,
although difficult to implement, result in a very efficient and effective audit. Com-
puter-based controls, which can be built into applications when they are initially cre-
ated, can be designed to ensure that transactions meet a number of objectives (e.g.,
weekly hours worked should be less than or equal to 60). The computer will unerringly
check every transaction for compliance with the transaction controls.
A computer’s speed in processing accounting transactions also benefits the exe-
cution of computer audit procedures. Audit procedures such as randomly selecting
transactions for detailed examination can easily be performed with the computer.
Unlike in manual auditing, computer-generated random numbers could be used to
select transactions. To the extent that control checks are performed by the computer,
the auditor can be assured that those checks will be consistently and reliably carried
out, much more so than if humans were performing the same control checks.

reality Can you audit your personal financial information to be sure there are no
CH ECK mistakes in your bank records, credit card records, paychecks, and so on?

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