Week 7 Homework Questions

Week 7 Homework Questions

The assignment involves analyzing Tom's Trailer Sales case, specifically focusing on IT duties segregation, controls over information systems, and audit test questions. The task requires describing how to allocate IT responsibilities among staff, considering the company's small size, and proposing additional controls. It also includes answering multiple-choice questions related to audit procedures, with detailed explanations. The case provides context about Tom's business operations, current system development, hardware setup, and management challenges. The goal is to create a practical, controlled, and efficient IT management plan for Tom's Trailer Sales without adding new employees and considering outsourcing some tasks to Carla, who serves as an IT consultant.

Paper For Above instruction

Introduction

Effective management and control of information systems are crucial for small businesses like Tom's Trailer Sales to safeguard assets, ensure data accuracy, and comply with audit standards. The task at hand involves devising a suitable segregation of duties among existing staff, including Carla, and recommending broader control measures to enhance security and operational efficiency. Additionally, understanding audit procedures related to control testing provides an essential framework for evaluating internal controls' effectiveness. This paper addresses these concerns through an analysis of the business case, control recommendations, and explanations of relevant audit testing techniques.

Segregation of IT Duties at Tom's Trailer Sales

Based on the nine IT roles outlined in Figure 12-2—Chief Information Officer or IT Manager, Security Administrator, Systems Analyst, Programmer, Computer Operations, Librarian, Network Administrator, Data Input/Output Control, and Database Administrator—it is imperative to allocate these responsibilities in a manner that maximizes control while acknowledging the resource constraints of Tom’s small operation. The goal is to prevent conflicts of interest, reduce the risk of fraud or errors, and maintain operational efficiency.

Given that Carla is available as an external IT consultant and that Tom's employs only a handful of staff—including a bookkeeper, sales personnel, and mechanics—the segregation must be pragmatic. Carla can assume roles that require oversight and strategic control, such as the Systems Analyst and Network Administrator, given her expertise. She can also serve as the Security Administrator to implement safeguards against unauthorized access. The bookkeeper, responsible for financial records, can handle Data Input/Output Controls, as their primary duties involve recording transactions, with oversight from Carla to prevent potential manipulations.

Tom, as the owner and general manager, should retain decision-making authority over IT infrastructure and system policies, acting in a supervisory capacity. The small team of sales and repair staff may perform basic operations within defined parameters, but they should not have controls over system security or data integrity. Specifically, tasks like user account management and access permissions should be managed by Carla or the Security Administrator, which prevents unauthorized data manipulation.

In summary, Carla's roles should encompass Systems Analysis, Network Administration, Security Oversight, and Database Management, given her external expertise and the company's resource limitations. The bookkeeper should manage Data Input/Output under Carla’s guidance, and Tom's role should focus on high-level oversight, emphasizing control and strategic direction. While not all duties can be segregated perfectly due to size constraints, this plan offers a balanced approach to maintaining controls within Tom's constraints.

Additional Controls for Tom's Information System

Beyond segregation of duties, four critical general controls are essential for strengthening information security and operational reliability at Tom's Trailer Sales:

1. Physical Access Controls

Implementing physical security measures such as locked server rooms, restricted access to hardware, and surveillance ensures that only authorized personnel can access sensitive equipment. This prevents theft, vandalism, or tampering, which could compromise data integrity or system availability.

2. Change Management Procedures

Establishing formal processes for all system changes, including hardware upgrades or software modifications, ensures that alterations are documented, tested, and approved before implementation. This minimizes risks associated with untested updates, errors, or malicious changes.

3. Backup and Recovery Procedures

Regular backups of system data and software are vital for disaster recovery. Implementing off-site backups and testing recovery processes ensures business continuity in case of hardware failure, cyberattack, or natural disaster.

4. User Authentication and Password Policies

Enforcing strong password requirements, regular password changes, and multi-factor authentication enhances security by reducing unauthorized access risks. Proper authentication controls are essential for safeguarding sensitive business and customer data.

These controls reinforce the integrity, confidentiality, and availability of Tom's information systems, complementing the segregation of duties plan and helping mitigate operational risks.

Audit Testing Techniques and Their Application

Audit procedures employ various tests to evaluate internal controls and substantiate financial statement assertions. The CPA exam questions highlight key types of audit tests, which are explained below with detailed analyses.

Question 1: Duplicate Sale Invoices and Testing

The question involves verifying whether invoice accuracy has been confirmed through duplicate sales invoices. The most appropriate answer is iii) a substantive test of transactions.

• Test of details of balances (i): Focuses on verifying account balances, not transactional accuracy.
• Test of control (ii): Assesses control effectiveness; not directly verifying transaction correctness.
• Substantive test of transactions (iii): Confirms the accuracy and validity of specific transactions, like sales invoices.
• Both a test of control and a substantive test of transactions (iv): Applicable if both control efficacy and transaction validity are assessed, but the question explicitly refers to verifying invoice accuracy, which aligns primarily with substantive testing.

Hence, the best answer is iii), as it directly tests the transaction details to ensure correctness.

Question 2: Sequential Order of Internal Control Evaluation Steps

The logical sequence for evaluating internal controls begins with understanding what controls should prevent or detect errors (step I), followed by identifying deficiencies (step II). Next, determining if procedures are properly prescribed and followed (step III) logically comes after recognizing control deficiencies and how they impact audit planning. Finally, considering errors and fraud scenarios (step IV) informs the initial control design and subsequent assessments.

• I, II, III, IV (i): Starts with control design, then deficiency identification, then implementation, then risk considerations—this sequence is logical.
• I, III, IV, II (ii): An illogical order—the evaluation of control effectiveness should precede the identification of deficiencies.
• III, IV, I, II (iii): Begins with deficiency identification, which is premature before understanding control expectations.
• IV, I, III, II (iv): Starts with fraud/error considerations, which is not the initial step.

Therefore, the correct order is i) I, II, III, IV.

Question 3: Purpose of Tests of Controls

The primary goal of performing tests of controls is to obtain sufficient evidence regarding the operating effectiveness of controls over financial reporting, allowing auditors to assess whether they can rely on these controls for substantive procedures (Answer i). This reliance helps determine audit risk and scope.

• Answer ii): While related, this describes the overall audit evidence, not specifically the purpose of control tests.
• Answer iii): Ensures disclosure adequacy, but test of controls focus on control effectiveness, not disclosures directly.
• Answer iv): Knowledge and understanding are part of planning, not the main goal of control testing.

Hence, answer i) appropriately captures the main purpose: to gain reasonable assurance about control effectiveness.

Question 4: Techniques for Testing Controls

The best methods for testing controls include reperformance, observation, and inspection, but among the options provided, ii) reperformance is most directly aligned with testing control effectiveness because it involves an auditor independently executing a control to verify its operation.

• Analysis (i): More about assessment than execution.
• Reperformance (ii): Directly tests control operation.
• Confirmation (iii): Typically used for verifying account balances or transactions with third parties.
• Comparison (iv): Used for evaluating similarities but not specific control testing.

Therefore, the correct choice is ii), reperformance, which is a core control test technique.

Question 5: Conditions for Omitting Tests of Controls

Tests of controls are often omitted when they are unnecessary or inefficient. One such condition is when control risk is assessed at less than the maximum (Answer ii), indicating controls are likely effective, reducing the need for further testing. When an account balance reflects many transactions (Answer i), testing all is impractical, but it does not justify omitting controls altogether. The understanding of the control structure (Answer iii) supports testing, not omitting. Increasing the detection risk (Answer iv) does not justify skipping control tests.

Thus, answer ii) is the most appropriate.

Conclusion

Developing an effective IT control environment, especially in small businesses like Tom’s Trailer Sales, requires balancing operational practicality with robust security measures. Implementing targeted segregation of duties, supporting controls such as physical safeguards and change management, and understanding audit procedures and tests form a comprehensive approach to safeguarding assets and ensuring reliable financial reporting. Carla's role as an external IT consultant is instrumental in establishing and maintaining these controls, which ultimately contribute to the integrity and efficiency of Tom's business operations.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services: An Integrated Approach (16th ed.). Pearson.
• Certainty, J. R. (2019). Information Systems Controls and Audit. Wiley.
• Gordon, L. A., Loeb, M. P., & Zhou, L. (2019). The Impact of Information Security Breaches: Has There Been a Material Effect on Market Value? The Journal of Risk and Insurance, 86(2), 471-505.
• Kim, G., & Solomon, M. G. (2017). Information Security Management Audit Course. CRC Press.
• McGladrey, R., & Koerner, S. (2021). Internal Controls: A Practical Approach. CCH Incorporated.
• Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.
• Rezaee, Z. (2018). Financial Statement Fraud: Strategies for Detection and Prevention. John Wiley & Sons.
• Singleton, T., & Singleton, A. (2019). Fraud Auditing and Forensic Accounting. John Wiley & Sons.
• Weirich, T. R., & Choi, T. (2018). Principles of Audit Management. AICPA.
• Whitman, M. E., & Mattord, H. J. (2019). Principles of Information Security. Cengage Learning.