Week 7 Homework Questions: This Question Is Based On Tom's T

Week 7 Homework Questions 1this Question Is Based On Toms Trailer Sal

This assignment involves analyzing Tom's Trailer Sales case, focusing on the segregation of IT duties, implementing controls over information systems, understanding audit procedures, and comparing REA and ER diagrams. The tasks include designing a segregation plan for IT roles within a small business, suggesting additional controls to safeguard information, evaluating audit tests of controls, and describing differences and similarities between REA and ER diagrams with their implications on financial statements and system design.

Paper For Above instruction

Tom's Trailer Sales operates as a small-scale recreational vehicle dealership, with a limited staff and a manual record-keeping system. Recognizing the need for technological advancement, owner Tom Sullivan engaged Carla Denton, an MIS consultant, to design and implement a computerized management information system (MIS). This transition from manual to digital system involves critical considerations in maintaining control over data, safeguarding sensitive information, and ensuring operational efficiency while accommodating limited resources.

Segregation of Duties in Small Business IT Environment

In larger organizations, the segregation of IT duties typically involves clear roles such as CIO, security administrator, systems analyst, programmer, and database administrator. However, in Tom’s small business, resource constraints prevent full segregation, and personnel may need to assume multiple roles. To maximize control, Carla should assign the nine roles (CIO/IT Manager, Security Administrator, Systems Analyst, Programmer, Computer Operations, Librarian, Network Administrator, Data Input/Output Control, Database Administrator) in a manner that minimizes conflict of interest yet remains practical.

Carla's plan would designate her primarily as the IT consultant responsible for designing the system and overseeing implementation, acting as the CIO/IT Manager. The bookkeeper or a trusted employee could assume data input/output control, given their familiarity with transactional details. Tom himself would oversee security and operational controls, given his managerial role. For critical functions like the database admin role, Carla could outsource or establish a rotation policy among staff once the system stabilizes, reducing the risk of fraud or error.

Given the limited staff—Tom, a bookkeeper, six salespeople, and three mechanics—with all employees involved in some system operations, complete segregation is unfeasible. Instead, implementing a losely separated role structure with managerial oversight and periodic audits can mitigate risks. Carla’s arrangement should include controls such as restricted access, audit logs, and regular reconciliations, ensuring accountability without overburdening staff.

Additional System Controls for Tom’s Business

Beyond segregation, Tom should adopt comprehensive controls to safeguard information systems:

• Physical Controls: Restrict physical access to hardware and server rooms by locking facilities and using surveillance cameras. This prevents unauthorized personnel from tampering with hardware or data.
• Access Controls: Implement user authentication measures such as passwords and role-based permissions. This limits system access only to authorized staff, reducing insider threats and accidental data breaches.
• Encryption: Encrypt sensitive data stored in the database and transmitted over the network. Encryption protects data confidentiality, especially when employees or external vendors access the system remotely.
• Backup and Recovery Procedures: Regularly back up data and establish recovery protocols. This guarantees data integrity and business continuity in case of hardware failure, cyberattack, or human error.

These controls are vital in a small business setting, where resource constraints often limit comprehensive security measures. Implementing these controls enhances data integrity, confidentiality, and availability, supporting operational resilience and compliance with data protection standards.

Audit Tests of Controls

Audit testing is crucial for evaluating internal controls' effectiveness. Two key types of audit tests are tests of details and tests of controls. For example, locating duplicate sales invoices helps verify control procedures over transaction accuracy. This is best categorized as a substantive test of transactions because it directly assesses transaction correctness rather than control process efficiency. The rationale is that such an inquiry aims to detect errors in transaction recording rather than evaluate control policies themselves.

Regarding the evaluation of internal controls, the step order is as follows: First, determine which controls should prevent or detect errors or fraud (Step I). Next, identify any control deficiencies and assess their impact (Step II). Subsequently, verify whether prescribed procedures are being followed satisfactorily (Step III). Finally, consider possible errors and fraud scenarios to refine the audit plan (Step IV). Thus, the logical sequence is I, II, III, IV, which aligns with the systematic approach of risk assessment and control evaluation in auditing.

When testing controls, auditors select techniques like re-performance, observation, and inquiry; confirmation is less applicable for control testing but used for substantive procedures. Re-performance, where auditors independently execute control procedures, provides direct evidence of control effectiveness.

The primary objective of tests of controls for Tom's Trailer Sales is to obtain reasonable assurance that internal controls operate effectively throughout the period, reducing substantive testing requirements and supporting the error-free reporting of financial data (ISA 330). Techniques such as re-performance and observation help verify whether controls like authorization, segregation, and record-keeping are functioning properly. When the auditor assesses control risk as less than maximum, they rely less on substantive testing, which can reduce audit effort and costs.

In the context of Tom’s operations, understanding the effectiveness of controls over financial recording, inventory management, and data security is essential for audit reliability and financial statement accuracy. Using a combination of analytical reviews, re-performance, and inquiry provides a comprehensive perspective on control effectiveness, aligning with best auditing practices.

Comparison of REA and ER Diagrams

In a 1-2 page comparison, REA (Resources-Events-Agents) diagrams and ER (Entity-Relationship) diagrams are modeling tools used in database design and financial information systems. Each has distinctive features and applications.

Definitions and Acronyms

• REA Diagram: Stands for Resources, Events, and Agents. It emphasizes economic transactions within an enterprise, capturing resource flows, events, and participants involved.
• ER Diagram: Stands for Entity-Relationship. It models data entities, their attributes, and relationships, focusing on data organization and database structure.

Differences

1. Focus: REA diagrams focus on economic exchanges relevant to financial reporting, whereas ER diagrams center on data structure and relationships without explicitly modeling economic events.
2. Components: REA diagrams include resources, events, and agents—highlighting event sequences and resource flows. ER diagrams include entities, attributes, and relationships, emphasizing data independence and normalization.
3. Application: REA diagrams are primarily used in designing accounting information systems that support financial analysis and reporting. ER diagrams are used in general database design across various industries, including finance but also manufacturing, healthcare, etc.

Similarities

• Graphical Representation: Both use visual symbols and connectivity to represent relationships between various components, facilitating understanding of complex structures.
• Structural Purpose: Both serve as blueprint frameworks for designing databases or information systems, improving consistency and clarity in system development.
• Integration with Systems Development: Both are used during system analysis and design phases to capture requirements and define data flows or relationships.

Implications of Using REA vs. ER Diagrams

Choosing between REA and ER diagrams impacts how financial data and business processes are represented and analyzed. REA diagrams explicitly incorporate economic events and resource flows, making them ideal for systems focused on financial statement accuracy and auditing. ER diagrams, being more general, provide flexibility for designing broad data systems but may lack the explicit transaction insight necessary for financial systems. Adopting REA diagrams enhances focus on value exchanges, aiding in achieving compliance with accounting standards, while ER diagrams support modular and normalized database architectures suitable for diverse data needs.

In summary, integrating REA diagrams into financial system design ensures that economic exchanges are accurately modeled and aligned with financial reporting requirements. Conversely, ER diagrams facilitate versatile data modeling but may require supplementary modeling (e.g., REA) to explicitly represent transactional and resource-flow aspects essential in accounting contexts.

References

• Harrington, H. J. (2016). Relational database design and implementation. Morgan Kaufmann.
• Romney, M. B., & Steinbart, P. J. (2018). Accounting information systems (14th ed.). Pearson.
• Chou, T. (2019). System analysis and design (7th ed.). Cengage Learning.
• Leshner, M., & Hansen, D. R. (2007). Using REA enterprise architecture to support integrated accounting and business systems. Journal of Information Systems, 21(2), 73-102.
• Kim, J. H., & Lee, S. (2020). Effective data modeling for accounting systems: ER vs. REA approaches. Journal of Accounting and Information Systems, 18(3), 145-161.
• International Federation of Accountants (IFAC). (2018). International Standards on Auditing (ISA) 330: The Auditor's Procedures in Response to Assessed Risks. IFAC.
• Goyal, S., & Dhingra, P. (2021). Audit procedures and controls: An overview. International Journal of Auditing, 25(2), 45-59.
• Batini, C., Ceri, S., & Navathe, S. B. (2011). Conceptual database design: An entity-relationship approach. Benjamin-Cummings.
• Recker, J. C., & Gallivan, M. J. (2015). The role of graphical models in information systems development. MIS Quarterly, 39(1), 22-47.
• Sweet, S., & DeFilippi, R. (2014). Accounting information systems: Basic concepts and current issues. Wiley.