CHAPTER 20

THE COMPUTER ENVIRONMENT

I. Review Questions

1. In a batch processing system, documents evidencing transactions and events are

gathered and processed by groups. The day’s sales invoices, for example, may
be converted to machine-readable form and processed the next morning. In a
real time system, transactions are input into the system and processed as they
occur. A branch sale, for example, may be input into the system via a terminal
at a remote location. The computer checks for product availability, customer
authenticity, customer credit approval, and shipping terms; and if all conditions
are met, the sale is processed immediately and the sales invoice and shipping
order are produced.

2. In a real-time system, much of the data are stored internally and

documentation is often not as extensive as in a batch system. Retrieval
and audit of transaction data, therefore, are often more difficult in a real-
time system. Also, controls are more likely to be programmed in real-
time systems, and for this reason, are more difficult to test.

3. Inasmuch as computer processing requires increased dependence on the

computer systems and software for the accuracy and completeness of
processing, documentation assumes major significance relative to effective
control. Documentation facilitates reviewing and updating systems and
programs as the environment changes; and it also minimizes the probability of
unauthorized system and program changes which could result in loss of control
and decreased reliability of financial data.

4. In a batch system, files are stored off-line for the most part, and access control
assumes the form of safeguarding the programs, transaction files, and
master files by assigning responsibility for the files to a librarian and
instituting a formal checkout system. Only those persons authorized to
process transactions (computer operators) are permitted access to
transaction and master files; and programmers are permitted access to
programs only for testing and “debugging” purposes. In an on-line, real-
time system, transactions and master files are stored internally, often in a
system of integrated data bases. Access control in this type of data
environment assumes the form of controlling access to data bases and fixing
of responsibility for the data base components. Assigning a password to an
individual who is responsible for the data base component accessible by that
password, canceling passwords of former employees, and frequent changing
11-2 Solutions Manual - Principles of Auditing and Other Assurance Services
of existing employees’ passwords are examples of access controls in a real-
time system.
5. Recording forms and transaction logs assure consistency and completeness of
data inputs. The form or log should include codes describing such transaction
components as employee number, customer number, vendor number,
department number, stock number, purchased part number, or job number. The
form should also provide for quantities, prices, dates, and usually a short
narrative description of products, parts, materials, or services for purchase and
sales transactions.

6. A transaction file is the batch of entered data that has been converted into
machine-readable form. A transaction file may contain payroll information for a
specific period of time. It is similar to a journal in a manually prepared system.
A master file contains updated information through a particular time period. It
is similar to a ledger in a manual system.

7. Small businesses have found that microcomputers or personal computer systems

are cost effective for processing accounting data. In small businesses, one
would expect to find microcomputers (or personal computers) using
commercially available software.

8. In the computerized system, documents to support a transaction may not be

maintained in readable form, requiring associated performance of controls.
However, the computerized system will enable processing of transactions to be
done more consistently, duties to be consolidated, and reports to be generated
more easily.

II. Multiple Choice Questions

1. d 5. c 9. c 13. c 17. c
2. c 6. c 10. c 14. d 18. a
3. a 7. c 11. d 15. a 19. b
4. a 8. b 12. c 16. a 20. a

III. Comprehensive Cases

An auditor should have the following concerns about the Box system:
 Does the system have any flaws or incompatibilities? (No one appears to
have tested the software or found out about others’ satisfaction with it.)
 The computer sits out in the open. (Anyone could have access to and
damage the hardware.)
 Anyone could come up with the password by guessing.
 The backup disks are not stored in a safe place.
 A Risk-based Audit Approach – Part II 11-3
 Was the conversion appropriately executed, with no data lost or added?