Auditors : Subsystem Interaction and Reliability

Auditors usually begin their analysis with the lowest level of subsystem activity attempting to identify all the different types of events that occur in these subsystems. Through this effort, the auditor begins to build a vision of what happens in the organization's business processes. Auditors must be mindful of two levels of prohibited events, prohibited events that are presently occurring and prohibited events that might occur in the future. In this vein, it is important for the auditor to focus her attention on the major process functions and how each subsystem supports the process's mission. One of the most important aspects of identifying permissible events in management subsystems is the determination of how a particular function should be performed within the subsystem. After the auditor performs research in the management subsystem, it should be clear how the management subsystems vary between circumstances in each relevant business unit.

A valid basis for identifying events in applications subsystems, attention must be placed on the transactions that occur as data is input to the subsystem. Events in an application subsystem cause changes in the application's state when the data is received in the form of input. More events take place as the application processes the transaction. Permitted events occur if the transaction and processing are authorized, complete, accurate, and not redundant. If anything otherwise occurs, a prohibited event occurred.

Risks Affecting Auditors
Information technology auditors must be concerned with four essential goals:

Safeguarding critical assets

Data integrity

System effectiveness

System efficiency

All auditors must consider that errors or irregularities will cause financial losses to the organization. Auditors collect evidence to achieve their goals, but there are inherent risks in these efforts. There is a risk that auditors may fail to detect actual or potential misstatements or process errors through the course of the audit. Experienced auditors approach and design their audit programs in such a fashion as they can fully articulate and document their efforts to minimize audit risks. If they fail to adequately address audit risk, audit results will not be valid and will not represent the true state of the system.

Assessing the levels of control risk associated within an audit segment, auditors consider the reliability of, and implementation of management and application controls. It is important to remember that management controls are fundamental controls in that they govern all application systems. In this hierarchical view, the absence of some or all management controls is a serious matter and reason for immediate action on the part of senior managers.

Once auditors have evaluated a management control and it is discovered that it spans the business unit's operation, it should function in relevant subsystem applications. For example, if an auditor reviews an adequate sample and discovers that an organization enforces high documentation standards of software development, it is likely these standards are enforced throughout the software development unit. Therefore, it is unlikely the auditor will review all documentation in all software development projects. Rather, she will select a representative amount ensuring that adequate documentation standards are observed thereby addressing any audit risk.

Experienced auditors estimate the level of detection risk they might achieve within a given set of audit procedures. They develop a good understanding of the probability these procedures have in detecting material loss or misstatements. It is very important that auditors choose audit procedures that provide the organization with an acceptable level of detection risk. In light of deadlines and limited resources, addressing audit risks must be focused on areas where they can deliver the highest payoffs.

Frequently, auditors cannot collect evidence to the extent they would prefer because they must spread their abilities among so many demands. They must be careful in the terms of where they apply their audit practice and how they interpret the evidence they collect. Throughout the audit, they must continuously make decisions based on their experience and training. It is their knowledge of audit methodology, material evidence collection and acceptable risks that guides them in making decisions as to what should be reported, to whom, and when.

Generally Accepted Government Auditing Standards (GAGAS)
According to GAGAS 4.21, auditors should obtain a sufficient understanding of internal control to plan the audit and determine the nature, timing, and extent of tests to be performed. According to GAGAS 4.21.1, auditors must consider the following when conducting an audit:

The extent to which computer processing is used in each significant accounting application

The complexity of the entity's computer operations

The organizational structure of the computer processing activities

The kinds and competence of available evidential matter in electronic and paper formats to achieve audit objectives

Audit Procedures
Auditors generally use five types of procedures in collecting evidence for their audits:

Procedures in obtaining an understanding of system controls. Auditors will make inquiries, inspections, and observations to obtain an understanding of the controls that exist, the design of the controls, and whether the controls have been implemented. Inquiries, inspections, and observations can be used in obtaining an understanding of the controls affecting the company's asset safeguards. It is important to remember the three critical asset pillars: human resources, data, and physical facilities.

Tests of controls. Auditors will make inquiries, inspections, observations, and reperformance of control procedures to determine whether controls are operating effectively and efficiently. These tests deal with whether controls have been designed and whether they are effectively operating. For example, the auditors will determine if the operations manager reviews system response times and what substantive steps she has taken to address unacceptable system response times.

Transactions tests. These tests are designed by the auditors to detect errors or irregularities in system transactions that affect the organization. For example, an auditor would verify that accounts payable transactions are correctly posted in the business' financial journals and ledgers. Auditors must evaluate the limits of transaction effectiveness and efficiency. For example, auditors sample system response times for individual transactions attempting to determine if they are within acceptable limits.

Analytical review. Tests of an analytical nature look at relationships between data items in identifying areas. For example, an auditor examines two years of inventory levels to determine if there are substantive levels of fluctuation requiring further investigation. Auditors may employ similar procedures in evaluating the effectiveness and efficiency of an organization's operation: These are comparisons between two related procedures concerning effectiveness and efficiency. For example, auditors will design a model where the amount of document processing by the system is evaluated and compared with the previous two years.

Tests of system results. These are tests of management's assertions regarding effectiveness and efficiency. For example, senior IT management may assert that system response time over the past two years is three seconds. Auditors will design a sampling technique where a survey of system users is made to determine the validity of this assertion for the applicable period.

Auditors : Code of Ethics and Conduct

Auditors must subscribe to a formalized, universal code of ethics. For example, a code of ethics for holders of the Certified Information Systems Auditor (CISA) certification has been established by the Information Systems Audit and Control Association (ISACA).

Codes of ethics are usually required by professional organizations and typically address the following areas of auditor conduct:

Establishment and compliance with information systems controls, standards, and procedures

Trustworthy service and reporting to stakeholders throughout the audit process

Avoidance of participating in improper acts personally and professionally

Confidentiality of observed and collected audit evidence

Auditor independence

Professional competence through participation in continuing professional development

Due diligence when conducting audits and documentation of sufficient evidence supporting conclusions and recommendations

Communication of audit results to appropriate stakeholders

Education of stakeholders in the audit process to enhance understanding of systems and the audit process

Free and Independent
External auditing is often called independent auditing as qualified individuals outside the organization being audited do the audit. External auditors represent the interests of third-party stakeholders such as creditors, government agencies, and stockholders.

Internal auditors operate as independent appraisers established within an organization examining and evaluating activities as a service to the organization itself. Internal auditors perform a wide variety of tasks including assessing compliance with legal obligations, assessing operational efficiency, detecting and pursuing fraud and system vulnerabilities. External auditors are distinguished from internal auditors in that they represent outside constituents, while internal auditors represent the interests of the organization. Their efforts are not necessarily exclusive, internal auditors often cooperate and assist external auditors in performing audits achieving efficiency and reducing audit fees. External auditors depend on the independence and competence of internal auditors in relying on their work. Independent internal auditors add value to business processes. Internal auditors often collect evidence throughout the fiscal period that can be used at year end to conduct more-efficient, less-costly external audits.

In auditing and all related matters, auditors must be free from personal and external impairments to their independence. Auditors must be organizationally independent and should maintain an independent attitude and appearance.

Auditors must consider not only if they are independent with their attitudes and beliefs, but also whether there is anything about their situation that might lead others to question their independence. All situations must be considered, as it is essential that auditors consider themselves to be impartial and that knowledgeable third parties consider them to be independent.

For auditors, there are essentially three very general types of impairments to independence: organizational, personal, and external. If any of these impairments affect their ability to do their work and report their findings impartially, the auditors must decline the engagement.

Organizational Impairments
Internal auditors may be affected by their job-placement within the structure of the business entity where they are employed. Auditors must be sufficiently removed from managerial, political, and organizational pressures ensuring that they can conduct their audits independently and report their findings, opinions, recommendations, and conclusions objectively. In the case of external auditors, they may be presumed to be independent of the audited entity if there are no personal, external, or organizational impairments.

External Impairments
There may be factors external to the auditor interfering with an auditor's ability to form objective and independent opinions, recommendations, and conclusions. There may be interference or undo influence that improperly limits or modifies the scope or methodology of an audit.

Personal Impairments
Regrettably, there are circumstances in which auditors may not be impartial or perceived by knowledgeable third parties as being impartial. It is important for an auditing unit to have policies and procedures in place to determine if auditors have any personal impairment affecting their ability to conduct audits. Although the responsibility rests on the shoulders of the individual auditors, audit managers and executives need to be alert for impairments affecting the judgment and performance of their audit staff. Auditors must be responsible for notifying the appropriate official about any personal impairment. Personal impairments include, but are not limited to the following:

Official, professional, financial, or personal relationships that might cause the auditor to limit the methodology, extent of the audit inquiry, limit disclosure, or minimize or slant the audit findings in any way.

Preconceived ideas toward the audit or the organization on which the audit is going to be performed; any feelings that the auditor has that could taint audit results require that the auditor is removed from the audit engagement

Previous responsibility for decision making or management authority that would affect current operations of the entity to be audited is considered biasing

Personal biases (including business, political, religious, or social convictions) resulting from employment or loyalty to a particular group or organization

Direct or indirect financial interest in the audited entity

Auditors: Auditor Attributes

Managers Are Not from Venus, Auditors Are Not from Mars
This is a difficult question that could literally be debated for many years without resolution. Who makes the best auditors and where are they found? One of the first general standards for all auditors, is they must collectively possess adequate professional ability to complete their required tasks. This does not mean they know all things about all things in the organization. What it does mean is that auditors must have the skills and knowledge about the area they going to audit. They should have a thorough knowledge of the target's business environment relative to the nature of the audit being performed. Auditor qualifications apply to the audit team collectively and not necessarily to each individual auditor. Acceptable skills could include, but not be limited to such areas as, accounting, statistics, law, engineering, computer science, business administration, public administration, economics, social sciences, and mathematics.

Auditing is a field that requires significant ongoing education in professional disciplines. Auditors generally plan to complete at least 40 hours annually of continuing relevant education and training in order to remain current in their discipline. Continuing professional training should include topics such as, audit methodology, assessment of internal controls, principles of management, computer information systems management, statistical sampling methodology, evaluation design, and data analysis.

Auditor Attributes

Following are some important characteristics to consider when selecting candidates as auditors:

Personal
The auditor determines when decisions can be made and exercises authority sparingly. She shares appropriate information with the correct people in a timely fashion. She exercises correct judgment and maintains a professional demeanor at all times. She understands the limits of her knowledge and knows when to call others seeking their expertise. In other words, she does not think she knows all things.

She builds trust by demonstrating honest and direct behavior yet is acutely aware of sensitive issues. Auditors do not compromise their ethics, nor will they tolerate a compromise of ethics by others. This may seem a bit rigid, but considering that auditors must prize their credibility highly, it is not unreasonable. It is important to note that auditors in essence are not ever off-duty. They are aware that their off-duty conduct affects their on-duty credibility. Auditors are professionals that understand that if they engage in activities that call their personal judgment into question, their professional judgment may be called into question on the assessments they make on the job.

They consistently develop comprehensive plans to accomplish their goals and take the initiative to meet or exceed deadlines in anticipation of timelines. They are adept at multitasking and handle multiple tasks simultaneously prioritizing work by focusing on significant problems.

Leadership
Auditors take an active role in preparation of presentations delivering oral and written presentations that are grammatically correct, logical, clear, concise, and relevant. They incorporate business and personal experiences in the communication of ideas to others. An auditor is thoroughly knowledgeable in emerging and current trends applicable to her tasking as well as her profession. She possesses excellent negotiation and persuasion skills and is adept at exercising various types of negotiation styles. She presents her point of view yet is sensitive and adept at leading herself and others to win/win conclusions. She discusses matters in a factual, professional fashion yet delivers her point of view in a passionate and persuasive manner. She effectively and efficiently recognizes and manages potential conflicts.

Functional Abilities
She knows her profession and is experienced and well trained in her craft. Auditors routinely provide advice to senior managers on the assertions that need to be provided regarding systems' confidentiality, availability, and integrity. She leads the audit team in drafting the audit management plan, program, and final report and determines the requirements of any postmortem actions. She effectively and efficiently collects evidence regarding assertions and conformity criteria. When appropriate, she will direct the evidence collection efforts of others.