Effectiveness Of It Auditing To Improve Corporate Governance Accounting Essay

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Background and research problem definition: The demand of earning increased by publicly traded companies concerned with allegations of financial statement fraud and lack of responsible corporate governance of high-profile companies (e.g. Enron, Global Crossing, WorldCom, Adelphia) has sharpened the ever increasing attention on corporate governance in general and the audit committee in particular. The audit committee's function has evolved over the years and now with recommendations of the Blue Ribbon Committee (BRC, 1999) and the new rules of the Securities and Exchange Commission (SEC, 1999) and organized stock exchanges (e.g. New York Stock Exchange (NYSE), American Stock Exchange (AMEX),National Association of Securities Dealers Automated Quotation NASDAQ), it is viewed as an oversight function of corporate governance, financial reporting process, internal control structure, and audit functions. The Sarbanes-Oxley Act of 2002,also known as ``Public Company Accounting Reform and Investor Protection Act of 2002,'' has expanded the formal responsibilities of audit committees[1]. These expanded responsibilities of audit committees should be specified in both audit committee charters and reports. Yet, until recently, there was not a common view of what an audit committee charter includes, what it should achieve, and whether to include the report by the audit committee in annual reports. The status of the audit committee report has evolved from non existence to voluntarily and now mandatory for publicly traded companies under the SEC jurisdiction in the USA.

Information Technology (IT) has caused the accounting profession to change at a rapid pace during the last forty years. Indeed, technology is so pervasive in the accounting profession that it would be difficult for many companies to meet their accounting and financial reporting objectives without using technology. As a result, IT audit and control concepts play a very important role in the current business environment. Accordingly, the need for accounting students to understand IT auditing concepts has evolved to a point that warrants required coverage of IT audit concepts in the accounting curriculum.

Research Questions:

Research Objectives

The aim of this dissertation is to critically evaluate the effectiveness of Information Technology auditing in the context of corporate governance among the United Kingdom commercial entities. This can be done by means of taking on the research upon the following objectives.

• To considerably look at the concept of corporate governance and its importance to an enterprise both internally also externally

• To assess the vital characteristics of business information and its growth in the context of corporate governance.

• To evaluate the financial reporting scams in context of a corporate business and the function of IT in such cases by means of significantly studying cases from all different industries.

• To significantly review Sarbanes Oxley Act and its Section 404 that is the finalized rule of the act to be put in place by corporate organizations in United Kingdom.

• To analyze case study of energy sector as well as banking sector in the United Kingdom and putting Sarbanes Oxley application.

Literature review:

The ability to growth of IT is responsible for businesses of all sizes to obtain a competitive advantage have led to a dramatic increase in the use of IT systems to originate process, store and communicate information. Today, the demand of IT employees and IT systems increased in their daily activities. Now the advancement in the IT which has replaced the Traditional paper with Electronic records because it is an efficient use to save the record permanently. In fact, there are few company don't relay on IT to at least some extent to achieve their financial reporting, operating and compliance objectives. As a result, it is found very often to find separately that IT use does not also affect its independent audit.1

The foundations of auditing depend upon the competence, independence, and due professional care which are affect the quality and the value of an audit. In today's environment, it is evident that audit is increasingly digital in nature, which led to competence and due professional care have taken on a new and different character. Competence relates with an auditor's technical ability to discover a material misstatement in the financial statements and is a function of education, training, and experience. Technical ability of an auditor is responsible to collect evidence to support the audit opinion and weigh it in order to determine if the evidence is sufficient and reliable that led to dramatic changes in information technology have changed the very nature of the evidence of transactions and have created a challenge for the audit profession to maintain its competence. The amendment in the use of information technology by business have had a profound effect on accounting and auditing because these records are almost universally recorded, processed, and reported digitally.2

IT control handles the overall controls structure that is conjunction with manual or user control procedures to manage business risk. The idea of audit has been evolved in 21st century as an internal audit department or external auditor needs to be driven by a shared assessment of the entity's business risks used by both financial and IT auditors.3

The U.S. General Accounting Office (GAO) and the National State Auditors Association

(NSAA) published a guide to help state government agencies build the information

security (IS) audit capabilities and skills that many are lacking in the face of growing

security threats. According to the document, Management Planning Guide for

Information Systems Security Auditing, state agencies' increasing dependence on

information technology and the Internet has revealed them to greater security risks. Yet,

many agencies has a lack of basic information-security plans, policies, controls, and

skills. It is the weakness of state government auditors to Understand technology,

According to a skills-assessment survey of state government audit agencies conducted

by GAO and NSAA in spring 2001. Survey show that, overall, auditor had to face

problem to understand the technologies they audited. In 55 out of 75 technical

categories, more than 40 percent of respondents wanted more training or experience in

those areas of technology.4 as the connectivity increased between the people that is

responsible for the internal auditor to show the more exposure to IT systems than in the

results past. Technology plays a vital role in the field of IT that led to modern

organizations function, and it has become integrated to the degree that virtually every

type of audit requires at least some consideration of IT issues. Whereas technology was

once considered the domain of specialized IT auditors, it is now the concern of all

auditors, including audit generalists.5

E-Business introduces new challenges to conventional external auditors and the audit profession. Therefore, conventional manual audit techniques are the oldest technique to conduct the internal audit that is inadequate for the electronic age. External auditors need to understand how the advanced technology affects their audit process. They also need to acquire the necessary knowledge and skills about this technology to be able to deal with the audit of electronic transactions on a daily basis using continuous audit approaches.6

As the growth of enterprise- wide computing increased that led to face the problems audit of year-end financial statements. Paper trails and control checkpoints that were once standard for an audit firm are now available only in electronic form. If traditional methods of testing controls continue to be used, significant risks may go end up. When we are dealing with advanced information systems, the auditor may not be able to reduce detection risk to an acceptable level by relying solely on substantive tests. Auditing standards require that if the client uses technology to process data the technological infrastructure must be audited. Testing of sophisticated controls including firewalls, encryption of sensitive information, passwords, and authentication of electronic images may be necessary when dealing with electronic evidence.7

IT has had a profound influence on companies and their auditors are in preparing financial statements. Some organization follow the Information Technology for the internal audit while few organizations do not use IT at least to maintain the general ledger, and most entities have automated the process of entering transaction totals and adjustments (including journal entries) into the general ledger and preparing financial statements. In the old days the auditor examine manually prepared cash-receipt journals and check registers, trace monthly totals to handwritten entries in the general ledger (noting erasures or changes) and examine manually prepared worksheets combining general ledger accounts for the first pencil draft of the financial statements.8

Information technology plays an important role in an auditor's assessment of financial reporting controls. Compliance with Sarbanes-Oxley requires that reporting rise from the transaction level all the way to its final destination in the financial statements. In the end we wind up the internal control processes across significant business units must be examined end-to-end, which in turn requires an integrated evaluation of automated, IT-dependent, and manual controls in relation to each other The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: The nature and characteristics of a company's use of information technology in its information system affect the company's internal control over financial reporting.10 The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.11

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: The nature and characteristics of a company's use of information technology in its information system affect the company's internal control over financial reporting.10 The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.11

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

Theoretical framework

Corporate Governance is that in which we place the structure, processes and mechanisms by which business and affairs of the company or firm are directed and managed, in order to enhance long term shareholder value through accountability of managers and enhancing firm performance. In other words, through such structure, processes and mechanisms, the well-known agency problem, agency problem occurs because the management of the corporation and owner of the corporation are separated with each other, owners elect board of director and board of directors hires management on behalf of owner - the separation of ownership (by shareholders) and control (by managers) which gives rise to conflict of interests within a firm may be addressed such that the interest of the managers are more aligned with that of shareholders.

In recent years, the corporate scandals, some of which are still unfolding, involving high incidence of improper activities of managers expropriating the resources of a firm at the ultimate expense of shareholders prompt the intense reexamination

and scrutiny of some of the existing corporate governance practices and also considerable interest in empirical research on the effectiveness of various corporate governance institutions and mechanisms.

The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: The nature and characteristics of a company's use of information technology in its information system affect the company's internal control over financial reporting.10 The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.11

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: The nature and characteristics of a company's use of information technology in its information system affect the company's internal control over financial reporting.10 The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.11

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

An information technology audit, or information systems audit, is an examination of the controls within an Information technology (IT) infrastructure. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization's goals or objectives. These reviews may be performed in conjunction with a financial statement audit, internal audit, or other form of attestation engagement.

IT audits are also known as automated data processing (ADP) audits and computer audits. They were formerly called electronic data processing (EDP) audits.

Research design and methodology:

The following research was performed:

• Colleges and universities were surveyed.

• Accounting curriculums were reviewed via the Internet.

• Textbooks were analyzed.

Data collection and analysis techniques

The textbooks offered by publishers were reviewed to identify auditing, IS auditing and AIS textbooks. From this review:

1. Eight auditing textbooks were analyzed to determine if they cover IT control and IT audit concepts.

2. Four IS auditing textbooks were analyzed to determine if they cover IT control and IT audit concepts.

3. Ten AIS textbooks were analyzed to determine if they cover IT control and IT audit concepts

Auditing Textbooks

IT Control Coverage

Arens Alvin A., Beasley, Mark S., and Elder, Randal J. Auditing and Assurance Services 10th ed. Prentice Hall, 2005.

No

Konrath, Larry F. Auditing: A Risk Analysis Approach 5th ed. Thomas South-Western, 2002.

Impact Discussed

Louwers, Timothy J., Ramsay, Robert J., Sinason, David, and Strawser, Jerry R. MP Auditing and Assurance Services 1st ed. McGraw-Hill, 2005.

No

Messier, William F. Auditing & Assurance Services 3rd ed. McGraw-Hill, 2003.

No

Messier, William F, Glover, Steven M., and Prawitt, Douglas F. Auditing & Assurance Services: A Systematic Approach 4th ed. McGraw-Hill, 2006.

No

Ricchiute, David. Auditing 8th ed. Thomas South-Western, 2006.

No

Rittenberg, Larry E. and , Schwieger, Bradley J. Auditing: Concepts for a Changing Environment 5th ed. Thomas South-Western, 2005.

Impact Discussed

Whittington, Ray and Pany, Kurt. MP Principles of Auditing 14th ed. McGraw-Hill, 2004.

Impact Discussed

Data validity and reliability

Ethical issues

Research conclusions and recommendations:

Information Technology has caused the accounting profession to change at a rapid pace during the last forty years. Indeed, technology is so pervasive in the accounting profession that it would be difficult for many companies to meet their accounting and financial reporting objectives without using technology. As a result, IT audit and control concepts play a very important role in the current business environment. Accordingly, the need for accounting students to understand IT auditing concepts has evolved to a point that warrants required coverage of IT audit.

IT audit concepts cannot be mastered from a book. The opportunity to experience IT auditing is crucial to the mastery of IT audit concepts. Since it is not always possible for students to perform real IT audits as part of the learning process, case studies can provide a method to gain IT audit experience. This paper demonstrates the need to develop integrated IT auditing cases. The cases should allow students to simulate an IT audit. This simulation could be accomplished with hypothetical background information that students would use to develop an IT audit program and perform procedures. Ideally, the cases would include electronic background data so that certain audit procedures could utilize the electronic data. The audit cases should allow students to actually experience or simulate audit.

References (Harvard Reference system)

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