I.

Rationale

Recent developments in information technology have a tremendous impact on the field of

auditing. IT has inspired the reengineering of traditional business processes to promote more efficient
operations and to improve communications within the entity and between the entity and its customers
and suppliers. These advances, however, have introduced new risks that require unique internal
controls. They have engendered the need for new techniques for evaluating controls and for assuring the
security and accuracy of corporate data and the information systems that produce it. In connection with
this, the work of an auditor becomes more difficult and complex as things get modernized. Auditors find
a way to address this problem by using techniques that would lessen and simplify the work. One of those
techniques is the Computer-Assisted Audit Tools and Techniques (CAATs) which is all about the
performance of test of application controls. Application controls are programmed procedures designed
to deal with potential exposures that threaten specific applications such as payroll, purchases and cash
disbursements. This application controls fall into three broad categories: input, processing controls and
output controls.

Holy Name University had adopted this tremendous change in technology. The university does
not only employ it to its administrative function but also to the academic aspect. Part of its curriculum in
the Accountancy and Management Accounting program is the "Accounting in an IT Environment" or
Accounting 10.1 subject. In relation to this, the university had also offered an "Auditing in an IT
environment" or Accounting 11.1 subject. In this matter, we found the relevance of integrating this two
subjects. It would be beneficial to the both classes to do it in such a way that the Accounting 11.1 class
would conduct an evaluation and assessment on the quality of the system used by the institution. In fact,
it will not only benefit the students of each class but also to the future students who will take the subject
by knowing the lapses and features of the system and most of all to the institution itself.
II. Presentations and Interpretations

POSSIBLE FEATURES RESPONDENTS

1. Has check writing and cash payments screen that generates the 85%
resulting cash payments journal entries
2. Has a cash receipt screen that permits entry of all cash receipts and 85%
generates resulting cash receipts journal entries
3. Sales and purchase journal entries are generated as sales and purchases 80%
are entered
4. Has a check box option (in The Company Information Tab) that indicates 90%
whether or not special journals should be used
5. Has the ability to dynamically switch between the use of special journals or 75%
not
6. Automatically computes sales tax (Output Tax) 60%
7. Generates
8. Automatically computes
reports, sales
such as tax (Input
Financial Tax)
Statements, Schedules, Inventory Lists, 45%
80%
etc., automatically.
9. Has an option that automatically generates depreciation, payroll and closing 75%
entries.
10. Automatically creates report 90%
11. Automatically updates inventory for every purchase and sale 85%
12. Automatically creates a journal entry for every sales, purchase, receipt and 55%
disbursement
13. Automatically computes tax for sales and purchases 40%
14. Real time ( cab be accessed and updated anytime, anywhere with the 5%
internet)
15. Asks for password and username for every start up 25%
16. Automatically computes for depreciation and payroll 65%
17. Automatically generates a closing entry 65%
18. Can print receipts 35%
19. Can print reports 80%
20. Can run many businesses in one install 20%
21. Automatically generates Bank Reconciliation 40%
22. Has an audit trail 25%
23. Automatically updates date 20%

Table 1.0 Accounting System Features

Base on the above data, the possible features with the highest percentage are no.4 and no.10. It
means that the system has a feature that gives the user an option to whether use special journals or not
as no.4 indicated. The system can also generates report automatically as no.10 stated. 85% of the
respondents agree that the system have both cash receipt journal and cash payment journal that
generates resulting cash receipt journal entries and cash payment journal entries and that the system
automatically updates inventory for every purchase and sale. 75% to 80% of the respondents check the
features that state that the system can generate sales and purchase journal entries as sales and
purchased are entered, that the user can dynamically switch between the use of special journals or not,
that the system can generate reports such as financial statements, different schedules etc. automatically,
that it has an option that automatically generates depreciation payroll and closing entries, and that it can
print reports.55% to 75% of the respondents agree that the system can generate output vat
automatically and that the system can creates journal entry for sales, purchases, cash receipt and cash
payment, and that the system can automatically generates depreciation, payroll and journal entry. The
possible features that have below 55% percentage possibly means that those features are not present in
the system such as the feature of automatic generation of input vat and bank reconciliation, the feature
of having an audit trail, automatic update of date, ability to print receipt, the feature of being real time
and the need for password and user name for every start up. As the table shows there is no feature that
had 100% percentage, it just prove that not all users in the system understand and familiarize each
features in the system.

INPUT CONTROLS

80 % of the respondents said that the system has employed a missing data check. Graph 4.1
below shows the specific field where missing data check is applicable and not applicable.

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% Yes
No
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Figure 1.0
 For Document Number, 50% said yes and 50% said no. For the name of the Vendor or Customer,
44% said yes and 56% said no. For Credit Term, 100% said yes and 0% said no. For Purchase or Sale
Quantity and Description, 16% said yes and 84% said no. For Price and Total Amount, 22% said yes and
78% no.

Based on the results, we can conclude that the system has a Field Interrogation Control in the
form of Missing Data Check and the fields where the Missing Data Check is employed are Name of
Vendor or Customer, Purchase or Sale Quantity and Description, and Price and Total Amount.

80%

70%

60%

50%
Yes
40% No

30%

20%

10%

0%
No. of Hours worked Rate of Salary Allowable Deductions
 Figure 1.2 LIMIT CHECKS-Payroll

Limit Checks are controls which determine if a given value exceeds an authorized limit. Based on
the above figure majority of the respondents says that there are no limit checks applicable on the
identified items in the payroll. Limit checks are essential controls in the system, particularly in the payroll
transactions since it could detect discrepancies and manipulated input of data such as the number of
hours worked, rate of salary, allowable deductions, etc. if such amount already exceeded the maximum
threshold. Lack of such control on the system, especially on payroll, could create a very big impact on the
Financial Statements particularly the income statement since if an employee tries to manipulate his
payroll by increasing his hours work than that of the normal to increase his salary, the Payroll Expense
account would be overstated, overstating the expenses and thus understating the income. The
Integrated Accounting for Windows according to majority of the respondents lack this type of control in
its payroll transaction.

70%

60%

50%

40%
Yes
No
30%

20%

10%

0%
Purchase Price Sales Price Sales Quantity

Figure e. LIMIT CHECKS-Inventory

Based on the figure shown, majority of the respondents agreed that the Integrated Accounting
for Windows lacks the limit check for inventories. Lack of such control could in system on the Inventory
transactions could easily be prone to manipulation on the price and the quantity of inventories. If
Purchase prices are increased beyond the maximum limit it could overstate the cost of goods sold and
thus understating profit which would eventually show a lesser income tax. Increasing the sales price and
sales quantity beyond the maximum limit would be a way of the company to increase sales in order to
show the creditors and investors the ability of the company to raise revenue. Limit Check is an essential
control in inventory to minimize and detect any manipulation and errors in the data inputted.
 NO

RECORD INTERROGATION-
Sign Checks

YES

0% 10% 20% 30% 40% 50% 60%

Figure 1.3 RECORD INTERROGATION –SIGN CHECKS

Record Interrogation procedures validate the entire record by examining the interrelationships
with fields. Sign checks are tests under record interrogation in which it sees to it that the sign on a field is
correct for the type of record being processed. This control is highly applicable on the Sales Returns,
Sales Discounts, Purchase Returns and Purchase Discounts accounts. Based on the above figure the
respondents have conflicting opinion on the presence of such control unto their current system. Lack of
such control in the system would highly misstate some of the amounts and balances on the accounts
these controls should be highly applicable. Wrong application of signs on sales returns for example
(positive instead of negative) would misstate the balance of this account since instead of adding such
transaction on the sales return account it would otherwise deduct it. Moreover, the conflicting opinions
between the respondents exhibits the lack of knowledge on their current system, maybe due to lack of
overview and exploration on the system.

REJECT THE BATCH - if an error is detected, the whole batch is rejected.

CREATE AN ERROR FILE - errors are flagged to prevent them from being processed and are temporarily stored in an error file for future investigations.
NO
YES

CORRECT IMMEDIATELY - the system halts the data entry procedure upon detection of an error until the user corrects the error

Figure 1.4 INPUT ERROR CORRECTION

 Input error corrections are necessary controls in the system to minimize or totally wipe out
errors in the processing of data. This control ensures that the errors are dealt completely and correctly.
The figure above shows the different error handling techniques in the input error correction control.
Majority of the respondents negates the presence of such control in the system. Lack of this type of
control can increase the probability of an erroneous and manipulated output since errors would not be
handled promptly and on time.

YES
50% 50%
NO

Figure 1.5
VALIDITY CHECKS

Validity Checks are controls which compares actual values in a field against acceptable values. If
a value in the field does not match one of the acceptable values, the record is determined to be in error.
Based on the figure above the respondents have opposing views as to the presence of such control on
their current system.

PROCESS CONTROLS
 Control Record

60%

30%

10%
Yes
No
uncertain

Figure 1.6

A control record is where the amount fields, hash totals, record counts and transaction code are
stored. 6o % of them said that the system has control record. So if a record in the batch is lost, goes
unprocessed more than once, this will be revealed by the discrepancies between these figures.

Sequence Check

Yes No Uncertain

20%
35%

45%

Figure 1.7

The order of the transaction records in the batch is critical to correct and complete processing.
As the batch moves through the process, it must be re-sorted in the order of the master file used in each
run. The sequence check control compares the sequence of each record in the batch with the previous
record to ensure that proper sorting took place. Most of the respondents answer that there is no
sequence check control. This means that the system cannot ensure that proper sorting of transactions
took place as it process data.
 Entered the various controls

20%
Uncertain

50%
No

30%
Yes

Figure 1.8

Systems sometimes require operator intervention to initiate certain actions, such as entering
control totals for batch of records, providing parameter values for logical operations, and others.
Majority of the respondents check the "No" column of the questionnaire, which means that the user was
not the one who entered the various system controls. Such practice is an indication of a good process
control in the system.

Audit Trail

40% 40%

20%

Yes No Uncertain

Figure 1.9

The preservation of an audit trail is an important objective of process control. In an accounting

system, every transaction must be traceable through each stage of processing from its economic source
to its presentation in financial statements. 40% answered yes, as well as no, maybe because they didn’t
understand if the system really has an audit trail. And 20% of them were not sure. In this case, we can
say that the audit trail of the system is weak. It is hard to audit the system since the transactions entered
could not be traced.

OUTPUT CONTROLS

20

18

16

14

12

10

0
Yes No Uncertain

FIGURE 1. 10 AVAILABILITY OF ERROR FILE

The figure shows that 12 out of 20 respondents affirmed that when an error is encountered by
the system, the program would still continue to run and the error(s) detected by the system would
automatically be saved in an error file. 6 of them said that an error file is not created. 2 of them is
uncertain about this.

20

18

16

14

12

10

0
Yes No Uncertain

FIGURE 1.11 INTERNAL LABEL CHECK FOR REPORT TO BE DISPLAYED

Figure 2 shows that 16 out of 20 respondents affirmed that the program used has an internal
label check. Internal Label check ensures that the correct file is being processed by the system. A
concrete example occurs when the user selects a Balance Sheet as report. Internal Label check allows the
program to display the Balance Sheet instead of the Income Statement. 3 of them said that when they
selected a report for display, a different report is generated by the system. 1 of them is uncertain of this.

10%

Yes
Uncertain

90%

FIGURE 1.12 ACCURACY OF TRANSACTION TOTALS AS TO REPORT GENERATED

 The figure shows that an overwhelming majority (90%) affirmed that the transaction totals of the
reports are accurate to the totals of the amounts of input in each transaction. This means that when the
total of the amount in a certain account is P10,000.00 , then a footing on the said account is also
P10,000.00. 10% of the respondents are uncertain of this.

20

18

16

14

12

10

0
Yes No Uncertain

FIGURE 1.13 CORRUPTED REPORTS WHEN USED WITH SYMBOLS INSTEAD OF ALPHABETS AND
NUMERALS

The figure shows that 7 out of 20 respondents affirmed that when symbols (e.g. @, #, $, %, ^) are
used instead of alphabets and numerals, the file created is corrupted. A concrete example is when an
inventory item is described as “Er2&m”, the existence of “&” causes the file to go corrupted such that
some inventory items in the inventory list will be deleted or missing. 12 of them said that they have not
experienced this situation. 1 of them is uncertain about this.
 20%

Yes
Uncertain

80%

FIGURE 1.14 CORRECT ORDER OF OUTPUT SPOOLING

The figure shows that 80% of the respondents affirmed that when reports are printed, the
reports will print in the order selected. An example of this is when file 1, file 2, and file 3 are
simultaneously selected for printing, the order of the report generated or printed is file 1, file 2, and file
3. The rest of the respondents are uncertain about this.

10

0
Yes No Uncertain

FIGURE 1.15 MANIPULATION OF DATA BEFORE PRINTING

 Figure 6 shows that 7 out of 20 respondents affirmed that the contents in the report could be
changed before printing. 9 of them said that it could the report could no longer be manipulated before
printing. The remaining 4 of them is uncertain about this.

20

18

16

14

12

10

0
Yes No Uncertain

FIGURE 1.16 POSSIBILITY OF PAUSING PRINTING AND SIMULTANEOUS MANIPULATION OF DATA

Figure 7 shows that 3 out of 20 respondents affirmed that the program allows printing to be
paused and while printing, it allows the user to simultaneously change the contents of the report. The
manipulated report would then be the report that is printed. 13 of them said that they have not
experienced this kind of activity. The remaining 4 of them is uncertain about the occurrence of this
event.

10

0
Yes No Uncertain

FIGURE 1.17 CAPACITY TO PRINT MULTIPLE COPIES OF THE SAME REPORT IN ONE PRINTING
 The figure shows that 9 out of 20 respondents affirmed that the program allows the user to print
multiple copies of the same report at the same time. 7 of them said that the program does not allow
them to print multiple copies of the same report at the same time. 4 of them are uncertain about this.

20

18

16

14

12

10

0
Yes No Uncertain

FIGURE 1.18 AVAILABILITY OF PRINTING LOG

Figure 9 shows that 3 out of 20 respondents affirmed that the program provides for Printing Log.
Printing Log contains reports necessary in tracing the printing activities of the reports generated. This log
contains information such as the specific report printed, the time and date the report(s) is/are printed,
and the number of copies printed. 12 of them said that there is no available Printing Log. The remaining
5 of them were uncertain about this.

III.SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

Summary

The main purpose of this study is to determine the various strengths and weaknesses of the
software in use by the students enrolled in Accounting 10.1 this semester. It is likewise of evaluate the
system as a whole by evaluating its application controls.

Based on the generated data, the researchers arrived at the following major findings:

1. There is automatic numbering of source documents but it is overshadowed by the fact that the
numbering can be changed by discretion.
 2. ID number is not required when logging in. Basically, anyone can have access to any file.
3. It employs missing data checks but only up to a certain degree. There are no limit checks.
Validation checks and record interrogation do not apply at all times.
4. There is no input error correction. Errors are mainly tolerated by the system.
5. Input controls are generally weak.
6. There are control records but not all controls are present. There are no sequence checks.
7. Processing controls are generally weak.
8. There are internal labels for reports and transaction totals are accurate. However, there is no
notification for corrupted reports. Data in reports cannot be manipulated. Reports can be
printed and in multiple copies.
9. Output controls are generally strong.

Conclusions

Based on the findings presented above, it is concluded that the accounting system currently in
use by the Accounting 10.1 students have more weaknesses than strengths. Even though it has strong
output controls, it is more than compensated for by its weak input and processing controls. Such controls
are necessary to validate the data entered into and processed by the system, whether they are accurate
and properly authorized or not. It is likewise important to help detect erroneous entries and possibly
even fraud. The absence of important controls has rendered the software ineffective and inefficient
especially when it comes to the validity of the information it generates.

Recommendations

Based on the summary and conclusions of this study, the following are recommended by the
researchers:

1. Since the application control of the system is weak, we recommended that the system should be
replaced if possible.
2. If the system will not be replaced, we recommend the Accounting 10.1 students to explore,
understand and familiarize the system well. Based on our study, our respondents were not
consistent on their answers, this means that they have different understanding about the
system.