Accounting Information Systems:

Essential Concepts and Applications

Fourth Edition by Wilkinson, Cerullo, Raval,
and Wong-On-Wing

Chapter 8: General Controls

and Application Controls

Slides Authored by Somnath Bhattacharya, Ph.D.

Florida Atlantic University
Introduction to Controls

Controls may relate to manual AISs, to

computer-based AISs, or both
Controls may be grouped into General
controls, Application controls, and Security
measures
Controls may also be grouped in terms of risk
aversion: Corrective, Preventive, and
Detective Controls
These categories are intertwined and an
appropriate balance is needed for an effective
internal control structure
 Control Classifications

By Setting By Risk Aversion

General Corrective

Preventive
Application
Input
}
Processing
Output
Detective

Figure 8-1
General Controls
General Controls pertain to all activities
involving a firms AIS and resources
(assets). They can be grouped as follows:
Organizational or Personnel Controls
Documentation Controls
Asset Accountability Controls
Management Practice Controls
Information Center Operations Controls
Authorization Controls
Access Controls
Organizational or
Personnel Controls - I

Organizational independence, which separates

incompatible functions, is a central control objective
when designing a system
Diligence of independent reviewers, including
BOD, managers, and auditors (both internal and
external)
In a manual system, authorization, record-
keeping, and custodial functions must be kept
separate. e.g., purchases, sales, cash handling, etc
Organizational or
Personnel Controls - II
In computer-based AISs the major segregation is
between the systems development tasks, which
create systems, and the data processing tasks,
which operate systems
Within data processing, one may find segregation
between separate control (receiving & logging),
data preparation (converting to machine
readable form), computer operations, and data
library - batch processing
Other personnel controls include the two-week
vacation rule
Flow of Batched Data in
Computer-Based Processing Data Library
Data Preparation Section
User Departments Control Section Computer
Section
Operations Files
Receive Convert
Data
to
and machine Process
Inputs
readable
Log media
Files
Log
Outputs Outputs
and

Distribute

Errors To users
to be (exception
corrected and summary
report)

Figure 8-4
Segregation of Functions in a
Direct/Immediate Processing System
Online Files (or data library
User Departments Computer Operations for removable disks and
backups

Data Inputs
Batch
Files

Displayed Outputs Process

Online
Printed or Files
Plotted Outputs

Figure 8-6
Documentation Controls

Documentation consists of procedures manuals

and other means of describing the AIS and its
operations, such as program flowcharts and
organizational charts
In large firms, a data librarian is responsible for
the control, storage, retention and distribution of
documentation
Storing a copy of documentation in a fireproof
vault, and having proper checkout procedures are
other examples of documentation controls.
Use of CASEs
System Standards
Documentation

Systems development policy statements

Program testing policy statements
Computer operations policy statements
Security and disaster policy statements
System Application
Documentation
Computer system flowcharts
DFDs
Narratives
Input/output descriptions, including filled-in source
documents
Formats of journals, ledgers, reports, and other outputs
Details concerning audit trails
Charts of accounts
File descriptions, including record layouts and data
dictionaries
Error messages and formats
Error correction procedures
Control procedures
Program Documentation

Program flowcharts, decision tables, data

structure diagrams
Source program listings
Inputs, formats, and sample filled-in forms
Printouts of reports, listings, and other outputs
Operating instructions
Test data and testing procedures
Program change procedures
Error listings
Data Documentation

Descriptions of data elements

Relationships of specific data
elements to other data elements
Operating Documentation

Performance instructions for executing computer

programs
Required input/output files for specific programs
Setup procedures for certain programs
List of programmed halts, including related
messages, and required operator actions for specific
programs
Recovery and restart procedures for specific
programs
Estimated run times of specific programs
Distribution of reports generated by specific
programs
User Documentation

Procedures for entering data on source

documents
Checks of input data for accuracy and
completeness
Formats and uses of reports
Possible error messages and correction
procedures
Examples of Asset
Accountability Controls
Subsidiary ledgers provide a cross-check on the
accuracy of a control account
Reconciliations compare values that have been
computed independently
Acknowledgment procedures transfer
accountability of goods to a certain person
Logs and Registers help account for the status
and use of assets
Reviews & Reassessments are used to re-
evaluate measured asset values
Management Practice
Controls
Since management is responsible and thus over
the internal control structure, they pose risks to a
firm
General controls include:
Human resource Policies and Practices
Commitment to Competence
Planning Practices
Audit Practices
Management & Operational Controls
In a computerized AIS, management should
instigate a policy for:
Controls over Changes to Systems
New System Development Procedures
Examples of Computer
Facility/Information Center Controls

Proper Supervision over computer operators

Preventive Diagnostic Programs to monitor hardware
and software functions
A Disaster Recovery Plan in the event of a man-made
or natural catastrophe
Hardware controls such as Duplicate
Circuitry, Fault Tolerance and Scheduled
Preventive Maintenance
Software checks such as a Label Check
and a Read-Write Check
Application Controls

Application controls pertain directly to the

transaction processing systems
The objectives of application controls are to
ensure that all transactions are legitimately
authorized and accurately recorded,
classified, processed, and reported
Application controls are subdivided into input,
processing and output controls
Authorization Controls - I

Authorizations enforce managements policies

with respect to transactions flowing into the
general ledger system
They have the objectives of assuring that:
Transactions are valid and proper
Outputs are not incorrect due to invalid
inputs
Assets are better protected
Authorizations may be classified as general or
specific
Authorization Controls - II

A General authorization establishes the standard

conditions for transaction approval and execution
A Specific authorization establishes specific criteria for
particular sums, events, occurrences, etc
In manual and computerized batch processing systems,
authorization is manifest through signatures, initials,
stamps, and transaction documents
In on-line computerized systems, authorization is usually
verified by the system. e.g., validation of inventory
pricing by code numbers in a general ledger package
Input Controls

Input Controls attempt to ensure the validity,

accuracy, and completeness of the data
entered into an AIS.
Input controls may be subdivided into:
Data Observation and Recording
Data Transcription (Batching and
Converting)
Edit tests of Transaction Data
Transmission of Transaction Data
Controls for Data
Observation and Recording

The use of pre-numbered documents

Keeping blank forms under lock and key
Online computer systems offer the following features:
Menu screens
Preformatted screens
Using scanners that read bar codes or other
preprinted documents to reduce input errors
Using feedback mechanisms such as a
confirmation slip to approve a transaction
Using echo routines
Data Transcription - I

Data Transcription refers to the preparation of data for

computerized processing and includes:
Carefully structured source documents and input screens
Batch control totals that help prevent the loss of transactions
and the erroneous posting of transaction data
The use of Batch control logs in the batch control section
Amount control total totals the values in an amount or
quantity field
Hash total totals the values in an identification field
Record count totals the number of source documents
(transactions) in a batch
Data Transcription - II
(Conversion of Transaction Data)

Key Verification which consists of re-

keying data and comparing the results
of the two-keying operations
Visual Verification which consists of
comparing data from original source
documents against converted data.
Examples of Batch Control
Totals

Financial Control Total - totals up dollar amounts (e.g.,

total of sales invoices)
Non-financial Control Total - computes non-dollar sums
(e.g., number of hours worked by employees)
Record Count - totals the number of source documents
once when batching transactions and then again when
performing the data processing
Hash Total - a sum that is meaningless except for
internal control purposes (e.g., sum of customer
account numbers)
Definition and Purpose of
Edit Tests

Edit Tests (programmed checks) are most

often validation routines built into application
software
The purpose of edit tests is to examine
selected fields of input data and to reject
those transactions whose data fields do not
meet the pre-established standards of data
quality
Examples of Edit Tests
(Programmed Checks)
Validity Check (e.g., M = male, F = female)
Limit Check (e.g., hours worked do not exceed 40 hours)
Reasonableness Check (e.g., increase in salary is reasonable
compared to base salary)
Field Check (e.g., numbers do not appear in fields reserved for
words)
Sequence Check (e.g., successive input data are in some prescribed
order)
Range Check (e.g., particular fields fall within specified ranges - pay
rates for hourly employees in a firm should fall between $8 and
$20)
Relationship Check (logically related data elements are compatible -
employee rated as hourly gets paid at a rate within the range of
$8 and $20)
Transmission of
Transaction Data
When data must be transmitted from the point of origin
to the processing center and data communications
facilities are used, the following checks should also be
considered:
Echo Check - transmitting data back to the
originating terminal for comparison with the
transmitted data
Redundancy Data Check - transmitting
additional data to aid in the verification
process
Completeness Check - verifying that all required
data have been entered and transmitted.
Objectives of Processing
Controls

Processing Controls help assure that data are

processed accurately and completely, that no
unauthorized transactions are included, that the
proper files and programs are included, and that all
transactions can be easily traced
Categories of processing controls include
Manual Cross-checks, Processing
Logic Checks, Run-to-Run Controls,
File and Program Checks, and Audit
Trail Linkages
 Examples of Processing
Controls
Manual Cross-Checks - include checking the work
of another employee, reconciliations and
acknowledgments
Processing Logic Checks - many of the
programmed edit checks, such as sequence
checks and reasonableness checks (e.g., payroll
records) used in the input stage, may also be
employed during processing
Examples of Processing
Controls
Run-to-Run Totals - batched data should be controlled
during processing runs so that no records are omitted or
incorrectly inserted into a transaction file
File and Program Changes - to ensure that transactions
are posted to the proper account, master files should be
checked for correctness, and programs should be
validated
Audit Trail Linkages - a clear audit trail is needed to
enable individual transactions to be traced, to provide
support in general ledger balances, to prepare financial
reports and to correct transaction errors or lost data
Output Controls

Outputs should be complete and reliable

and should be distributed to the proper
recipients
Two major types of output controls are:
validating processing results
regulating the distribution and
use of printed output
Validating/Reviewing
Processing Results

Activity (or proof account) listings

document processing activity and reflect
changes made to master files
Because of the high volume of
transactions, large companies may elect
to review exception reports that
highlight material changes in master
files
Regulating/Controlling
Distribution of Printed Output

Reports should only be distributed

to appropriate users by reference
to an authorized distribution list
Sensitive reports should be
shredded after use instead of
discarding
Application Controls Arranged
by Two Classification Plans
Control
Purpose
Preventive Detective Corrective

Control
Stage Properly authorized Batch control totals Sound error correction
transactions procedures
Adequate input edit tests
Well-designed and (programmed checks) Complete audit trail
controlled source
Input documents

Sound conversion control

techniques
Sound file maintenance Run-to-run verifications Complete audit trail
procedures
Processing Adequate detective-type
Adequate preventive- programmed checks
type programmed checks
Distribution log of Reconciliation of Reviews of logs and
authorized users computed totals with procedures by internal
predetermined control auditors
totals
Output Review of error-
Reviews of outputs and correction statistics
tests to source
documents by users
 Accounting Information Systems:
Essential Concepts and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing

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