INTRODUCTION TO COMPUTERIZED ACCOUNTING SYSTEM

A computerized accounting system; is a software application that automates

financial records and reporting processes to make them faster, more accurate, and
easier to manage. It reduces the manual entry of data, eliminates redundant
operations, and reduces accounting error risk with built-in controls. An accounting
system is a set of procedures and record-keeping systems for managing the financial
and operational activities of an organization. Basically, it’s a method for tracking and
managing the business’s finances. (geeksforgeeks,2012)
What Accounting software does

 It is software for financial record-keeping and analysis.

 It records the purchase of goods and services, sales value and other
financial transactions.
 Accounting Software saves time, money and resources.
 It is a business tool for bookkeeping and other financial operations.
Accountants use this software in recording and tracking financial
transactions.
 The software is designed to make accounting tasks easier and more
accurate.
Features of a Computerized Accounting System:
1. Data Security: A computerized accounting system allows users to store their
data in a central location. In this way, if any piece of paper that contains valuable
information is lost, no one is at risk of having their information stolen. All the
data is hence stored at a central location.
2. Improved Reporting: In Accounting software, various things are automated,
and very less things are recorded manually. This helps in improving reporting of
transactions and statements.
3. Accuracy and Speed: The automation of accounting processes with the help of
various accounting software ensures that accounting work is done fast and accuratel

4. Quick Decision Making: Since a computerized accounting system generates real-

time information, managers are quick to come up with instant decisions or solutions to
a particular problem.

Advantages of Computerized Accounting System:

1. Accuracy: Accounting errors are one of the biggest problems that businesses face
in their accounting process. Accounting software is designed to anticipate common
errors and correct them before they are added to the company’s records. It is more
accurate than most manual systems.

2. Simplicity: Regardless of the size of a company, accounting software is designed

to be straightforward and easy to use. This means that even new employees can
quickly understand how to use the system and record their financial activities.

3. Financial Report Accuracy: Accounting software is designed to be completely

accurate. Companies can be assured that their financial reports have no errors. This
means that managers can quickly make decisions based on the accounting data.

4. Greater Control: A computerized Accounting system helps the management of a

company to have greater control over its operations. This is more suitable for a
company which is large in size and has multiple departments. All vital information is
easily available with one click.

Disadvantages of Computerized Accounting System:

1. Cost: Although accounting software is designed to simplify bookkeeping and

reduce the cost of accounting services, it can also be costly to set up and maintain.
Many businesses decide to use computerized accounting systems once they have
reached a certain level of growth.
2. Unemployment. The adoption of computerized accounting software means a lot of
work is done by fewer employees. Such a move at times leads to lay-offs. Where lay-
offs have not been done, employees live in fear of anticipated job loss.
3. Time consuming; in order to avoid loss of work at the time of system failure, there
is need for providing backup arrangement which is a time consuming process.
4. Heavy to installation; means that computer hardware need to replacing and
software need to be updated time to time with the availability of newer versions.

problems of computer information systems(CIS) audit

Computer information systems (CIS) audit is the process of examining and
evaluating the controls within an organization's computer systems to ensure that they
are functioning effectively and efficiently. However, there are several problems that
can arise during a CIS audit. Some of these include:
Lack of access to critical systems. Auditors may not have access to all of the systems
and data that they need to perform a thorough audit. This can make it difficult to
evaluate the effectiveness of controls and identify potential vulnerabilities. This can
be an issue when trying to access legacy systems which may not be compatible with
current audit software and tool.
Also sensitivity of information stored in computer systems can be vulnerable to
hacking and unauthorized access, an auditor may not have the expertise to properly
assess the security of the system and identify potential vulnerabilities.
Complexity of systems. Computer systems can be complex and difficult to
understand, making it challenging for auditors to evaluate their effectiveness. This can
be especially true for systems that are customized or highly integrated with other
systems.
Auditors may also struggle to keep up with rapidly changing technology and the
implementation of new systems.
Difficulty in identifying and assessing risks. CIS audits often involve assessing the
risks associated with different systems and controls. However, it can be difficult to
identify all of the risks that are present and to determine the likelihood
Changes in technology. The rapid pace of technological change can make it difficult
for auditors to keep up with the latest developments and ensure that their audit
methods and techniques are current. These cause audit techniques to change time to
time due to high advancement in technology in every day time.
Limited resources. Auditing computer systems can be time-consuming and resource-
intensive. This can be a problem for organizations that have limited resources to
devote to CIS audits.an organization may have no enough resource which can be used
by auditor in auditing
Difficulty in Evaluating the effectiveness of controls. Auditors may have difficulty
evaluating the effectiveness of controls in place, due to the complexity of systems,
lack of documentation or the lack of proper monitoring mechanisms.
Lack of standardization.There is no universally accepted standard for CIS audits,
which can make it difficult for auditors to compare the results of audits across
different organizations.in such that some organization may use the same CIS audits
but other use different method for CIS audits which become cumbersome for auditors
who work in many organization round the word.
CIS audits is costly. This is because they often require specialized knowledge and
expertise, as well as the use of specialized tools and equipment. Additionally, the audit
process can disrupt the normal operations of an organization, which can also add to
the cost.
Overall, CIS audit is a complex and challenging process that requires specialized
knowledge, skills, and expertise. It requires significant resources and time, and it can
be difficult to evaluate the effectiveness of controls and identify vulnerabilities, in
particular due to the rapid pace of technological change and the complexity of
computer systems
Internal control is a process affected by an organization’s structure, work and
authority flows, people and management information systems designed to help the
organization to accomplish its specific goals or objectives. It is the means by which
the organization’s resources are directed, monitored and measured. The internal
controls in a computerized information system are classified into two which are;
General internal control and Application internal controls.
The General Internal Controls. These relate to the environment in which the computer
based systems are developed, maintained and operated aimed at providing reasonable
assurance that the overall objectives of the internal controls are achieved.
The General CIS controls include; organization and management controls which are
designed to establish an organizational framework over CIS activities, Application
systems development and maintenance controls- designed to provide reasonable
assurance that systems are developed and maintained in an authorized and efficient
manner, Computer operational controls- designed to control the operations of the
systems and provide reasonable assurance, Systems software controls- designed to
provide reasonable assurance that system software is acquired or developed in an
authorized and efficient manner and Data entry and program controls- designed to
provide reasonable assurance that an authorized structure is established over
transactions being enters in the system.
The Application CIS control; the purpose is to establish specific control procedures
over the accounting application in order to provide reasonable assurance that all
transactions are authorized and recorded and processed completely, accurately and on
time basis CIS Application control included.
1.Control over input-designed to provide reasonable assurance that:
Transaction are properly authorized before being processed by computer.
Transaction are accurately Converted into machine readable form and recorded in a
computer data files.
Transaction are not lost, added, duplicate or Improperly changed.
Incorrect transaction is rejected, corrected and if necessary resubmitted on a time
basis.

2. control over processing and computer data files-designed to provide

reasonable assurance that;
Transaction including system generated Transaction Are Properly processed by
computer.
Transaction are not lost, added, duplicate or improperly changed.
Processing errors are identified and corrected in timely basis.
3.Control over output-designed to provide reasonable assurance that
Result of processing are accurate.
Access to output is restricted to authorized personnel.
Output provided to appropriate authorized personnel on a timely basis.

System audit
System audit is an audit conducted on a management system. The description of
system audit involves a documented activity performed to verify, by examination and
evaluation of objective evidence, that applicable elements of the system are
appropriate and effective and have been developed, documented and implemented in
accordance and in conjunction with specified requirements. Example, a food safety
system audit will examine food safety management system. A quality management
system audit evaluates existing quality management program to determine its
conformance to company policies, contract commitments and regulatory
requirements. Other examples include audit of design process, manufacturing process
and other processes used in operations.

Why do we do system audit?

Companies generate a lot of data and information which affect its output endlessly
through its daily operations. The business world is continuously getting transformed
thus companies require more complex software with new systems, more technology
and computerized equipment to optimize activities. Due to presence of this software
and technology thus pressing the need for system audits.
Main aim of systems audit then is to validate the integrity of the information and data
stored in the databases of the information systems and their processing, thus this
auditing aim goes beyond economic factors. For a system audit to be effective its
analysis and evaluation has to be objective, critical, impartial and systematic for the
aim to be achieved.

Objectives of System Audit

 To guarantee integrity, security and confidentiality through professional
security and control systems.
 To increase reliability and satisfaction of the users of computerized systems.
 To improve cost-benefit ratio of information systems.
 To minimize the occurrence of risks affecting the systems, example hacking
and virus attacks.
 Optimize decision making in the organization through using up to date and
efficient systems which are audited and brings effectiveness to work.
 Giving education on control of the whole information systems so that users are
well versed with computerized processes.

Processes in system audit

1. Review
In this phase, the system auditor tries to comprehend the management practices and
various functions used at multiple levels of the IT hierarchy. This step determines
whether or not the auditor will proceed with the rest of the rest.
Tasks such as observing installation procedures, interviewing installation staff, and
going through installation documentation take place. Additional reviewing is carried
out for the management and application controls; crucial weaknesses are identified in
the management controls. Auditors also try to determine if the measures implemented
in the installation controls are sufficient to bring down losses to an acceptable level.
2. System Vulnerability is assessed
In the next step of the audit, different applications are individually assessed to find out
the most vulnerable ones. Computer systems and applications that are the most
vulnerable are also the ones used for abuse. Hence, the type of application and the
control of quality protocols are reviewed.
3. Threats are identified
Information systems are threatened by external and internal users such as
programmers, system analysts, regular users, cyber security specialists, data entry
operators, software services, data vendors, etc. All such people are identified by
system auditors.
In the same way, events, points, and occasions are found out when the IT
infrastructure was breached earlier. It can be when a transaction was carried out that
might have been deleted, added or altered. There’s also the possibility of risky
behavior when data or programs are edited or when their operation is at fault.
4. Internal Controls are analyzed
In this step, system auditors determine the efficacy of the information system’s
internal controls and whether or not they are working the way they should. They also
check any missing internal controls within the system.
5. Final Evaluation
In the last step of the system audit, different tests are carried out for the various
components of the internal control systems of the organization. The main purpose of
this phase is to calculate the probability of any future losses in assets. These tests
include identifying erroneous processing, assessing the data quality, finding out
inaccurate data, comparing physical counts of data, and confirming data with external
sources.
All these should be done with an effective system audit team within a defined scope
set and under constant surveillance which gives freedom at the least half a year in a
business year.

Benefits of system audit

1. Removal of ambiguity or confusion
When everyone understands their role and what is expected of them, they can be more
productive; having a system audit in place makes it much easier to not only see where
improvements can be made, but also what changes need to be implemented. Most
importantly, there is better communication between different teams and different
departments that are working toward the same goal.
2. Error reduction or eradication
The chances of errors happening are reduced or removed altogether. In the event they
do happen, the system is in place to help correct them quickly and effectively. This
saves time and money which to be preserved in any business.
3. Current and accurate data
When done right, system audits are a living document that teams will use for years to
come. These audits are not something that can be set up and forgotten; they need to be
monitored, updated when necessary, and used as a resource for teams to reference
when they need it. This means they are always current, and the resulting data is
always accurate. When a system is audited, it allows those within the system to see
where improvements can be made, resulting in more efficient productivity.
4. Improved quality
A system audit also allows for an examination of quality control processes. If any
issues are found, they can be addressed and corrected quickly, before they have a
negative impact on the product or service being offered. For example, problems in
safety system.
5. Enhanced customer experiences
When improvements are implemented, customers benefit from faster turnaround
times, improved product quality, and greater satisfaction. Example, how to effectively
serve customers in a qualified system.

Challenges facing system audit

They require a lot of time to carry out all inspections on the systems operating in the
company at all stages.
It is also very expensive thus it requires an organization to set apart this cost before
otherwise it is difficult to do system audit due to the cost required.
The approach taken by the auditor when examining computerized records in
computerized accounting system take either of the two main forms;
 Auditing around the computer
 Auditing through the computer
What does it mean to audit around the computer?
Auditing around the computer is when the audit team doesn’t inspect IT system
controls. Instead, they obtain source documentation from the system (i.e. system
reports) and compare that information to the financial statements. Unless the audit
team has specific IT knowledge, this is the route most audit teams take as its less
complex.
Audit around the computer approach is used in situations when auditor is of the
opinion that computer system is reliable and often comparison of inputs i.e. source
documents to outputs i.e. financial reports is done which in auditor’s judgement is
enough. In other auditor will not assess whether required controls are in place and if
they are working operating effectively while inputs are processed. Due to the same
reason, relying too much on this approach is not recommended for important aspects
of the audit especially where assessed risk is high as this may result in ineffective
audit and ultimately inappropriate audit opinion being expressed by the auditor.
As mentioned earlier that auditor will bypass computer system and will not check for
existence and/or operating effectiveness of controls in processing data therefore
auditor may use any one or combination of the following methods:
Output oriented method: Sample select the information generated by the computer
system (output) and compare it with auditor’s ideal system or information gathered
from other sources or evidence collected by the auditor by the application of other
audit procedures. For example, comparing receivables balances with the statement of
accounts received from customers or comparing stock records with reports of
inventory counts
Input oriented method: Sample select source documents (input) that are fed in to the
computer system for processing and auditor independently processes the inputs using
his own computer system or software and then compare the outputs generated by
auditor’s computer system with the output generated by the client’s computer system
to confirm accuracy, completeness and other assertions. Auditor’s processing may be
manually done without getting any assistance of the computer. For example, client’s
system reports that cash book balance reconciles with bank balance as per bank
statement. Auditor may conduct his own reconciliation to confirm whether it is true.
Advantages of auditing around the computer
It saves time and its justification is that computers are 100% accurate in processing
transactions and therefore material processing errors do not occur
Disadvantages of auditing around the computer
Once an application is programmed to process an item incorrectly, then it processes
exactly as programmed indefinitely. Hence frauds and errors system failures should be
picked up in the assets and liabilities verification.
Auditing through the computer
Describes the various steps taken by auditors to evaluate client’s software and
hardware to determine the reliability of operations that is hard for human eyes to view
and also test the operating effectiveness of related computer control
Its common method now by many companies and organization, mostly internal
auditor more frequently uses auditing through the computer technique.
There are two basic techniques available to the auditor for auditing through the
computer. these are use of computer audit programs and use of test data.
Computer programs
These consist of computer programs used by the auditor to read magnetic files and to
extract specified information from the files, they are also used to carry out audit work
on the contents of the files. these programs they can be written by an audit firm or
they can be bought by software houses.

Advantages of computer programs

Reliability; most of the major software programs make using the program simple. the
math is accurate and reliable, so a business owner can accurately determine available
funds at any time.
Cost effectiveness; the owner doesn’t need pay to purchase software and setup
Disadvantages of computer programs
Technology driven, if you are not passionate about technology at heart, you may
become unhappy over the influence it exerts on your values
Test data
These are designed to test the performance of clients programs, whereby auditor may
use dummy data or live data for processing to manually work out the expected result
using the logic of the program.
Live data testing has the following advantages
 If the data is included with normal, separate tests data totals cannot be
obtained. this can sometimes be resolved by use of dummy branches or
separates codes to report the programs effects on the test data.
Dummy testing has the following disadvantages
 Difficulty will be encountered in simulating the whole system or part of it
 A more detailed knowledge of the system is required than with use of lives
files.
Computer assisted audit technique (CAAT) is a method of gathering and reviewing
electronic records. It is used to simplify or automate the data analysis and audit
process, and it involves using computer software to analyze large volume of electronic
data for anomalies.it can also be defined as the tools used by auditors during their
work when dealing with the bulk of data. The branch has a dedicated team of
computer audit specialists who develop and maintain computer assisted audit
techniques and respond to auditors request for assistance.
Types of computer assisted audit technique
Computer assisted audit technique have for types; test data, audit software, integrated
test facilitates, and embedded audit software. When it comes to what is included in the
computer assisted audit technique or different types of CAATs two types are also two
parts of process.
Besides, the other two types are less acknowledging and used in audits. We will
discuss the constituent types and the other two that are not commonly used in audit
procedures.
TEST DATA
Test data is the first technique or type of CAAT that involves testing a client’s system.
The auditor use dummy information sets and enter them into client’s system. The
dummy testing is executed in controlled setting to keep other arears of an audit
unaffected. The purpose of test data is to get insights into the internal controls
procedure in information technology system of a business. The successful test data, it
has to include mixed data (the one with errors and the one without errors). Errors in
the data can be of the following types;
- Codes like customer, supplier and employee are missing from the data
- Include transactions that exceed pre-determined rate. For instance, salaries
above contracted amount, more credit sales than agreed- upon limit.
- Arithmetical errors of overstating, understanding in invoice
- Data submission with incorrect batch control totals
it’s the choice of auditors to run the test data during the normal operational cycle or at
a specific point outside the normal operational cycle. The downside of live data is that
it can interrupt the system and affect master files. On the other hand, the dead testing
does not show the strains a system might encounter during normal operation

AUDIT SOFTWARE
Is the second aspect of computer- assisted audit techniques. It includes the use of
software for data processing and analysis of software for data processing and analysis
of large data sets. Without CAATs, the auditors were supposed to manually perform
the data analysis on large groups.it would easily eat up most of the time and increase
the probability of errors. The purpose of audit software is an interrogation of the
client’s system. It looks into the discrepancies and analyzes different patterns visible
in the system.
Audit software not only saves the auditors from inefficient manual work but also
gives more accurate result that can be investigated in details. Audit software can be
off-the-self, packaged, or customized for the specific client’s system. The procedures
that can be performed with audit software include;
- Calculation of ratio and selection of indicators falling to meet pre- defined
benchmarks
 - Extraction of samples based on benchmarks like categorizing transactions over
a certain limit, below a certain limit, relating to certain dates.
- Stratify data based on variables like ages, customers
- Preparation of financial report like budget, comparison of the budget with
actual figures.
- Trace transaction through the computerized system

Benefits of CAATS audit are

(1) CAATs facilitate the auditors to test a huge volume of data, or the operation of
the controls in a system, precisely and rapidly and are therefore, very cost
efficient when operated appropriately.
(2) CAATs lessen the level of human error in testing and facilitate a very high
level of audit evidence to be derived. Auditors can review more segment of the
taxpayer’s business activities systematically using analytic tools.
(3) The application of CAAT frees up expensive human capital that would
otherwise be engaged in key areas to concentrate on judgement areas.
Computerized accounting software programs have made many advancements over
the years. These programs they make life easier for business owners when it comes to
tracking expenses, preparing taxes and looking at revenue growth. Accounting
software programs have become common, there are both advantages and
disadvantages to relying on a computer for all accounting.
The following are the importance of computerized accounting system;
Simplicity
Most business owners are not accountants or bookkeepers by trade and find it
challenging to do most accounting tasks. This is where accounting software programs
give a business owner advantages. A wide variety of accounting software programs
are consumer friendly. Business owners can shop around to find a program that is
easy to install, learn and use. Many programs provide prompts for the type of data that
should be entered in each section. Once the system is established with bank accounts,
debts and vendors, the business owner only needs to update information as it comes
in.

Reliability

Most of the major software programs make using the program simple. The math is
accurate and reliable, so a business owner can accurately determine available funds
at any time.

Cost effectiveness
Hiring an in-house bookkeeper or outsourcing the work to a bookkeeper or accounting
firm can be costly. The software program has an upfront cost and might require
contracting a bookkeeper to set up the accounts and coach the business owner on
using the program, but it quickly becomes cost-effective. The owner doesn’t need to
pay for anything beyond the software purchase and setup. Most programs work with
operating systems for years and only occasionally require an inexpensive upgrade.

Ability to Collaborate
Many software programs allow business owners to set permissions that give an
outside bookkeeper or accountant access to the data. Business owners can sync
information with bank and credit accounts and import data with a click of a mouse.
This allows business owners to quickly reconcile accounts and import the correct
information that needs to be reviewed by key advisors.
Business owners should review the best options for the business. Consider backups
either on the cloud or on separate hard drives to maintain accurate records should
problems arise.
Potential Fraud
Dependence on computers sometimes leads to bigger problems. With more software
data being housed in the cloud, there are more opportunities for hackers to get your
business’s financial data and use it. This puts assets at risk and creates potential
liability if hackers use employer tax identification to open credit cards and business
loans. There is also the risk of someone within the business accessing the information,
perhaps pilfering money from daily deposits and altering the data in the program.
Business owners must diligently protect financial information.
Technical Issues
When dealing with computers, issues can arise. You may be completing year-end data
for your accountant and experience a power outage. Computers might acquire a virus
and fail. There is also the potential of users incorrectly performing software tasks that
they are not familiar with. If a user tries to do one thing but inadvertently does
something else, it might take some work to undo the error.
Incorrect Information
Bookkeeping records are only as good as the data put into the system. Business
owners that don’t take the time to establish account categories properly may enter data
and generate reports that are not accurate. Business owners can do a lot to mitigate the
disadvantages and potential problems associated with computerized accounting with
proper planning and software integration. Taking the time to establish it correctly is
easier and cheaper than trying to backtrack because when a problem occurs.
REFERENCE:

Arens, A, (2011) Auditing and Assurance Services, Student Value Edition (15 thEdition).

Hayes, R. & Philip, W, (2013) The Internal Auditing Pocket Guide Book: Preparing,
Performing, Reporting and Follow up