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1. What is the difference between an information technology general computing
control and an automated application control? Provide an example of each in your
An information technology general computing control is used to help control the entire
computing environment for an organization. For example, most organizations require password
access to log into the computing environment. Information technology general computing
controls also include the controls around the: development of new programs within the computing system; changes that are made to existing programs within the computing system; the operations of a computer service area. An automated application control is a computerized control procedure that is explicitly
designed to accomplish some type of control objective within a company?s overall system of
internal control. For example, a company?s accounts receivable system may have an application
level control that automatically checks a customer?s credit limit before a new sales order is
approved. In order to function properly, an application level technology control is dependent on
effective information technology general computing controls.
2. Consult Paragraphs 36-37 of PCAOB Auditing Standard No. 5. Do you believe that
information technology general controls have a pervasive effect on the reliability of
financial reporting at an audit client like WMI? Why or why not? Please be specific.
Information technology general controls do have a pervasive effect on the reliability of
financial reporting because it impacts so many automated application controls and manual
controls that are dependent on information generated by the technological infrastructure. For
example, information technology general controls over program development, program changes,
computer operations, and access to programs and data help ensure that specific automated
application controls over the processing of transactions are operating effectively. Stated simply, the proper functioning of automated application controls is dependent on effective ITGCs to
provide a secure environment for functioning.
Information technology general controls also have a pervasive effect on the reliability of
financial reporting as such controls directly impact computerized accounting calculations, and
any other control procedures that depend at least in part on information generated from the
computerized system. As such, information technology controls would definitely have a
pervasive impact on the reliability of financial reporting at WMI.
In the case, the successful integration of the billing systems between Waste Management and
USA Waste Service is shown to be important to the success of the merger. Several additional
information systems were created in order to provide more timely financial statements as well as
increase the efficiency and effectiveness of the flow of transactions between information
systems. When these systems were not operating effectively, management was unable to access
timely financial information to make effective decisions and monitor business operations.
3. Consult Paragraphs B28-B31 (in Appendix B) of PCAOB Auditing Standard No. 5.
Define what is meant by a benchmarking strategy. Based on the case information, do
you believe that a benchmarking strategy would have been appropriate during the
first year audit at WMI? Why or why not?
According to paragraph B28, ?Entirely automated application controls are generally not
subject to breakdowns due to human failure. This feature allows the auditor to use a
"benchmarking" strategy.? A benchmarking strategy allows the auditor to rely upon the results
of testing in a prior year to provide evidence about the effectiveness of an automated application
control in the current year. According to paragraph B29, ?If general controls over program
changes, access to programs, and computer operations are effective and continue to be tested,
and if the auditor verifies that the automated application control has not changed since the auditor established a baseline (i.e., last tested the application control), the auditor may conclude
that the automated application control continues to be effective without repeating the prior year's
specific tests of the operation of the automated application control.?
Based on the case information, a benchmarking strategy would not likely have been
appropriate in the first year audit of WMI because the information technology general controls
did not appear to be effective. In addition, it is unlikely that a prior year?s baseline could have
been established because of the new system conversion. As a result, a benchmarking strategy
would not have been applicable on this audit.
4. Consult paragraph A4 (in Appendix A) of PCAOB Auditing Standard No. 5. Given
the PCAOB?s view, do you believe that the audit firm should be providing assurance
on the information contained in public company press releases? Why or why not?
Paragraph #A4 (in Appendix A) sets the boundaries for the auditor's evaluation and testing of
the internal control system. Specifically, the answer states that the audit of internal control does
not need to ?extend to the preparation of MD&A or other similar financial information presented
outside a company?s GAAP-basis financial statements and notes.?
It is clear that the technical guidance does not require auditors to audit this type of
information. According to the SEC, the pro forma information would be considered outside a
company?s GAAP-basis financial statements and notes and would not be subject to auditor
evaluation and testing.1 However, the situation does give rise for an interesting class discussion.
Arguments for positive assurance on information contained in public company press
releases: 1 Companies are providing information about future earning which would greatly
influence a stock holder?s financial decision to keep or sell their shares. Thus,
assurance should be provided. SEC. (4 February 2003). ?SEC Issues Final Rule on Furnishing Earnings Announcements to the SEC and on
Using Pro Forma Information Generally.? Fenwick & West LLP.
http://www.fenwick.com/docstore/publications/corporate/sec/Corp_Sec_02-04-03.pdf. The bottom line is that press releases are utilized by companies to provide
information to financial statement users and the public (just like financial
statements), therefore assurance should be provided on them.
Press releases have a direct effect on a company?s future reputation and forecasts
Press releases have an impact on financial analysts' recommendations to the
marketplace, which influence investors. So, assurance should be provided. Arguments against providing assurance on information contained in public company
press releases: Press releases typically only contain information in piecemeal fashion and thus do
not provide an overall view of the company?s financial position. Thus, assurance
is not necessary.
Press releases on future earnings and future transactions can not be assured due to
unpredictable future events. This would open the door for substantial litigation.
Investors and analysts should not be relying on the information provided in the
press release because they should know that the information has not been audited.
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