Guide to the Assessment of IT General Controls Scope Based on ...Presentation Transcript
GAIT G uide to the A ssessment of IT General Controls Scope Based on Risk A Top-Down, Risk-Based Approach to the Scoping of Key ITGC
Problems with IT SOX Compliance
Overview / Advantages
Methodologies – Five Phases
Challenge defining an effective and efficient scope for the annual assessments of ICFR
Internal control assessments and testing by management and external auditors was not focused on risk of material errors (e.g., not following a risk-based approach)
Lack of established guidance (i.e., inconsistency and subjectivity, reliance on checklists, etc.)
CobiT and ITGI provide more scope than SOX expects, causing companies to do too much
Significant cost overruns
Difficulty defining the key IT general controls required to address risks of material errors to financial reports
What is GAIT?
GAIT provides a set principle and methodology that facilitates the cost-effective scoping of IT general control assessments
GAIT is a reasoned thinking process that continues the top-down and risk-based approach to assess risk in ITGCs
GAIT focuses on identifying risk in IT processes that could affect critical functionality needed to prevent/detect material errors
Control objectives are identified in GAIT, but not specific key controls
Why was GAIT formed?
Based on the problems described earlier, the IIA noticed the need to help companies identify key IT general controls where a failure indirectly result in a material error to the financial statements
Who helped with GAIT?
Core team of 7 people wrote and edited the documents
Christine Bellino, Jefferson Wells
Ed Hill, Protiviti
Fawn Weaver, Intel
Gene Kim, Tripwire
Heriot Prentice, The IIA
Norman Marks, Business Objects
Steve Mar, Microsoft – Team Leader
CPA Firms – Big Four, Mid-sized Firms
Who is a part of GAIT?
The Institute of Internal Auditors
IIA Support Staff
Advanced Technology Committee
American Institute of Certified Public Accountants (AICPA)
International Federation of Accountants (IFAC)
How does GAIT work?
The GAIT document has two main parts:
Four Core Principles
Define the relationship between business risk, IT general controls risk, and the IT general controls that can mitigate these threats as they pertain to financial reporting objectives
Helps organizations to examine each financially significant application and determine whether failures in the IT general control processes at each layer of the IT infrastructure represent a likely threat to the consistent operation of the application's critical functionality – HOW TO APPLY THE PRINCIPLES
Advantages of Applying GAIT
Two Primary Advantages
Improves cost effectiveness of IT General Controls auditing by including within audit scope only the elements or layers of infrastructure and IT general control processes that are relevant to financial control risks.
Aids in the documentation of scoping decisions.
Overall GAIT Scoping
RISK of material misstatement/fraud to financial statements & disclosures Scope SOX according to RISK of material misstatement/fraud.
IT Risk Assessment and Scoping
IT Process Controls:
Change Mgt, Operations, Security
STEP 1 : validate understanding STEP 2 : perform risk assessment at each layer STEP 3 : Conclude: is it REASONABLY LIKELY a failure in this IT Process area could impact application controls & result in a material misstatement? Risk is not eliminated; is it reduced to a REASONABLE level.
Controls may be assessed and tested that are not critical, resulting in unnecessary cost and diversion of resources
Controls that are key may not be tested, or may be tested late in the process, presenting a risk to the assessment or audit
Risk of not using GAIT By not applying a top-down and risk based approach starting at the financial statements and significant account level, there is a risk that:
The identification of risks and related controls in IT business processes should be a continuation of the top-down and risk-based approach used to identify significant accounts, risks to those accounts, and key controls in the business processes.
The IT general control process risks that need to be identified are those that affect critical IT functionality in financially significant applications and related data.
The IT general control process risks that need to be identified exist in processes and at various IT layers: application program code, databases, operating systems, and network.
Risks in IT general control processes are mitigated by the achievement of IT control objectives, not individual controls.
GAIT’s Four Principles
Financially Significant – Definition
Application: contains functionality relied upon to assure the integrity of the financial reporting process.
Should that functionality not function consistently and correctly, there is at least a reasonable likelihood of a material misstatement that would not be prevented or detected.
Data: data that, if affected by an unauthorized change that bypasses normal application controls (i.e., as a result of an ITGC failure), is at least reasonably likely to result in a material misstatement that would not be prevented or detected.
. . . guides you by asking
What IT functionality in the financially significant applications is critical to the proper operation of the business process key controls that prevent/detect material misstatement?
For each IT process at each layer in the stack, is there a reasonable likelihood that a process failure would cause the critical functionality to fail — indirectly representing a risk of material misstatement?
If such IT business process risks exist, what are the relevant IT control objectives?
The GAIT Methodology
Phases of GAIT Methodology Identify controls over financial reporting to provide reasonable assurance as to their reliability Identify and validate critical IT functionality Identify significant applications where ITGCs need to be tested Identify ITGC process risks and related control objectives Identify ITGC to test that meet control objectives AS5 Phase 1 Phase 2 Phase 3 Phase 4 Perform a reasonable person review Phase 5
Top Down Approach
Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.
The auditor should use a top-down approach to the audit of internal control over financial reporting to select the controls to test. A top-down approach begins at the financial statement level and with the auditor's understanding of the overall risks to internal control over financial reporting.
Role of IT
The auditor should assess the extent of information technology ("IT") involvement in the period-end financial reporting process;
The identification of risks and controls within IT should not be a separate evaluation but, rather, an integral part of the auditor's top down risk assessment, including identification of significant accounts and disclosures and their relevant assertions, as well as the controls to test.
Methodology – Phase 1
Review key controls, reports, and other functionality in the company’s business processes and determine which are manual and which are automated.
Develop a list of critical IT functionality.
Confirm key automated controls.
Determine whether there is additional critical IT functionality not identified as a key control.
Identify and validate critical IT functionality
Sort the critical IT functionality by application.
Identify the financially significant applications that are in scope for ITGC.
Methodology – Phase 2 Identify significant applications where ITGCs need to be tested
Continue only with financially significant applications.
Methodology – Phase 2
What is the likelihood of an IT process failure occurring and what is the potential impact ?
What is the likelihood of the IT process failing in such a way that it would cause the critical IT functionality to fail ?
Is it at least reasonably likely that the critical functionality would fail without prompt detection and result in a material error in the financial statements ?
Methodology – Phase 3 Risk of IT Process Failures Identify ITGC process risks and related control objectives
Consider the pervasiveness of ITGC . . .
Are there risks that may affect multiple applications and their critical IT functionality?
Select Key IT general controls to test.
Link each key IT general control to the control objectives identified through GAIT.
Methodology – Phase 4 Identify ITGC to test that meet control objectives
Confirm that the risks and key controls represent a reasonable view of risk to financial reporting.
Ensure that the selection of risks is reasonable, given the organization’s risk tolerance in their 404 scope.
Methodology – Phase 5 Perform a reasonable person review
Prior to implementing GAIT , companies should perform a top-down, risk-based assessment of their business processes and identify the key controls in those processes.
GAIT will utilize the information gathered from this assessment and define what functionality within the IT applications is critical and to see what IT applications provide this functionality.
Sample GAIT Matrix
Factors that affect the risk associated with a control include:
The degree to which the control relies on the effectiveness of other controls (e.g., the control environment or information technology general controls);
Whether the control relies on performance by an individual or is automated (i.e., an automated control would generally be expected to be lower risk if relevant information technology general controls are effective);
Case Study 1
Energy Trading Company
Key IT general controls reduced from 48 to 20
Able to consolidate many of the controls
Added 2 applications due to reliance of financial controls
Identified other risk areas related to a key application
Case Study 2
Eliminated 3 systems from scope – no controls dependent upon the systems
Able to eliminate all Network related controls except for access
Some controls were added back at management’s request due to the immaturity of the processes
Case Study 3
Reduced key IT general controls from 49 to 18
Reduction had significant potential for reducing administrative overhead
Paved the way for self assessment program
Able to provide good rationale for in-scope applications
Maximizing GAIT’s Implementation
Tips and Techniques
Start with a top-down, risk-based assessment of each risk and key control in the business process being evaluated
Build a team of internal controls experts with both business and IT knowledge to complete or review GAIT results
Engage external auditor
Perform GAIT assessment early in the process
Focus on getting scope right , not just on reductions
Document results carefully and be sure to explain what is and is not in scope