Page 146 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 8.4 Auditing and EDP Environment—Meaning of Electronic Data

Processing (EDP)

Auditing in computer information system Environment CIS Environment or electronic data
processing exists when an organization uses one or more computer (s) of any type or size for
preparation of financial statements. While there is change in overall objective and scope of audit
under CIS or EDP, the auditor will need to assess the effect of computers on (a) processing,
(b) storage (c) retrieval, and (d) communication of financial information.

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Caution Under electronic data processing system, there is virtual elimination of errors
such as calculation mistakes, posting errors, totaling, etc. However, any error in
programming may result in serious errors and produce incorrect result.

8.4.1 Basic Features of EDP Environment

The following are the basic features of CIS or EDP environment:
1. EDP infrastructure: This includes hardware, operating systems and application software.

(a) Hardware: Hardware consists of CPU (central processing unit), Monitor, Printer,
Mouse and Keyboard. One may put it to use differently, such as
(i) Personal computer ( PC ) used by individual who feeds and processes data on
a single machine.
(ii) Local area network ( LAN ), where there is connection between two or more
computers located at a given small place, ( say, office ) to store and program
any data files centrally.
(iii) Remote linked PCs, where location of PCs is at different places or cities, but
interconnected with one another.
(iv) Distributed data processing, where a mainframe computer handles main
processing, and subsidiary processing takes place at decentralized processors.
(v) Electronic data interchange (EDI), under which there is transfer of structured
data without manual review to individual computers, sparing them the need
to process the data themselves.
(b) Operating systems: These may be window, Microsoft (MS) Office, Disc Operating
system (DOS), LINUX, etc. They oversee the communication of data between the
computer processor and its magnetic discs, as well as the management of files and
programs on the discs.
(c) Application software: This is a set of computer programs, such as TALLY, MYOB,
Simply accounting, Quicken etc. that is a specially development accounting Software,
including operating system, compilers, packages and user programs, which enable
a particular computer centre to operate.

2. Lack of documents and transactions trail: In manual accounting, there is a transactions
trail. Firstly, a document (voucher, invoice, receipt, etc.) originates transaction. Then,
there is entry of the transaction in the original books of account (daybooks, journal, etc)
Thereafter, there is posting of the transaction in the principal books (ledger, etc). Lastly,
the net effect of transaction reflected in financial statements.

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