a) Computerized and manual accounting system
b) Auditing around computer and Audit through computer
Distinction between computerized and Manual Accounting System:
i. Faster and efficient in processing of information in computerized system and no such faster and efficient in processing of information in manual system
ii. Automatic generation of accounting documents like invoices, cheques and statement of account which manual system cannot produce.
iii. With the larger reductions in the cost of hardware and software and availability of user- friendly accounting software package, it is relatively cheaper like maintaining a manual accounting system;
iv. More timely information can be produced than manual system
v. No more manual processing of the data- all automatically posted to the various ledgers/accounts and many types of useful reports can be automatically generated for management to make decisions where as such reports cannot generated on manual system
vi. Power failure, computer viruses and hackers are the inherent problems of using computerized systems, such risk not remain in manual system
vii. Once data been input into the system, automatically the output are obtained hence the data being input needs to be validated for accuracy and completeness, we should not forget concept of GIGO (Garbage In (Input) Garbage out (Output) where validation in manual system can be checked on inception
viii. Accounting system not properly set up to meet the requirement of the business due to badly programmed or inappropriate software or hardware or personnel problems can caused more havoc, where manual system does not have such problem.
ix. Danger of computer fraud if proper level of control and security whether internal and external
i. Audit Around the Computer: Audit around the computer involves forming of an audit opinion wherein the existence of computer is not taken into account. Rather the principle of conventional audit like examination of internal controls and substantive testing is done. The auditor views the computer as a black box, as the application system processing is not examined directly. The main advantage of auditing around the computer is its simplicity. Audit around the computer is applicable in the following situations:
The system is simple and uses generalized software that is well tested and widely used.
Processing mainly consists of sorting the input data and updating the master file in sequence.
Audit trail is clear. Detailed reports are prepared at key processing points within the system.
Control over input transactions can be maintained through normal methods, i.e. separation of duties, and management supervision.
Generalized software packages, like payroll and provident fund package, accounts receivable and payable package, etc. are available, developed software vendors. Though, the auditor may decide not to go in details of the processing aspects, if there are well tested widely used packages provided a reputed vendor. However, he has to ensure that there are adequate controls to prevent unauthorized modifications of the package. However, it may be noted that all such generalized packages do not make the system amenable to audit. Some software packages provide generalized functions that still must be selected and combined to achieve the required application system. In such a case, instead of simply examining the systems input and output, the auditor must check the system in depth to satisfy him about such system. The main disadvantages of the system of auditing around the computer are:
It is not beneficial for complex systems of large scale in very large multi-unit, multi locational companies, having various inter unit transactions. It can be used only in case of small organizations having simple operations.
It is difficult for the auditor to assess the degradation in the system in case of change in environment, and whether the system can cope with a changed environment.
(ii) Auditing through the Computer: This approach involves actual use of computer for processing the information auditor. The circumstances, where auditing through the computer is done are as follows:
The organization has developed either in house or through a reputed vendor, a software package suitable to its requirement, because of inability of a generalized package to cater to the complex nature of transactions.
The system processes very large volumes of output. This makes examination of validity of input and output difficult.
The major part of the internal control system in the organization is in the computer system itself, as the majority of the records is processed through the computer. Examples are system in bank, insurance companies, online booking in case of Railway, etc.
The logic of the system is quite complex, and there is virtually no visible audit trail. The auditor has to use the computer to test the logic and controls existing within the system.
The auditor has to use the computer system itself for verification, for which he has to be sufficiently computer literate, and should have adequate technical knowledge and expertise. The auditor can through the computer, increase his performance, and can rely on the data processing carrying out the required tests and applying his skill