Designing Audit Procedures When Evidence Is ... - Semantic Scholar

ISSUES IN ACCOUNTING EDUCATION Vol. 18, No. 3 August 2003 pp. 275–290

Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Travel Revenue A. Faye Borthick and Jack E. Kiger ABSTRACT: The objective of the Fly Airline case is for you to learn to develop audit procedures in a context, e-ticket revenue, in which most of the evidence is available electronically, and in which many tests of controls and substantive tests can be performed using data stored in electronic form. In sequence, you will identify controls and their objectives, match controls to financial statement assertions for revenue, develop tests of controls, develop substantive tests for each assertion, and organize audit procedures into an effective and efficient audit program. Keywords: auditing; e-ticket revenue; collaborative learning; electronic evidence; internal control; monitoring; systems expertise for auditing.

OVERVIEW ly Airline’s revenue generation begins when a customer selects a flight for a specific date and time. The process is similar whether a ticket agent or the customer interacts with the system to make the reservation. If the customer is paying with a credit card, the system validates the credit card number the customer presents for billing before making the reservation. When it obtains approval of the credit charge (electronically, from the card issuer), the system records the charge and other details of the reservation. The customer gets a confirmation number and itinerary immediately, and gets a boarding pass at the gate only by presenting picture identification. Daily, the system batches each day’s charges by credit card issuer and transmits them electronically to credit card issuers. Until a flight occurs, ticket sales are recorded as unearned revenue. After a flight, the system records earned revenue based on the reservations for the flight and decreases unearned revenue accordingly. Furthermore, Fly Airline’s bank provides electronic bank statements. In addition to offering flights to customers and allowing customers to make reservations, Fly’s system accommodates changing reservations, handling cash and credit card receipts, boarding passengers, and booking revenues. The system includes procedures for setting fares and for passengers flying free. The system includes monitoring activities designed to ensure the effectiveness of operations and information analysis that management uses to maximize revenue per seat-mile. Figure 1 presents an overview of the system and Figure 2 illustrates the system database. Details about how the system works appear following Figures 1 and 2.

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A. Faye Borthick is a Professor at Georgia State University and Jack E. Kiger is a Professor at the University of Tennessee. The authors are indebted to the airline personnel that revealed nuances of business processes, to the many students that pointed out what they did not understand and what they needed to learn to develop effective audit programs, and to editor Tom Howard, associate editor Tom Hall, and two anonymous reviewers for helpful comments.

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FIGURE 1 1 Diagram (DFD)a Ticketless Travel:FIGURE Data Flow Ticketless Travel: Data Flow Dia gram (DFD)*

Customer

Check for suitable flights

flights

Check for seat

seat inventory

Determine fare

fares

Charge customer

charges

Make reservation

reservations

Display confirmation

Present identification manifes t

Customer

Log seat occupancy manifes t

a

In DFDs, circles represent processes, squares indicate sources or destinations of data, arcs with arrows designate flows of data, and parallel lines signify a store of data.

Issues in Accounting Education, August 2003

Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Revenue

FIGURE 2 Data Tables with Example Records Flight Table (primary keys in bold; foreign keys in italics) Flight number 1011 1012

Arrive time

Type

Peakadvance fare

Peakregular fare

Off peakadvance fare

Off peakregular fare

D D

$149 $109

$229 $169

$119 $89

$179 $159

Departs

Arrives

Depart time

Atlanta New York

Chicago Miami

8:00 am 8:05 am

8:49 am 10:10 am

Departs

Arrives

Seat capacity

Seats remaining

Atlanta New York

Chicago Miami

178 135

144 101

Seat Inventory Table Flight number 1011 1012

Date 07/14/2002 07/14/2002

Reservation Table

13999191 13999258 13999375

06/02/2002 06/02/2002 06/02/2002

0021991 1021896 1011992

Flight number

Flight date

Charge number

1012 1011 1012

07/04/2002 08/29/2002 07/14/2002

0200018

Cash receipts number

Free flight number

0200141 80289992

Previous confirmation Status number A A A

13596310

Manifest Tablea Flight number

Flight date

Departs

Arrives

Confirmation number

Customer number

Lastname

Firstname

Seat

1012 1012 1012

07/04/2002 07/04/2002 07/04/2002

New York New York New York

Miami Miami Miami

13727182 13999258 12839782

1021896 0021251 0499213

Able Boggs Kitai

Ken Sue Ted

4D 12A 39C (continued on next page)

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Confirmation Reservation Customer number date number

278


FIGURE 2 (continued) Charge Table Charge Customer number number 0200018

Credit card issuer

Credit card number

Expiration date

Visa

222-44-4444

03/05

$100

Cash received

Ticket agent

Receipt date

M108

06/02/2002

0021991

Cash Receipts Table Cash receipt Customer number number 0200141

Change fee

1021896

Fare amount $129

$129

Free Flier Table Free flier Customer number number

Affiliation

Authorization code

0652141

Employee

393255

1011992

Free Flights Table Free flight Customer number number

Affiliation

Authorization code

80289992

Employee

393255

Street

City

1011992

Firstname

0021991 1021896 0021251 1011992 0499213

Jon Ken Sue Jill Ted

Abbot Able Boggs Coggin Kitai

123 Bea St 25 Ratcliff Ln 199 Roe Rd 826 Sky Way 4512 Coop Rd

Chicago Denver Atlanta Boise Erie

Fare waived

$124

Ticket agent

$119

State

Zip

IL CO GA ID PA

60605 80210 30339 83710 16525

Charge amount

Authorization code

Charge date

$199

E4342T

06/02/2002

Waiver date 06/02/2002

Phone 312 303 770 208 814

442-1187 564-8945 525-1685 891-3312 561-8978

Email address [email protected] [email protected] [email protected] [email protected] [email protected]

a The database is unnormalized with respect to the manifest table to enable better performance at boarding time and in order to keep historical records of passenger lists that are archived separately from other tables.

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Customer Table Customer Lastnumber name

Change Fare fee amount


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Offering Flights to Customers Fly offers flights to customers through a system that customers and agents access through the Internet. Customers and ticket agents enter the origination and destination cities and the dates and preferred times for travel. The system generates information that permits customers to choose specific flights. In collaboration with other Fly units, flight operations establishes the flight schedule. To change the schedule, flight operations enters changes into a flight change edit program. After the flight operations manager has approved schedule changes by attaching an electronic signature to the schedule change file, the system schedules the changes for application on the right day (at midnight), counts the number of schedule changes, creates a hash total of the flight numbers, adds a header record to the charge file containing the count, the hash total, and the manager’s electronic signature, copies the file to the update queue, and notifies computer operations of the pending update of the flight table. A file of schedule changes is maintained. Fares vary based on the route to be traveled, whether travel is during peak or off-peak times, and whether the ticket purchase is an advance or regular purchase. Tickets bought 14 days before the flight date are advance purchase tickets. Given the destination and whether the purchase is an advance or regular purchase, the system determines, based on the date and hour of the flight, whether travel is during peak or off-peak times and displays the appropriate fare. While customers and ticket agents do not actually see the flight table (Figure 2), its contents determine the fare the system displays. Marketing personnel are responsible for maintaining fares. Once they decide on fare changes, marketing personnel enter approved fare changes and their effective dates into a fare change edit program. This program verifies the flights exist and determines that the changes meet reasonableness criteria such as not falling below minimum fares or exceeding maximum fares and as functions of the destination, type of purchase, and time of day. Once all changes pass input edits, the fare change edit program creates a fare change file for the marketing manager’s approval. After the marketing manager has approved the fare change file by attaching an electronic signature, the system schedules the fare changes for application on the right day (at midnight), counts the number of fare changes, creates a hash total of the flight numbers, adds a header record to the charge file containing the count, the hash total, and the manager’s electronic signature, copies the file to the fare update queue, and notifies computer operations of the pending update of the flight table. A file of fare changes is maintained. Once the customer selects an acceptable flight, the system determines whether seats are available by examining the seat inventory table and the applicable fare. Ticket agents may not override fares. The flight operations department provides data for the seat inventory table (Figure 2), which contains dates, flight numbers, seat capacity, and the number of seats remaining. The system automatically updates the number of seats remaining by reducing (increasing) it by one each time a reservation is made (canceled). Creating Reservations When making a reservation, the system prompts customers (or ticket agents) for a customer number, which it uses to look up information about the customer. If the customer is new, the system prompts for a customer name, address, phone number, email address, credit card number, credit card issuer, and expiration date and writes the information in the customer table (Figure 2). Fly’s system, linked with credit card issuers, requests approval for the charge. If the charge is not approved, the customer may enter new credit card information and request approval. If credit authorization is unobtainable, no reservation can be made unless the customer is at the airport with cash to pay for the ticket.


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Once credit has been authorized, the system writes information about the charge (a unique charge number generated by the system, the credit card issuer and card number and expiration date, the amount of the charge, the authorization code from the credit card issuer, and the charge date) in the charge table. If a customer pays cash at the ticket counter in the airport, the system records the cash receipt in the cash receipts table. For complimentary fliers such as employees, members of employees’ families, or employees of other airlines, the system looks up the customer number and the affiliation that entitles the person to fly free (such as employee) in the free flier table. If the customer number and affiliation match a record in the free flier table, the system writes the appropriate record in the free flights table. Each day, the system generates reports about changes to the free flier table and free fliers, which the personnel director reviews daily. After creating an entry in the charge table, the cash receipts table, or the free flights table, the system writes the reservation record in the reservation table. The record includes a unique confirmation number generated by the system; either the charge number in the charge table, the cash receipt number in the cash receipts table, or the free flight number in the free flights table; the flight date; the flight number; the customer number; and the date the reservation was made. The system displays the confirmation number and itinerary and emails a receipt and an itinerary to the customer. When the data tables were first created, the charge number field in the reservation table was designated as a foreign key to the charge table; the cash receipt number in the reservation table was designated as a foreign key to the cash receipts table; and the free flight number in the reservation table was designated as a foreign key to the free flights table. This means that before an entry can be made or updated in a record in the reservation table, the system verifies that the charge number already exists in the charge table, that the cash receipt number already exists in the cash receipts table, or that the free flight number already exists in the free flights table.1 If a corresponding number does not exist in the any of the tables, then either credit has not been approved, cash payment has not been received, or free flying has not been authorized. In this case, the system will not write a reservation record, and no supervisor can override the prohibition. Changing Reservations To change a reservation using the website, a customer selects the flight to be changed and then the change function. After the customer selects the new flight, the system requests credit card authorization and writes the appropriate charges (a $100 change fee and the amount by which the new fare exceeds the fare amount for the previously purchased flight) in the charge table. The customer forfeits any difference if the fare for the new flight is less than the earlier one. Then the system writes the new reservation in the reservation table and changes the status of the old reservation to canceled. The system adjusts the values of seats remaining in the seat inventory table for the old and new flights. Similarly, to change a reservation, a ticket agent selects the change function and records the change in either the charge table or the cash receipts table. Flights may be canceled due to weather conditions, the unavailability of suitable aircraft, or other circumstances beyond an airline’s control. Most customers are rerouted on other flights. To cancel a flight, a flight operations supervisor indicates to the system that the flight is canceled and the reason for the cancellation. Upon receiving the cancellation, the system permits the customer to be rerouted on another flight. These reservation changes do not incur the $100 change fee. 1

In database terminology, this way of linking records in two different files is known as referential integrity. That is, before a record containing a foreign key can be written, the object of the reference must exist as the primary key of the target table. In this case, the charge number is the primary key of the charge table, the cash receipt number is the primary key of the cash receipts table, and the free flight number is the primary key of the free flights table. Thus, through systemimplemented referential integrity, the reservation system will not record a reservation for which there is no charge, payment, or authorized fare waiver.



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Handling Cash and Credit Card Receipts Agents at airports may record cash receipts and credit card transactions while the website may record only credit card transactions. Each agent has a drawer with a change fund that only he or she operates. At the completion of each shift, agents submit the cash collected to their supervisors. The system determines the amount of cash a ticket agent should have based on charges for tickets issued, change fees, and credit card charges. The amount of cash an agent is over or short is recorded. Agents that are careless in handling cash receipts are dismissed. The system generates a cash receipts total that is reconciled with total cash receipts for all cash drawers each day. If a supervisor in the cashier’s office cannot reconcile the cash receipts within 24 hours, the system notifies the treasurer electronically. For each bank deposit, the employee making the deposit enters the amount from the deposit ticket receipt into the system. Daily, the system performs a reconciliation of deposits per deposit tickets to the cash collections determined by the system. If the totals differ, details of the deposit ticket receipts are recorded in a suspense file. A cash receipts supervisor can remove the amounts from the suspense file only after reconciling the amounts and entering an explanation of the cause of the discrepancy. Whenever ticket receipts are not reconciled to system-determined totals within one day, the treasurer is notified electronically. Daily, the system generates a reconciliation of credit card charges by issuer with total credit card charges for the day. If balancing does not occur, electronic notification goes to a supervisor and details of the day’s activity go into a suspense file. If the supervisor fails to reconcile the amounts and clear the suspense file within one day, the system notifies the treasurer electronically. The actions undertaken to reconcile the amounts are recorded online. The system batches each day’s charges by credit card issuer and electronically transmits charges to credit card issuers. Credit card charges by issuer by day are reconciled with bank account receipts that occur in the airline’s online ticket receipts bank account. If the charges do not reconcile, electronic notification goes to a supervisor and details of the day’s activity go into a suspense file. If the supervisor fails to reconcile the amounts and clear the suspense file within one day, the system notifies the treasurer electronically. The actions undertaken to reconcile the amounts are recorded online. In effect, the procedure constitutes a daily reconciliation of bank records with the airline’s cash journal. Monthly bank statements are available online from the bank. Boarding Passengers Before boarding begins, the system writes records in a manifest table (Figure 2) for the flight that contains an entry for each confirmed passenger. The manifest table is a real table, not a view, because it is the permanent record of persons on the flight. At the gate, the boarding agent verifies fliers’ identification, matches fliers to the manifest, gives them boarding passes, and permits them to board. With each flier verification, the system logs the seat occupancy in the manifest table. Based on the number of boarding passes issued, the system generates a total number of passengers, which must match a count determined by the on-plane flight attendant. The attendant counts the passengers (or the number of empty seats) and enters the number into the system. If the numbers differ, the attendant recounts the passengers and reenters the number. If the numbers still differ, the gate agent must enter an explanation into the system. The plane is permitted to depart after the pilot enters his or her electronic signature into the system. Recording Revenue Ticket sales are recorded as unearned revenue when reservations are recorded, and change fees are recorded as revenue when reservations are changed. When a plane departs, operations records a time for its departure that triggers the system to record earned revenue. Revenue for a flight may not be recorded until the system has received notification of the flight’s departure. Based on the manifests


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for all the flights that occur, the system records earned revenue by type (domestic or international, by flight in the flight table) and decreases unearned revenue accordingly. A flight is designated as domestic or international when the operations manager adds the flight to the flight table. Forty-eight hours after a flight’s arrival, entries associated with it are removed from the reservation table, the charge table, the cash receipts table, and the manifest table. Before being archived, the removed entries are added to a flight history data warehouse. Each day’s revenue consists of fares for the flights that occurred that day plus the fees charged for reservation changes that day. The system prepares a summary of revenue by flight, a summary of charges for reservation changes, and a total for the day. This total is posted as earned revenue. Flight operations personnel have access to the summary, which shows for each flight the number of paying fliers, the number of complimentary fliers, and the averages for each of those on the same day of the week during the preceding month. Daily, the system performs a balancing routine that verifies that: (1) unearned revenue by type (domestic or international) reconciles to the charges for which reservations have been made and the flight time has not yet passed, and (2) earned revenue by type (domestic or international) reconciles to the charges made to unearned revenue for flights that occurred. If the amounts differ, details are recorded in a suspense file and a supervisor is notified electronically. The supervisor must bring the system into balance, clear the suspense file, and record the cause of the difference. Assessing the Effectiveness of Monitoring The airline’s risk management department has the responsibility for assuring the integrity of monitoring activities. Risk management personnel have read-only access to all files containing: (1) notifications of unreconciled amounts, e.g., for cash drawers, deposit ticket receipts, credit card charges, credit card collections, earned and unearned revenue; and (2) explanations of the causes of reconciliation failures and attempts to reconcile accounts. Controlling Operations and Improving the System The files containing the underlying causes for reconciliation failures are available to department managers, who are responsible for identifying system changes consistent with more effective operations. Department managers consult with system development personnel on proposed changes and authorize those that appear to be cost-effective process improvements. For example, a cash receipts manager might suggest modifications to the system to reduce the incidence of reconciliation failures between system-determined revenue and cash receipts. Each department has read-only access to system-calculated statistics for financial and operating results and is responsible for using the information to control its area and to recommend changes with the potential to improve any aspect of the airline’s operation. For example, supervisors are responsible for investigating excessive numbers of accounts that fail to be reconciled within one day and recommending corrective action. Marketing personnel are responsible for evaluating the effectiveness of the fare structure and recommending changes to it. Together, flight operations and marketing personnel are responsible for evaluating the effectiveness of the flight schedule and recording changes to it. Executives also have access to the financial and operating results, which prompt them to suggest changes to be evaluated by one or more departments.



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Maintaining System Integrity and Continuity Controlling System Development through Change Control The airline uses a proprietary program library management system to ensure that all program code and system changes are authorized and documented. A quality assurance (QA) group provides test data to programmers and migrates programs from development libraries to test libraries to production libraries after users have authorized changes. Change approvals are documented with electronic signatures. For emergency program changes made in response to system failures, QA personnel monitor subsequent authorization and documentation. Program development and testing are done on servers that are independent of the production system and large enough to conduct volume tests. Attaining System Reliability and Access Control The airline uses a proprietary system to monitor and manage its information technology (IT) infrastructure. From an operations center control room, technicians monitor processes whose degradation or failure would threaten system operability. Aspects subject to monitoring include application availability, application performance, file availability, application interfaces, data transfers, and response levels. For customer-facing applications, the service goal is to detect and correct problems before customers notice them. From their desks, technicians investigate problem situations, summon hardware, software, and network specialists, and reconfigure the network and servers to avoid problem areas until full capabilities can be restored. For example, if particular network paths seem prone to failures, technicians shift network traffic to other paths. Through the use of software and hardware monitors, some of the technicians specialize in analyzing unusual activity on the network that might be indicative of hacker penetration, denial-ofservice attacks, or laxity in administration of passwords or access privileges. These technicians are also responsible for detecting security lapses in the way hardware, software, and network resources are configured and proposing system parameter changes and security patches to correct security lapses. Once management authorizes the changes and patches, QA personnel implement them on the production system. Recovering from Processing Interruptions All the groups with a role in the IT infrastructure are responsible for recommending changes to the airline’s business continuity plan. Because the online systems require 24 hours per day, 7 days a week availability, the continuity plan has never been tested in its entirety at one time. Some aspect of the plan is executed every time a component fails or a component is replaced or added. Individual components are occasionally disabled to test specific functions. For example, some servers might be varied offline at a nonpeak time to enable operating personnel to practice planned recovery efforts. Maximizing Revenue per Seat-Mile Because of fierce competition and large fixed costs, a significant risk to the airline is the inability to maintain profit margins. The airline’s approach to managing this risk is to use a load forecasting model and data mining software to maximize flight profitability. The airline’s flight history data warehouse contains the number of passengers in each fare category for each flight for each day. The forecasting model incorporates factors such as day of the week, holiday occurrence, time of the year, fuel cost by location, and competitors’ flights and fares. Analysts investigate flights whose actual loads are outside the forecasted load ranges, and recommend changes to flight schedules and fares and abandonment of unprofitable flights. In addition to using the load-forecasting model, the marketing department looks for revenue enhancement opportunities with proprietary data mining software. Yield-management analysts make recommendations for allocating seats between cheap leisure travel (off-peak times and advance


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purchases) and on-demand business travel (peak times and regular purchases). Based on load forecasting and data mining results, marketing personnel change fares and flights to maximize revenue per seat-mile. After each set of flight and fare changes, the marketing department evaluates whether the changes had the intended effect on revenue. Another significant risk to the airline is unanticipated escalation of fuel costs. The airline manages this risk by placing forward contracts for fuel and minimizing fuel purchases in the highestcost areas. Other risks for the airline are that it will miss deadlines for implementing mandated security checking of passengers and luggage and be sluggish relative to its peers in using information technology to enable effective operations or revenue management. In addition to the uses already cited, information technology could be important in the following ways: matching airport employee schedules to flight arrivals and departures, routing and tracking baggage and freight to minimize handling and lost item recovery, expediting passenger boarding to minimize ground time and employee staffing, and rerouting flights and passengers when weather or other conditions disrupt flight schedules to minimize losses. The airline manages this risk by charging its chief technology officer with the responsibility of recommending new uses and enhancements to existing information systems on a monthly basis and evaluating the success of each technology implementation project. 1.

REQUIREMENTS Develop an audit program for Fly Airline’s e-ticket revenue: A. Identify controls for e-ticket revenue and explain the objective of each control, i.e., what the control is intended to accomplish with respect to financial reporting. Show the controls and objectives in the following format, adding rows as needed. The first row, containing a control and its objective, illustrates the appropriate level of detail for the entries.

1

C ontr ols and O b jec ti ves : e-T ic ke t Re ven ue O b jec tive: W h at the Co ntrol C ontr ol ach ie ves for Fin an cial Re por tin g S upervis ors m onit or the dai ly Ens ures that ticke t s ales or cha nge reconc ili ati on of credi t ca rd fee t rans act ions aris ing fr om credi t cha rge s b y i ss uer b y da y wi th ca rd t rans act ions exis t (a nd hence s ubse quent bank a ccount are not fict iti ous) rece ipts

2 3 4 5



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B. Group the controls by financial statement assertion and develop a test of each control. Show your groupings and tests of controls in the following format, adding rows as needed. The entry in the first row illustrates the appropriate level of detail for the entries. Con trols and Tes ts b y Ass ertion: e-Ti ck et Revenue Ass ertion Exis tence or occu rren ce

1

Control Supervisors m onito r the dai ly reconciliation of credit card charges by iss uer by day with subs equent bank account recei pts

Tes t of Control 1. Verify that the system perform s a valid dail y reconciliation of credit card charges by issuer by day with subsequent bank account receipts 2. R eview the reconciliati on logs to confirm that supervisors daily moni tor the cont rol

Completeness Rights or obligations Valuation Presentation and dis clos ure

2 1 1 1 1

C. Develop one or more substantive tests for each financial statement assertion in the following format, adding rows as needed.

S ub st an tiv e T es ts o f A sse r tio n s: e -T ic ke t R e v e n ue A sse r t ion E x iste n c e o r o c c ur r e n c e C o m ple t e ne s s R igh ts o r o blig a tio ns V a lu a tio n P r e s en t at ion a nd d is c lo s ur e

1

S ub st an tiv e T es t

1 1 1 1


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D. Using the tests of controls and substantive tests in B and C, prepare an audit program that organizes the procedures an auditor would perform to test e-ticket revenue into groups that would enable the work to be done efficiently. Show the audit program in the following format, adding rows as needed. A u d it P r o gr a m : e - T ic k e t R e v e n u e A u d it P r o gr a m G ro up Perfo rm a n a ly tic a l p r oc e d u r e s a s p a r t of p la n n in g V e r if y c o rr e c t s ys te m op e r a ti on an d su s ta in a b ilit y o f p r oc e s si ng P e r f o r m t e sts of c o n tr ols in c lu d in g te s tin g th e e f f e c tiv e n e ss o f a p p lic a t io n m o ni to ri ng p r oc e d u r e s Perfo rm su b st a nt iv e t e sts

2.

A u d it P r o c e d u r e

A s se r t io n

1 2 1 2

1 2

1 2

Explain the significance of the following risks to the financial statements and explain tests that an auditor might perform to assess the risks using data from Fly Airline’s information system. While current auditing standards require auditors to have an understanding of the client’s business, auditors are placing increased emphasis on business risks because they are concerned about the potential of risks to result in misstatements in the financial statements. A. The risk of impaired assets B. The risk of inadequate yield management



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LEARNING OBJECTIVES Learning Objectives The objective of the Fly Airline case is for students to learn to develop an audit program in a context, e-ticket revenue, in which most of the evidence is available electronically and in which tests of controls and substantive tests can be performed using data available in electronic form. In this situation, auditors would normally assess control risk below the maximum, and hence perform tests of controls and substantive tests. In sequence, students: 1. Develop an audit program by: A. Identifying controls and their objectives; B. Matching controls to financial statement assertions for revenue and developing tests of controls; C. Developing substantive tests by assertion; and D. Organizing the audit procedures in B and C into an efficient program that an auditor might follow to perform the audit work. 2. Explain tests for assessing risks using data from the client’s information system. Although missing some of the complexity of an airline’s actual operations, the case narrative presents a realistic representation of airline operations with respect to e-ticketing and related processes quickly. This simplification is helpful because it permits students to grasp the essential processes quickly. Because many auditing assignments concern products rather than services, this case likely represents a new context for many students. Furthermore, the pervasiveness of information technology embodied in the e-ticket revenue processes is intended to give students experience in thinking through the implications of auditing in situations where controls can be tested and relied upon. More important than students achieving the specific audit program provided in the solution is their learning to develop effective and efficient audit programs in a new context. That is, the objective is not for students to reproduce the suggested solution, but to let their efforts preparing an audit program for e-ticket revenue constitute learning for preparing audit programs for the next situations they encounter (Kozulin 1998; Sfard 1998). For this purpose, it is helpful for students to have the opportunity to defend their choices of audit procedures and to ask other students to justify their choices. This approach helps prepare students for auditing in situations featuring new business processes, especially those relying heavily on new uses of information technology. IMPLEMENTATION GUIDANCE Configuring the Case for Specific Learners The case is appropriate for students that have completed an introduction to auditing revenue and are familiar with information systems, e.g., by having taken an accounting information systems course. Hence, the case may be used late in a first course in auditing or in a subsequent auditing course, including an information systems auditing/assurance course. The requirements as presented are configured for students in a first auditing course. The suggested formats for Requirements 1.A and 1.B include one entry to reduce students’ uncertainty about what they are to do and at what level of explanation. Depending on students’ backgrounds, it may be helpful to include an entry for Requirement 1.C. First-course students would benefit from class discussion about outcomes from individual requirements, e.g., the first requirement (1.A) is to identify controls and their objectives, before proceeding with subsequent requirements. If students lack knowledge about preparing audit programs, then Requirement 1.D could be omitted. Configured as presented, students, depending on their backgrounds, need about four to ten hours to complete the case. In a second auditing course with more advanced students, some or all of the sample entries


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might be omitted. For truly advanced learners that do not need the scaffolding afforded by the individual requirements (A–D in Requirement 1), Requirement 1 could be stated simply as “Develop an audit program for Fly Airline’s e-ticket revenue” without the A–E subrequirements. In an information systems auditing/assurance course in which there might be students with strong information systems background but minimal auditing background, it is helpful to retain the subrequirements of 1 (A–D), even if other students might not need them. Regardless of how the case is configured for students, the objective is to provide the scaffolding learners need to complete the task, simplifying the learner’s role if needed, but not the task itself (Daniels 2001). Staging Collaborative Learning in Groups To maximize learning, it is helpful for students to work collaboratively on the case in groups of three to five members, which affords students opportunities to learn from each other (Rogoff 1998). The learning opportunities can be maximized by making the groups as heterogeneous as the enrollment permits. Working with each other to take advantage of the knowledge that each member already possesses has the potential to enable the groups to achieve outcomes that no member could achieve alone (Hansen et al. 1999). With respect to group composition, it is ideal for the information systems expertise to be distributed across all the groups so that each group has at least one member conversant with how an auditor might obtain evidence about the effectiveness of a control in an information system sufficient to rely on it. Such controls might be associated with a specific application or constitute a general control such as: (1) change control over modifications to application programs or (2) referential integrity in a database enforcing business rules. These information systems experts can explain technical aspects to other group members. Similarly, it is ideal for auditing expertise to be distributed across all the groups. In this case, the student expert’s role is to help other students make the logic leaps: (1) from control to financial statement assertion, (2) from assertions to tests of controls, (3) from tests of controls to putting tests of controls and substantive tests together to obtain sufficient evidence for each assertion. Students that are about average with respect to expertise in information systems and auditing can keep the student experts honest by asking them to explain and justify their reasoning in language that is accessible to everyone in the group. Although making the initially unshared knowledge of each group member available to all group members is essential (Stasser and Titus 1985, 1987), collaboration involves more than merely sharing knowledge. Collaboration sets the stage for group members to be confronted with the fact that members hold different beliefs. For example, although they might readily agree on what controls appear in the narrative and how to test each control, group members are unlikely to agree initially on what each control contributes to financial statement reporting and what substantive tests are needed to generate sufficient evidence. The benefit of collaboration is that students, in the process of being confronted with and coping with peers that do not hold the beliefs that they hold, can develop their ability to think critically about problems (Bruffee 1999). In essence, students learn “to discriminate better between facts and conclusions, to draw fewer false conclusions, to consider more than one solution to a problem, and to be less adversely influenced in their approach to a problem by their experience of a preceding one” (see Abercrombie 1960, 18). One of the sources of the power of collaborative learning appears to be a function of one’s reasoning about ideas that are ultimately rejected. In this framework, learning occurs in the activity of tearing apart inferior solutions rather than in the creation of an acceptable solution (Kruger 1993). Developing judgment this way requires interacting with peers, who push each other to justify their beliefs or abandon them (Abercrombie 1960). The overall objective of collaborative learning is to enable learners to go beyond simply learning a solution to the current problem. Instead, the objective is for learners to internalize reasoning



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strategies that enable them to develop effective approaches to the next new problem they encounter (Kozulin 1998; Sfard 1998). In terms of developing auditing expertise, this means not only learning to think like an auditor, but also to be able to design audit programs for business processes that have not yet been developed that will be implemented with technology that has not yet been invented. Working together in collaborative groups also lets students experience the kinds of collaboration that are expected of business professionals working on new problems for which new approaches or solutions are required (Schrage 1990; Raelin 1997). Student Feedback on Learning Students have found the case both challenging and engaging. It is challenging because it prompts students to apply what they have learned about auditing revenue in a new context and there is no one right answer. It is engaging because it features technologically enabled business processes like ones that many organizations are developing, and the interplay between tests of controls and substantive tests is inherently interesting. Another benefit of the case is that the airline’s reliance on processes implemented with technology prompts students that are reluctant to master the nuances of information technology to experience a need for doing so. The case has been used in different configurations with undergraduate and graduate students at two universities over a several-year period. For example, in a first auditing course, after students had been introduced to internal control and tests of controls, students identified controls in Fly’s system and their relationship to the financial statement assertions related to revenue. The exercise enabled students to see the relationships between controls and financial statement assertions. While most textbooks introduce monitoring as a component of internal control, materials for student use that emphasize the ramifications of effective monitoring for audit programs are scarce. In Fly’s system, monitoring is so pervasive that auditors’ tests of internal control become tests to evaluate the effectiveness of monitoring. If they have not discussed the impact of monitoring on tests of controls, students are likely to develop audit programs that merely test individual controls rather than the effectiveness of the monitoring. Without this discussion, students may not realize that testing the monitoring is a very efficient means of gathering evidence about the effectiveness of controls. A way to help students having difficulty understanding the role of individual monitoring activities is to have them think through how the revenue process might fail, and how the failure might go undetected in the absence of each of the monitoring activities. In a graduate auditing course, students liked the fact that preparing the audit program afforded them an opportunity to apply their knowledge of state-of-the-art information systems. The case is particularly appealing to students with a strong interest in information systems. The case also enables students to see that designing an audit program is a much more interesting intellectual endeavor than simply performing audit program steps. The first version of the case had just one part, i.e., “Design an audit program for e-ticket revenue.” Because of their lack of experience in designing audit programs, the first students completing the case found it difficult. Subsequently, the one-part “Design an audit program” direction was expanded into its component parts, i.e., identify the controls and their objectives, match controls to assertions, develop tests of controls, develop substantive tests, and organize the tests into an audit program. Following the steps in sequence enables students to see the relationships among the controls, financial statement assertions, the tests of controls, and the substantive tests, which enables students to develop more effective audit programs. After completing the case, student teams developed a narrative for the revenue cycle of another company that relies on technology for essential business processes and prepared an audit program for that company’s revenue. Given the experience of preparing the audit program for Fly Airline, students were able to design well-controlled processes for which they could develop an audit program that relied on testing the effectiveness of monitoring. Preparing the narrative and corresponding audit program enabled students to demonstrate that they had learned to audit revenue in a highly automated context rather than just learned the Fly case. Issues in Accounting Education, August 2003

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Extensions When discussing the audit program in class, the instructor might ask students about the implications of testing a control and finding that it is not effective. In such instances, students can be prompted to develop additional substantive tests for the relevant financial statement assertion. The case can be used as a model for students to develop an audit program for another technology-intensive business. After completing the Fly case, teams of students can be assigned to select a business in which the system could be as technology-enabled as Fly’s system. Some possibilities include a make-to-order company such as Dell Computer Corp. or a company with extensive outsourcing such as Cisco Systems Inc. From published accounts and their own experience, students write a description of the system the business could have. After revising the description based on the instructor’s recommendations, students design an audit program for the revenue of that business. This project enables students to transfer their understanding of an accounting system in one industry to another similar but different business. The electronic systems in these businesses are easy to audit because the teams have been sensitized to the need to build in monitoring that can be tested. Lest students be tempted to model their companies too closely on Fly Airline’s revenue processes, instructors could require students to select a different cycle, e.g., procurement. TEACHING NOTES Teaching Notes are available through the American Accounting Association’s new electronic publications system at http://aaahq.org/ic/browse.htm. Full members can use their personalized usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. If you are a full member of AAA and have any trouble accessing this material please contact the AAA headquarters office at [email protected] or (941) 921-7747.

REFERENCES Abercrombie, M. L. J. 1960. The Anatomy of Judgment. New York, NY: Basic Books. Bruffee, K. A. 1999. Collaborative Learning: Higher Education, Interdependence, and the Authority of Knowledge. Baltimore, MD: Johns Hopkins. Daniels, H. 2001. Vygotsky and Pedagogy. London, U.K.: Routledge. Hansen, T., L. Dirckinck-Holmfeld, R. Lewis, and J. Rugelj. 1999. Using telematics for collaborative knowledge construction. In Collaborative Learning: Cognitive and Computational Approaches, edited by P. Dillenbourg, 169–196. Amsterdam, The Netherlands: Pergamon. Kozulin, A. 1998. Psychological Tools: A Sociocultural Approach to Education. Cambridge, MA: Harvard University Press. Kruger, A. C. 1993. Peer collaboration: Conflict, cooperation, or both? Social Development 2 (3): 165–182. Raelin, J. A. 1997. A model of work-based learning. Organization Science 8 (6): 563–578. Rogoff, B. 1998. Cognition as a collaborative process. In Handbook of Child Psychology, Volume 2: Cognition, Perception, and Language, edited by D. Kuhn, and R. S. Siegler, 679–744. New York, NY: Wiley. Schrage, M. 1990. Shared Minds: The New Technologies of Collaboration. New York, NY: Random House. Sfard, A. 1998. On two metaphors for learning and the dangers of choosing just one. Educational Researcher 27 (2): 4–13. Stasser, G., and W. Titus. 1985. Pooling of unshared information in group decision making: Biased information sampling during discussion. Journal of Personality and Social Psychology 48 (6): 1467–1478. ———, and ———. 1987. Effects of information load and percentage of shared information on the dissemination of unshared information during group discussion. Journal of Personality and Social Psychology 53 (1): 81–93.
