2. What are the objectives of it governance?

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Chapter 2

Auditing IT Governance Controls
Review Questions
1. What is IT governance?

Response: IT governance is a relatively new subset of corporate governance that focuses on the management and assessment of strategic IT resources.
2. What are the objectives of IT governance?

Response: The key objectives of IT governance are to reduce risk and ensure that investments in IT resources add value to the corporation.
3. What is distributed data processing?

Response: Distributed data processing involves reorganizing the central IT function into small IT units that are placed under the control of end users. The IT units may be distributed according to business function, geographic location, or both. All or any of the IT functions may be distributed. The degree to which they are distributed will vary depending upon the philosophy and objectives of the organization’s management.
4. What are the advantages and disadvantages of distributed data processing?

Response: The advantages of DDP are:

a. cost reductions

b. improved cost control responsibility

c. improved user satisfaction

d. back up flexibility
The disadvantages (risks) are:

a. inefficient use of resources

b. destruction of audit trails

c. inadequate segregation of duties

d. difficulty acquiring qualified professionals

e. lack of standards
5. What types of tasks become redundant in a distributed data processing system?

Response: Autonomous systems development initiatives distributed throughout the firm can result in each user area reinventing the wheel rather than benefiting from the work of others. For example, application programs created by one user, which could be used with little or no change by others, will be redesigned from scratch rather than shared. Likewise, data common to many users may be recreated for each, resulting in a high level of data redundancy. This situation

has implications for data accuracy and consistency.

6. Explain why certain duties that are deemed incompatible in a manual system may be combined in a CBIS computer-based information system environment. Give an example.

Response: The IT (CBIS) environment tends to consolidate activities. A single application may authorize, process, and record all aspects of a transaction. Thus, the focus of segregation control shifts from the operational level (transaction processing tasks that computers now perform) to higher-level organizational relationships within the computer services function.
7. What are the three primary CBIS functions that must be separated?

Response: The three primary CBIS functions that must be separated are as follows:

a. separate systems development from computer operations,

b. separate the database administrator from other functions , and

c. separate new systems development from maintenance.
8. What exposures do data consolidation in a CBIS environment pose?

Response: In a CBIS environment, data consolidation exposes the data to losses from natural and man-made disasters. Consolidation creates a single point of failure. The only way to back up a central computer site against disasters is to provide a second computer facility.
9. What problems may occur as a result of combining applications programming and maintenance tasks into one position?

Response: One problem that may occur is inadequate documentation. Documenting is not considered as interesting a task as designing, testing, and implementing a new system, thus a systems professional may move on to a new project rather than spend time documenting an almost complete project. Job security may be another reason a programmer may not fully document his or her work. Another problem that may occur is the increased potential for program fraud. If the original programmer generates fraudulent code during development, then this programmer, through maintenance procedures, may disable the code prior to audits. Thus, the programmer can continue to cover his or her tracks.
10. Why is poor-quality systems documentation a prevalent problem?


Poor-quality systems documentation is a chronic IT problem and a significant challenge for many organizations seeking SOX compliance. At least two explanations are possible for this phenomenon. First, documenting systems is not as interesting as designing, testing, and implementing them. Systems professionals much prefer to move on to an exciting new project rather than document one just completed. The second possible reason for poor documentation is job security. When a system is poorly documented, it is difficult to interpret, test, and debug. Therefore, the programmer who understands the system (the one who coded it) maintains bargaining power and becomes relatively indispensable. When the programmer leaves the firm, however, a new programmer inherits maintenance responsibility for the undocumented system. Depending on its complexity, the transition period may be long and costly.
11. What is RAID?

Response: RAID (redundant arrays of independent disks) use parallel disks that contain redundant elements of data and applications. If one disk fails, the lost data are automatically reconstructed from the redundant components stored on the other disks.
12. What is the role of a data librarian?

Response: A data librarian, who is responsible for the receipt, storage, retrieval, and custody of data files, controls access to the data library. The librarian issues data files to computer operators in accordance with program requests and takes custody of files when processing or backup procedures are completed. The trend in recent years toward real-time processing and the increased use of direct-access files has reduced or even eliminated the role of the data librarian in many organizations.
13. What is the role of a corporate computer services department? How does this differ from other configurations?

Response: The role of a corporate computer services department (IT function) differs in that it is not a completely centralized model; rather, the group plays the role of provider of technical advice and expertise to distributed computer services. Thurs, it provides much more support than would be received in a completely distributed model. A corporate computer services department provides a means for central testing of commercial hardware and software in an efficient manner. Further, the corporate group can provide users with services such as installation of new software and troubleshooting hardware and software problems. The corporate group can establish systems development, programming, and documentation standards. The corporate group can aid the user groups in evaluating the technical credentials of prospective systems professionals.
14. What are the five risks associated with distributed data processing?

Response: The five risks associated with distributed data processing are as follows:

a. inefficient use of resources,

b. destruction of audit trails,

c. inadequate segregation of duties,

d. potential inability to hire qualified professionals, and

e. lack of standards.
15. List the control features that directly contribute to the security of the computer center environment.


a. physical location controls

b. construction controls

c. access controls

d. air conditioning

e. fire suppression

f. fault tolerance
16. What is data conversion?

Response: The data conversion function transcribes transaction data from paper source documents into computer input. For example, data conversion could be keying sales orders into a sales order application in modern systems or transcribing data into magnetic media (tape or disk) suitable for computer processing in legacy-type systems.
17. What may be contained in the data library?

Response: The data library is a room adjacent to the computer center that provides safe storage for the off-line data files. Those files could be backups or current data files. For instance, the data library could store backups on DVDs, CD-ROMs, tapes, or other storage devices. It could also store live, current data files on magnetic tapes and removable disk packs. In addition, the data library could store the original copies of commercial software and their licenses for safekeeping.
18. What is an ROC?

Response: A recovery operations center (ROC) or hot site is a fully equipped backup data center that many companies share. In addition to hardware and backup facilities, ROC service providers offer a range of technical services to their clients, who pay an annual fee for access rights. In the event of a major disaster, a subscriber can occupy the premises and, within a few hours, resume processing critical applications.
19. What is a cold site?


The empty shell or cold site plan is an arrangement wherein the company

buys or leases a building that will serve as a data center. In the event of a disaster, the shell is available and ready to receive whatever hardware the temporary user requires to run its essential data processing systems.
20. What is fault tolerance?

Response: Fault tolerance is the ability of the system to continue operation when part of the system fails due to hardware failure, application program error, or operator error. Implementing fault tolerance control ensures that no single point of potential system failure exists. Total failure can occur only in the event of the failure of multiple components, or system-wide failure.
21. What are the often-cited benefits of IT outsourcing?

Response: Often-cited benefits of IT outsourcing include improved core business performance, improved IT performance (because of the vendor’s expertise), and reduced IT costs.
22. Define commodity IT asset.

Response: Commodity IT assets are those assets that are not unique to a particular organization and are thus easily acquired in the marketplace. These include such things are network management, systems operations, server maintenance, and help-desk functions.
23. Define specific asset.

Response: Specific assets, in contrast to commodity assets, are unique to the organization and support its strategic objectives. Because of their idiosyncratic nature, specific assets have little value outside of their current use.
24. List five risks associated with IT outsourcing.


a. failure to perform

b. vendor exploitation

c. outsourcing costs exceed benefits

d. reduced security

e. loss of strategic advantage

Discussion Questions
1. How is pre-SOX IT governance different from post-SOX IT governance?

Response: Prior to SOX, the common practice regarding IT investments was to defer all decisions to corporate IT professionals. Modern IT governance, however, follows the philosophy that all corporate stakeholders, including boards of directors, top management, and department users (i.e. accounting and finance) be active participants in key IT decisions. Such broad-based involvement reduces risk and increases the likelihood that IT decisions will be in compliance with user needs, corporate policies, strategic initiatives, and internal control requirements under SOX.
2. Although IT governance is a broad area, only three aspects of IT governance are discussed in the chapter. Name them and explain why these topics were chosen.

Response: Although all IT governance issues are important to the organization, not all of them are matters of internal control under SOX that may potentially impact the financial reporting process. This chapter examined three IT governance issues that are addressed by SOX and the COSO internal control framework. These are:

a. Organizational structure of the IT function,

b. Computer center operations, and

c. Disaster recovery planning.

3. What types of incompatible activities are prone to becoming consolidated in a distributed data processing system? How can this be prevented?

Response: Achieving an adequate segregation of duties may not be possible in some distributed environments. The distribution of the IT services to users may result in the creation of small independent units that do not permit the desired separation of incompatible functions. For example, within a single unit the same person may write application programs, perform program maintenance, enter transaction data into the computer, and operate the computer equipment. Such a situation would be a fundamental violation of internal control.
4. Why would an operational manager be willing to take on more work in the form of supervising an information system?

Response: Managers are responsible for the success of their divisions. If the benefits to be reaped from a DDP are expected to be great enough, the manager may find it is worth her or his while to expend the extra effort. Some of the benefits the manager may hope will materialize within the divisions are more efficiently run operations, better decision making, and reduced processing costs. Increased customer satisfaction may also result if the DDP system is more accommodating.
5. How can data be centralized in a distributed data processing system?

Response: The data is stored centrally, but updated or processed at the local (remote) site. Thus, data is retrieved from the centralized data store, processed locally, and then sent back to the centralized data store.
6. Should standards be centralized in a distributed data processing environment? Explain.

Response: The relatively poor control environment imposed by the DDP model can be improved by establishing some central guidance. The corporate group can contribute to this goal by establishing and distributing to user areas appropriate

standards for systems development, programming, and documentation.
7. How can human behavior be considered one of the biggest potential threats to operating system integrity?

Response: The purpose of segregation of duties is to deal with the potential negative aspects of human behavior including errors and fraud. The relationship between systems development (both new systems development and maintenance) and computer operations activities poses a potential risk that can circumvent operating system integrity. These functions are inherently incompatible. With detailed knowledge of application logic and control parameters and access to the computer’s operating system and utilities, an individual could make unauthorized changes to the application during its execution.
8. A bank in California has thirteen branches spread throughout northern California, each with its own minicomputer where its data are stored. Another bank has 10 branches spread throughout California, with its data stored on a mainframe in San Francisco. Which system do you think is more vulnerable to unauthorized access? Excessive losses from disaster?

Response: The bank that has the data for all of its branches stored on one mainframe computer is at greater risk of access control. All of the firm’s records are centrally housed. Once a perpetrator gains unauthorized access to the system, the data for all 10 branches are at risk. For the other bank the perpetrator would have to breach security for each of the thirteen branch computers. Thus, the bank with all of its data centrally stored on a mainframe is more vulnerable to access control. The primary disasters of concern in California are earthquakes and fires. The bank with a central mainframe in San Francisco is probably at the greatest risk of damage from both earthquakes and fires. If that system is destroyed, all of the branches lose their processing capability and, possibly, stored data.
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