Auditing in the eCommerce era

The public accountats have provided audits for more than 100 years, a traditional attestation service. The auditing can create a huge economic value for companies. The cost of raising capital is reduced by auditing companies financial statement. It is for debt, companies would be able to offer their shares at high price, could pay low interest rates for equity.

Despite of the present and future value of auditing we should be concerned about the audits role in future. The traditional auditing is being threatened by the information technology power systems, that are being developed today. The use of the information technology provides users with an alternative resources, thereby the reduction of financial statements. These information technology developments are dramatically changing all of other aspects of preparation, audit and financial statements.

The growing power and increasingly pervasive information technology use, threatens auditors in many different ways. The first area that is being threatened, is the relative importance of financial statements to investors. In the beginning the majority of the information financial statements represented available to an enterprise’s debt and equity investors. Later on the gradual improvement of accounting principles, the financial statements valued increased as well, where as at the same point of time, the other relevant information was made available by information technology,for example now investors are able to get latest up-to minute data regarding companies via proprietary and public database instead of waiting for annual or a quarterly reports. The second threat posed by the information technology to auditing is the fact that the printed annual financial reports are based on historical figures, where as on the other hand side the information technology can provide users with a current figures and details.

In today’s fast growing society, the figures and details become outdated therefore when the investors and banks have real time access to company’s database the could have little interest in annual financial printed reports,just because of the fact that the audit franchise heavily relies on financial statements. There has been a recent decline investor-relevant share data in CPA’s market.

Referance:- Ning Zhao and David C.Yen(2004) “auditing in e-commerce era”

Threats and challenges to traditional auditing:-

The information technology presents a serious threats to the audit function. Many of the economic events are now being measured,captured, recognized, and reported electronically without any white paper documentation. Along this RTA(real-time accounting) is being to emerge, whereas the information technology presents a serious threats to the audit functions, it also on the other side offers CPA’s opportunities to develop valueable new services,for example as the branch of computer science “artificial intelligence” concerns itself with computer thinking is very useful in accounting area. The XBLR(extensible business reporting language) will also provide professional opportunities to financial executives and CPA’s,and will add value to financial information for all users as well

Reference:-

Bagrnaoff,N and Vendrzyk,V.(2000), “the changing role of IS audit among the big five accounting firms”, information systems control journal,vol 5.

Ning Zhao and David C.Yen(2004) “auditing in e-commerce era”

Real-time accounting:-

The attest function is the major function of auditing, which intakes giving a fair opinion on the fairness of the companies financial statement, the GAPP(Generally accepted accounting principles) conducted this evaluation and requires the GAS(generalized auditing standards )generalized application(Razaee et al, 2000). in early years a large part of the information was presented by financial statements to an enterprise investors. The equity investors, debtors and other investing an lending decisions were largely based on company’s financial statements. The auditor role was vital one just because of this reliability on these financial statements. The audits were necessary to make sure that the information public is receiving is complete,accurate and reliable as possible. The reason for the information needed to as accurate , complete and genuine as possible, because the statements were published on a perodic basis only. The financial statements are produced, audited and published only few times a year because of the reason that information needed to produce such reports is whether too costly to obtain or too difficult to obtain under RTA. However the use of information technology had currently made it feasible and economical, whereas the traditional accounting paper based systems increasingly become out of synchronization of practice. Now many of the economic events are being measured, captured , recognized an reported via electronic means, with out using paper documentation. This new accounting process is named as RTA by Rezaee at al (2000). the RTA(real time accounting can be defined as “making accurate,

appropriate accounting information available to a wider range of users as soon as possible,to assist in providing higher quality and faster decision support.

The changes which are occurring in accounting processes that removed traditional information source and requires new process and procedure to financial audit. A significant change is required by a procedures of audit. The firms which are using paper-based audit procedures need to be replaced by a continues audit procedure.

Reference:- Bondar,G and Hopwood,W.(2001),Accounting information systems,8th edition,prentice-Hall,upper saddle River,NJ

EDI(electronic data interchange):-The electronic data interchange initially was introduced to save money and time allowing companies to do business electronically with paper documentation usage, where as the electronic data interchange also permit company’s to make their supply chains more efficient with an ability to connect with supplier, a company will not went for paper document in order to get relevant and important data. The companies are linked through electronic data interchange, therefore they better are able to flows the goods and the services. They could produce and ship “just in time inventory” eliminating the “just in case inventory” need. Once the suppliers get access to company’s/enterprise data base they will be no more or little interested in the company’s annual financial reports and an auditor opinion. They will be only need the assurance and guarantee from the auditor that the information provided in database is accurate, relevant and complete.

Reference:-

Bondar,G and Hopwood,W.(2001),Accounting information systems,8th edition,prentice-Hall,upper saddle River,NJ.

Ning Zhao and David C.Yen(2004) “auditing in e-commerce era”

Artificial Intelligence:-

Most of the today’s businesses use artificial intelligence software that is expert system software in their accounting application’s. These expert systems are the software program’s that use knowledge, fact and figures, and reasoning techniques to solve problems that would normally require humans expert abilities. The perfect field for use of these systems is accounting, mainly because many of the problems call for the specialized expertise. These systems proved to work efficiently for company’s and immensely helping their auditors.

Extensible business reporting language(XBRL):-

The use of the extensible business reporting language will make the financial managers more effective and their work easier,because it will increase the useability and access of business data. It does not matter whether the information is from an association or a business whether it is a small or large company or whether the company is public limited or private limited or whether it is the non-profit organization. Once after the financial information has been created and is formatted in extensible business reporting language for first time,it could be never created again and on the other hand side the cost for processing,calculating and formatting will be lowered. As argued by Cohen and Hannon, extensible business reporting language will expand vast majority of professional opportunities for financial executive, for CPA’s and for all of the users it will add financial information(Cohen and Hannon, 2000).

Reference:-

Bondar,G and Hopwood,W.(2001),Accounting information systems,8th edition,prentice-Hall,upper saddle River,NJ.

Ning Zhao and David C.Yen(2004) “auditing in e-commerce era”

Continues Auditing, a new concept:-

The auditing is tremendously growing and in many public accounting firm’s, from many years the revenue of audit services have not grown, under this severe situation both the CICA(Canadian institute of charted accountants) and AICPA (American institute of certified of public accountants; www.aicpa.com) task force on assurance services has identified the continues auditing is an approach service that should be offered to help the reserve, the effect of decline, and also in order to provide a frame work that should be conceptual for external continues audits.

The Canadian institute of charted accountants(CICA) defines “continues auditing as a methodology that enables an independent individual auditor to provide written assurance on subject matter using series of auditor’s reports provided simultaneously with or a short period of time”.

In order to add value to internet based,real time financial information, the decision makers and third party independent real time assurance that the information is accurate,reliable and secure. The auditing profession by itself is slow to adopt to information needs of online financial data users. In recent study the conclusion drawn by Canadian institute of charted accountants and American institute of certified of public accounts both while financial data is technologically viable for real time auditing,the real time assurance requires a significant role of auditor’s in real time information system(Shield’s 1998).

Both of the Canadian institute of charted accountants task force on assurance service and American institute of certified of public accounts special committee on assurance services, identified continues auditing as a service that should be offered,. The annual financial audit and continues auditing are significantly different, as mentioned above the Canadian institute of charted accountants in its latest research defines continues auditing as a methodology that enables an independent auditor to provide written assurance on subject matter using series of auditor’s reports provided simultaneously with are a short period of times(Shields.1998). A senior manager in CICA’s auditing standards department Mr.Greg shields describes how in the continues auditing reports are issued simultaneously with or a short period of time and on immediate basis. In this case the report could take an “evergreen” report which is available on website when user access it. It contains with auditor’s report dated and time of user access along with complete, accurate and reliable audited information. However the report on demand could be issued which is similar to “ever green report” but available on specific request of users on satisfying certain conditions. According to Shield unlike the traditional auditing the continues auditing focuses on any information relevant to decision making process(Shield,1998).

The AICPA web guide reported that the auditor’s can conduct continues auditing when almost, most of the information would be in electronic form,for example the auditor can detect auditors-specific exception items from all of the transaction’s processed by using a software.

Reference:- Ning Zhao and David C.Yen(2004) ” Auditing in the e-commerce era” pg,393.

Continues auditing required support:-

The use of continues audit will present significant technical hurdles(Verschoor, 1999). The Shields in 2000 reported that during an annual financial statement audit, the evidence is obtained often after the occurrence of an events,these delays are not consistent with the concept of continues auditing. In the continues auditing the little time passed between the transaction being audited , occurrence of events and the process of getting audit evidence and report on relate information. Furthermore in continues auditing there would be much less time to deal and investigate any incorrect statements filed and detected, often happening mis-statements and time needed for resolution,could make possible delays in reports and make less usefulness of continues auditing. These technical hurdles can be overcome on satisfying following conditions(Shields,2000).

Reference:- Ning Zhao and David C.Yen(2004) ” Auditing in the e-commerce era” pg,394.

FINDINGS:-

Most of the today’s organizations heavily rely on sophisticated EDP(electronic data processing) systems to manage their daily business transactions and strategic accounting records in order to meet the challenges to cut throat competition. The increasing dependance on such systems has raised many serious concerns like ASB(2002 a,b;2003 a,b).for example the account information and the transations are kept in electronic form,which only is readable to computers(Foneca,2003). Furthermore the audit trails do not exist at all or even for a limited period, all of the transactions are processed by electronic data processing(Khemakhe,2001). Therefore an unauthorized access is difficult to uncover or other transactions that are not covered timely( The IIA research foundation).

In response to these auditing concerns many auditing tools and techniques CAAT’s have been proposed (ASB&ASB),for example GAS(Generalized audit software)provided with auditors to access live account data,stored in many formats in various files that are readable to machines only(EDP and AuG-37,2003). The generalized audit software’s(GAS) also can disclose that useful information on client master files,which are not included in those reports which are produced by clients(Helms,2002). Weber reported that the parallel simulation of CAAT’s could be used to correctness of the electronic data processing module “EDP”(Weber,2004). To examine the transaction’s flow and to detect expectation’s online can be achieved by SCARF “system control audit review file”(Haffley and Meunier,2004). The generalized audit software is not in the list of “common software use”.

The CAATs and ex-post both are used primarily in internal audit setting, even the most commonly installed AAT,ITF is only used by 5-20 per cent of the organizations(Schelluch and Ray 2002;Mahmet,2002;IIA,2003;Le Grand,2001;Knaster,2003).

Failure to meet the expectation’s of CAATs may be due to:

Reported by (AICPA;IDEA,Chunk and Cardyn,2004)Generalized audit software or computer assisted auditing techniques software’s, lack a common interface with information technology,like operating system’s,formats and application program’s .

One of the popular most generalized audit software package that can extract file formats such as BBASEIII, ACII, and other having a common interface.

The problems is that the auditor would have to such a audit software for each of the electronic data processing system,if the electronic data processing system use properiotry or other file formats.

Second for the CAATs like SCARF or ITF,it is often required that the special audit modules be embedded at electronic data processing system design stage(Pathak,2003). Therefore the involvement of the auditor’s become necessary at early stages(IIA,2003;Tongren,1999). Further more the change in any auditing policy may require not only the modification of audit module software’s(Wells,2001;Geired,2002). In short the implementation of these software’s is too costly if it is possible(Carolyn,2004).

As the auditee’s electronic data processing systems become more complex,them it becomes essential for auditor’s to audit via electronic means that is through computers(Harlod,2001). Most of the computer assisted accounting techniques currently in use cannot access auditor’s live data. The historical data would be gathered by the auditors from auditee’s personnel. The saituation creats a possibility of fraudulent data(Carolyn,2004). Furthermore if the sufficient controls are not in place, the electronic data tempered by unauthorized personell can remain undetected for ever.

Reference:-

Junaid M.Shaikh(2005) ” e-commerce impact:emerging technology_electronic auditing”

Assurance standars Board(ASB) (2002a,2003a) February, EDP-auditing guidelines 2-3 December and 9-10 January.

How auditors could effectively apply existing CAAT’s:-

The auditors could effectively apply existing computer assisted auditing tools,with the support of latest and modern technologies, for example internet security technology(Oppliger, 2000), object oriented distributed middle ware’s( COBRA,2003;Britcher,1995,2003) and intelligent agents(Petit,et al,2003). Furthermore with the help of latest auditing approach that is EA(electronic auditing) the basic concept of the electronic auditing is to perform audit’s electronically,automatically where most of auditee’s accounting systems are electronically stored and processed(Harlod,2001).

With electronic auditing we believe:-

The common interface is possible via middle wares, where heterogeneous auditee’s electronic data processing systems can be operated across operating systems, multi-vendor hardware and application software .

On specific basis the audit module can be triggered by an auditor,so the audit module is under the auditor control, the auditors are less dependent upon computer specialists and are not required to involve in the early auditee electronic data processing systems.

The electronic auditing enables auditor at any time,any where, direct access and authorization of course, the auditors trading partners live data through standard interface .

This process reduces the possibility of fraudulent and manipulation of data.

The figure below describes the electronic auditing frame work, which is constituted of three advanced technologies .

Intelligent agents.

Internet security technologies.

Object-oriented distributed middle ware.

Intelligent agents:- The dramatic evolution of information technology and with the explosive growth in world wide web people often feel frustrated with this”unorganized” cyberspace recent researches in this area such as the intelligent agents have provided people with some hope for future. The new concept that has been emerged recently called intelligent agent(Geired,2002).

The intelligent agents are the most powerful software’s for gathering professional information from cyberspace for people without professional knowledge. These capable of intracting with humans by using natural languages,analyzing semantics and cooperating with other agents on internet.

The auditors can get domain knowledge without need of any help from specialists. All of the acquired information as much as possible could be restricted. The intelligent agents will make all aspects of audit work effective and efficient,including the gathering of industry information,collecting,evaluating the evidence, performing analytical review and accessing the auditor’s industry risk.

Reference:-

Junaid M.Shaikh(2005) ” e-commerce impact:emerging technology_electronic auditing”

Internet security technologies:-

With the rapid and a quick changes in technology,the security risks are also changing. The purpose to include security layers in the electronic auditing framework as shown in figure. This security layer will not only guard the safety of data stored in electronic data processing systems but also the exchange of the messages between two parties over the internet against those of third party(Neumann,2002). These are the functions which include encryption, non-repudiation and authentication. The authentication is the process where by both of the server and client prove their identity before beginning secure session to a trusted third party. The process of authentication can be achieved by using security technologies such as digital certificate(Feghh et al,2004).

Reference:-

Junaid M.Shaikh(2005) ” e-commerce impact:emerging technology_electronic auditing”

Assurance standars Board(ASB) (2002a,2003a) February, EDP-auditing guidelines 2-3 December and 9-10 January.

Britcher(1995,2003), ” auditing client/server information processing”, EDPACS 22 8, Febraury.

Kalaba,L.A.(2002) ” the benefits of CAAT” IT audit vol %5.

CONCLUSION:-

The use of the information technology is dramatically changing the way financial statements are prepared,used and audited. While these changing are providing with auditor’s new opportunities for the audit profession,and on the other hand side it also pose serious threats to the economic viability of auditing. There is no doubt that the paper based auditing is becoming less relevant. The growing power and increasingly pervasive information technology use, threatens auditors in many different ways. The first area that is being threatened, is the relative importance of financial statements to investors. In the beginning the majority of the information financial statements represented available to an enterprise’s debt and equity investors. Later on the gradual improvement of accounting principles, the financial statements valued increased as well, where as at the same point of time, the other relevant information was made available by information technology,for example now investors are able to get latest up-to minute data regarding companies via proprietary and public database instead of waiting for annual or a quarterly reports. The second threat posed by the information technology to auditing is the fact that the printed annual financial reports are based on historical figures, where as on the other hand side the information technology can provide users with a current figures and details.

In today’s fast growing society, the figures and details become outdated therefore when the investors and banks have real time access to company’s database they could have little interest in annual financial printed reports,just because of the fact that the audit franchise heavily relies on financial statements. There has been a recent decline investor-relevant share data in CPA’s market.

The introduction of electronic auditing through which the some of the audit tasks will be conducted via electronic means, over the internet with the support of information technologies. The three emerging information technologies, intelligent agents, internet security technologies, and object oriented distributed middlewares. For verification of concept, the presentation of a prototype electronic data processing systems based on COBRA standards,which is the object oriented layer from OMG. This system intakes a banking system(electronic data processing) where it supports OMG’s GLF, whereas the electronic auditing has some limitations as well. This approach depends upon distributed middleware standards that is DCOM,COBRA,or Java KMI to enable the interconnections of WWW and auditee’s electronic data processing system and auditor’s GASI.

Appendix:-

E-Commerce:-

The electronic commerce commonly known as eComm or eCommerce is the buying and selling of products, goods and services via electronic means. Such as through computer, internet and other computer networks.

The amount of trade through the electronic means has grown tremendously with wide spread internet usage. The commerce use is conducted in this way, spurring on innovations in online transaction processing electronic data interchange(EDI),supply chain management, internet marketing,electronic funds transfer,inventory management systems and fully automated data collection systems. The latest and modernized electronic commerce typically uses the WWW(World Wide Web) at some point in transaction’s life cycle. Although it intakes a wide range of technologies such as e-mail, mobile devices and telephones as well. A large proportion of eCommerce is entirely conducted for virtual items such as premium content access on a website, but most electronic commerce involves transportation of tangible and physical products in some way. The online retailers are some times are known as e-tailers and online retail some times known as e-tail. Almost all of the big retailers do have the presence on world wide web. The electronic commerce that is conducted through or with is referred to as B2B(business to business) and it can be open to all parties commodity exchange, product exchange, or limited to specific, prequalified participants( private electronic market). On the other hand side the electronic commerce conducted through and with the business and consumers is known as business to consumer(B2C). This type of the electronic commerce is conducted by the companies such as Amazon.com. Amazon is the online shopping where the buyer is directly online to sellers computer usually through internet. There is no intermediary service, the sale and purchase transaction is completed via electronic means and interactively in real-time. If an intermediary is present than the sale and purchase and is called E-Commerce for example ebay.com. In general electronic commerce generally consider to the sale aspect of electronic business, it also intakes the exchange of data to facilitate the financing and payment aspects of business transactions.

Referamce:- http//en.wikipedia.org/wiki/electronic_commerce.

Early Developments of eCommerce:-

In original facilitation of commercial transactions via electronically ws identified by eCommerce using technology such as EFT(electronic funds transfer) and EDI( electronic data interchange) both of them are the inventions of late 70’s allowing business to send commercial documents like inventory or purchase orders etc electronically. The acceptance and the growth of ATM(automated teller machine),credit cards, telephone banking in 1980’s were also electronic commerce form’s. The another form of e-comm was the airline reservation system typified in USA and tourism in UK by sabore.

The data mining and data warehousing, EPR(enterprise resource planning) were added additionally 1990’s onward in electronic commerce.

The invention of world wide web in 1990’s by “Tim Berners-lee” and transformation of an academic telecommunication network into a world wide every day, every man communication system called internet world wide web commercial enterprise on internet was strictly prohibited until 1991.

the internet became popular popular in 1994 world wide around when first internet online shopping get started and it took about five years to introduce digital subscriber lane(DSL) and security protocols allowing continues connection to internet. By the end of 2000 many American and European business companies offed their services through world wide web, and from then people began to associate a word “eComm” with an ability to buying various goods and services through internet using secure electronic payment services and protocols.

Referamce:- http//en.wikipedia.org/wiki/electronic_commerce.

Chaudhury, Abijit; Jean-Pierre Kuilboer (2002). e-Business and e-Commerce Infrastructure. McGraw-Hill. ISBN 0-07-247875-6

Historical developments of e-Commerce:-

In olden days the use of internet was to produce information about companies and for public relations. Later on it was evolved to e-communication, which is the response to basic queries for instance on product availability and stock availability. After that e-Commerce at the third stage born this makes customers and consumers to an online shopping of products and for an entity online selling and distribution of products and services. At last the e-business encapsulates all of the above the integrate selling, purchase, delivery, register and so on. This was achieved by networking with the customer the consumer and supplier.

Referamce:- http//en.wikipedia.org/wiki/electronic_commerce.

System requirement:-

First of all the information to be audited must be generated by reliable systems,such as the use of computerized that can produce reliable information very quickly. Here the question arises how one came to know whether the system is reliable or not? Are there any standards to test computer system’s reliability? The answer is yes, recently the AICPA and CICA developed a new service to provide assurance on reliability that is SYS trust. In SYS engagement the auditor’s report on the availability,security,reliability,Integrity,non-repudiation and maintenance of system. SYS trust engagement includes a system description, covered by engagement managements assertion and an attention report by CPA that evaluates system against specific criteria. Reliable system is one which operates without fault or failure and material error.

During a specific time period in specified environment,the four essential principles underlying such systems are availability,security,integrity and maintainability.

Availability:- . At times set forth in service agreement, the system is available for operation and use.

Security:- The system is protected from an unauthorized access the physical and logical both(the logical access is the ability to read data through remote access).

Integrity:-System processing is accurate and complete truly.

Maintainability:- System should be updated in a manner that provides continues integrity,security and availability of information

Reference:- AICPA and CICA Exposure Draft: SYS trust ” principles and criteria for systems reliability, version,2.0″.

For each of the principle discussed above the following are the criteria that enables a practitioner to determine if an entity’s systems is meet. This criteria is organized in three categories that is communication, procedures and monitoring.

Communication:- The performance objectives,policies and standards for system availability,security,integrity and maintainability.

Procedures:- The procedures,software’s, people and infrastructure are used by an entity to achieve system availability,security,integrity and maintainability.

Monitoring:- The system availability,integrity,security and maintainability objectives,policies and standards can be achieved by an entity by ,monitoring and taking actions on it.

Audit tools requirement:-

The second condition that must be satisfied to conduct continues audit is to make sure that the continues audit process in fully automated(shields,1998). To achieve continues auditing,audit tools must be installed in information system,some tools contain an audit hooks and exception report. These are the tools which allows auditing to be occurred in an absence of auditor(Bodnar and Hopwood,2001).

The CAAT’s can help auditor in various auditing tasks,and can provide more information on a subject matter(Bodnar and Hopwood, 2001). The CAATs are the computer-assisted auditing tools that permit auditor to increase the audit functions and their own productivity. The CAATs are a way in which the auditor use the information system in gathering audit evidence, before the introduction of computer systems all of the audit functions were performed manually. The manual totaling of many paper transactions was used to proven the completeness of an audited account, as a result of which problem identification in an account could take many auditors a great deal of time. The use of such computer assisted audit tools allow the auditor to perform many of the previously manually intensive tasks very quickly,efficiently and effectively,also with the cost and time savings. With real-time accounting and electronic data interchange,popularizing computer assisted audit tools are becoming even more necessary(Brodie,1990).

Different CAATs may be used for different purposes in continues auditing,for example

Embedded audit module:- The embedded audit modules are the program’s which are written and compiled with an application used to preform operations when the application is in operation,and may be run on routine basis or when activated. These modules enable an auditor to continuously monitor systems.

Exception reporting:- The exception reporting is a very common CAAT tool. It involves the flow or an extraction of data from one file to another file using auditor’s specified criteria. In case of financial audit,they will ensure records that fall within categories.

Transaction Tagging:- The transaction tagging is step by step programme which allows auditor to follow a transaction until and unless the problem is identified,by doing so the certain transactions are tagged so that they can pass through a special system with special identifier(Simkin et al,1999).

Other requirements:-

A third important condition for the continues auditing is the need for an effective link between the audited entity’s system and the audit firm’s system in order to enable accurate,secure and fast communication of audit instruction’s and results(Shields,1998). Fourth condition is for understandable and accurate auditor’s report to be made available in time basis(Shields,1998). The continues information and related auditor’s report could be accessible on a website by posting’s from users. The company’s job is to implement and the auditor would have to test,controls over the automated process for information and the auditors report updating.