B-115369, SEP 18, 1957

B-115369, SEP 18, 1957

SUBJECT: ACCOUNTING AND AUDITING ASPECTS OF AUTOMATIC DATA PROCESSING

TO THE HEADS OF DEPARTMENTS AND AGENCIES:

THE INCREASING USE OF AUTOMATIC DATA PROCESSING (ALSO REFERRED TO AS ELECTRONIC DATA PROCESSING) EQUIPMENT BY GOVERNMENT DEPARTMENTS AND AGENCIES IN THE AREA OF FINANCIAL MANAGEMENT HAS IMPORTANT IMPLICATIONS FROM THE STANDPOINT OF THE ACCOUNTING AND AUDITING RESPONSIBILITIES OF THE DEPARTMENTS AND AGENCIES AS WELL AS THE GENERAL ACCOUNTING OFFICE. SOME OF THE CONSIDERATIONS WHICH SHOULD GUIDE DEPARTMENTS AND AGENCIES USING OR PLANNING TO USE AUTOMATIC DATA PROCESSING EQUIPMENT ARE INDICATED IN THE FOLLOWING COMMENTS AND OBSERVATIONS. CONTINUING STUDY IS BEING MADE OF THE AUDIT IMPLICATIONS AND ADDITIONAL INFORMATION WILL BE FURNISHED FROM TIME TO TIME AS IT IS DEVELOPED IN THE COURSE OF THESE STUDIES. FEASIBILITY STUDIES

FEASIBILITY STUDIES ATTEMPT TO BRIDGE THE GAP BETWEEN WHAT IS THOUGHT TO BE BEST AND WHAT CAN BE DONE ECONOMICALLY. SUCH STUDIES ARE PART OF ANY ANALYSIS TO DETERMINE WHETHER AN INVESTMENT IN NEW EQUIPMENT AND RELATED SYSTEMS SHOULD BE MADE. VIEWED IN THIS FASHION, FEASIBILITY STUDIES ARE NOT NEW. THEY TAKE ON ADDED SIGNIFICANCE FOR MANAGEMENT, HOWEVER, BECAUSE THEY ARE BEING APPLIED TO THE AREA OF DATA PROCESSING WHICH INVOLVES EQUIPMENT THAT IS VERY COSTLY. AN ADEQUATE FEASIBILITY STUDY SHOULD BE MADE BEFORE ANY DECISION IS MADE TO PURCHASE OR RENT AUTOMATIC DATA PROCESSING EQUIPMENT. ALSO, AS A GENERAL RULE, A COMPLETE SYSTEMS ANALYSIS OR FUNCTIONAL SURVEY OF EXISTING PROCEDURES SHOULD BE MADE WITH A VIEW TOWARD STREAMLINING AND IMPROVING OPERATIONS BEFORE ACTION IS TAKEN TO UTILIZE LARGE SCALE AUTOMATIC DATA PROCESSING (ADP) EQUIPMENT.

IN THE COURSE OF OUR AUDIT WORK IN AGENCIES USING ADP EQUIPMENT, WE WILL REVIEW FEASIBILITY STUDIES MADE TO DETERMINE WHETHER ADEQUATE PLANNING PRECEDED THE PURCHASE OR RENTAL OF COSTLY EQUIPMENT. CONFORMITY WITH PRINCIPLES AND STANDARDS

UNDER THE BUDGET AND ACCOUNTING PROCEDURES ACT OF 1950, THE HEAD OF EACH EXECUTIVE AGENCY IS RESPONSIBLE FOR THE ESTABLISHMENT AND MAINTENANCE OF SYSTEMS OF ACCOUNTING AND INTERNAL CONTROL. THESE SYSTEMS ARE SUBJECT TO APPROVAL BY THE COMPTROLLER GENERAL AND THEY MUST CONFORM TO THE PRINCIPLES, STANDARDS AND RELATED REQUIREMENTS PRESCRIBED BY HIM. CARE SHOULD BE EXERCISED TO ASSURE THAT ACCOUNTING SYSTEMS OR PORTIONS THEREOF CONVERTED TO ADP PROCEDURES WILL CONFORM TO THE PRINCIPLES, STANDARDS AND RELATED REQUIREMENTS PRESCRIBED BY THE COMPTROLLER GENERAL. CONTROLS IN ADP SYSTEMS

ADEQUATE CONTROL OVER ORIGINAL DATA IS OF UTMOST IMPORTANCE. GENERALLY SPEAKING, PROVISION SHOULD BE MADE FOR ADEQUATE VERIFICATION OF DATA PUT IN THE ADP MACHINES. VERIFICATION OF CERTAIN DATA SUCH AS PART NUMBER, COMMODITY CLASS, ETC., MAY BE PERFORMED BY THE INCLUSION OF EDITING STEPS IN THE PROGRAM OF THE MACHINE. IN THE CASE OF DATA PUT INTO ADP MACHINES WITH PUNCHED CARDS OR PUNCHED TAPE, INFORMATION AS TO QUANTITY AND AMOUNT OR OTHER DATA WHICH IS NOT SUBJECT TO MACHINE EDITING ROUTINES SHOULD BE KEY VERIFIED, THAT IS, CHECKED BY A SECOND OPERATOR IN ORDER TO ASSURE ACCURACY OF THE DATA BEING PUT INTO THE SYSTEM.

PREDETERMINED CONTROL TOTALS SHOULD BE USED TO PROVIDE A MEANS OF CHECKING THE ACCURACY OF THE DATA BEING PROCESSED. THE EXTENT TO WHICH PREDETERMINED CONTROLS ARE USED WILL VARY WITH THE TYPE OF APPLICATION BEING CONSIDERED. IN THE CASE OF PAYROLL APPLICATIONS, PREDETERMINED CONTROL TOTALS OF AT LEAST HOURS AND RATES OF PAY SHOULD BE UTILIZED AS PROVIDED FOR IN TITLE 6 OF THE GENERAL ACCOUNTING OFFICE POLICY AND PROCEDURES MANUAL FOR GUIDANCE OF FEDERAL AGENCIES (FORMERLY IN GENERAL REGULATIONS NO. 133).

A PROGRAMMED CHECK IS INCLUDED IN THE INTERNALLY STORED INSTRUCTIONS OF THE EQUIPMENT TO PROVIDE A MEANS OF ASSURANCE THAT THE DATA PROCESSING IS RELIABLE. FOR EXAMPLE, THE MACHINE MAY BE REQUIRED TO VERIFY THE RESULTS OF ONE OPERATION BEFORE PROCEEDING TO THE NEXT OPERATION. PROGRAMMED CHECKS, TO THE EXTENT FEASIBLE, SHOULD BE INCORPORATED IN ADP SYSTEMS. THE EXTENT TO WHICH PROGRAMMED CHECKS ARE USED WILL VARY WITH THE TYPE OF APPLICATION BEING CONSIDERED. IN A PAYROLL APPLICATION FOR EXAMPLE, ONE PROGRAMMED CHECK THAT SHOULD BE USED IS THE LIMIT CHECK IN WHICH EACH PAY COMPUTATION IS COMPARED TO A MAXIMUM ALLOWABLE GROSS PAY. PROVISION SHOULD BE MADE FOR A PRINT OUT OF ANY ITEM WHICH EXCEEDS SUCH A LIMIT TO PROVIDE THE BASIS FOR REVIEW AND CORRECTIVE ACTION. RETENTION OF RECORDS

THE PROBLEM OF RETAINING RECORDS AND PRINT OUT NEEDS AS IT PERTAINS TO AUDIT REQUIREMENTS IS UNDER CURRENT STUDY BY THE GENERAL ACCOUNTING OFFICE. IT IS RECOGNIZED THAT THE INTRODUCTION OF MAGNETIC TAPES AND OTHER NEWLY DEVELOPED TYPES OF RECORD STORAGE GIVES RISE TO NEW PROBLEMS IN THIS RESPECT. INQUIRY MAY BE MADE OF THE GENERAL ACCOUNTING OFFICE WHEN DOUBT EXISTS AS TO PRESENT REQUIREMENTS CONCERNING RETENTION OF RECORDS NEEDED FOR AUDIT PURPOSES. THE RECORDS, UNDER ANY CIRCUMSTANCES, SHOULD BE DISPOSED OF ONLY IN ACCORDANCE WITH THE EXISTING GENERAL SERVICES ADMINISTRATION RECORDS DISPOSAL REQUIREMENTS.

FUTURE DEVELOPMENTS MAY LEAD TO ORIGINAL DATA BEING RECORDED DIRECTLY IN CODED FORM; FOR EXAMPLE, THE USE OF EMPLOYEES' KEYS TO PUNCH A TIME CLOCK WITH NO VISIBLE TIME CARD BEING PRODUCED. IN SUCH CASES, SPECIAL CONSIDERATION WILL NEED TO BE GIVEN TO THE DOCUMENTATION THAT WILL SATISFY AUDIT REQUIREMENTS. IN VIEW OF THE AUDIT IMPLICATIONS, PRIOR APPROVAL OF THE GENERAL ACCOUNTING OFFICE SHOULD BE OBTAINED BEFORE SUCH TECHNIQUES ARE PUT INTO ACTUAL USE.

A GENERAL PRACTICE IN LARGE SCALE ADP OPERATIONS IS TO MAINTAIN A MACHINE TIME RECORD OR OPERATING LOG TO REFLECT OPERATING RESULTS INCLUDING THE ERROR CONDITIONS ENCOUNTERED IN THE DATA PROCESSING OPERATION FOR A SPECIFIC PERIOD OF TIME SUCH AS DAILY OR WEEKLY. SUCH RECORDS SHOULD BE RETAINED TO PROVIDE A BASIS FOR OVER-ALL EVALUATION AS TO EXCESSIVE MACHINE DOWN TIME AND RECURRING TYPES OF ERRORS.

DEPARTMENTS AND AGENCIES ARE INVITED TO DISCUSS SPECIFIC PROBLEMS IN ANY OF THESE AREAS WITH REPRESENTATIVES OF THE GENERAL ACCOUNTING OFFICE.