Chapter 16

1. Chapter 16 Controlling Computer-Based Information Systems, Part II

2. Objectives for Chapter 16 • Risks associated with electronic commerce conducted over intranets and the Internet and the control techniques used to reduce these risks • Exposures that arise in connection with electronic data interchange (EDI) and how these exposures can be reduced • Exposures that threaten firms that rely on personal computers and the controls necessary to reduce risks in this environment • The principal input, processing, and output controls that are used to ensure the integrity of computer applications

3. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

4. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

5. Internet and Intranet Risks • Communications is a unique aspect of the computer networks: • different than processing (applications) or data storage (databases) • Loss, destruction, and corruption of data from two main sources: • subversive activities, both inside or outside the firm • equipment failure

6. Internet and Intranet Risks from Subversive Threats • These acts include: • unauthorized interception of a message • gaining unauthorized access to an organization’s network • a denial-of-service attack from a remote location

7. Controlling Risks from Subversive Threats • Firewalls - software and hardware that provide security by channeling all network connections through a control gateway • Network level firewalls • low cost and low security access control • does not explicitly authenticate outside users • mainly for filtering out junk or improperly routed messages • hackers can easily penetrate the system • Application level firewalls • a high level of customizable network security, but can be extremely expensive • performs sophisticated functions such as logging or user authentication

8. Dual-Homed Firewall

9. Controlling Risks from Subversive Threats • Denial-of-service (DOS) attacks • Security software searches for connections which have been half-open for a period of time. • Encryption • Computer program transforms a clear message into a coded (cipher) text form using an algorithm.

10. DOS Attack Receiver Sender Step 1: SYN messages Step 2: SYN/ACK Step 3: ACK packet code In a DOS Attack, the sender sends hundreds of messages, receives the SYN/ACK packet, but does not response with an ACK packet. This leaves the receiver with clogged transmission ports, and legitimate messages cannot be received.

11. Variations of DOS Attacks • Smurfing • by sending pings to all members in a network to respond to the victim’s spoofed IP address causes the victim’s server to be flooded • SYN flooding • never sending the final (ACK) part of the three-way handshake causes the victim to keep sending the second (SYN/ACK) part until times out • Ping of death • send an invalid packet size in the protocol packet header ‘confuses’ the operating system

12. Controlling Risks from Subversive Threats • Encryption • A computer program transforms a clear message into a coded (ciphertext) form using an algorithm. • Encryption can be used for transmitted data and for stored data.

13. Encryption Program Communication System Ciphertext Encryption Program Communication System Ciphertext Data Encryption Standard Technique Key Cleartext Message Cleartext Message Key

14. Message A Ciphertext Ciphertext Ciphertext Ciphertext Message D Message B Message A Message C Public and Private Key Encryption Message B Message C Message D Multiple people may have the public key (e.g., subordinates). Public Key is used for encoding messages. Typically one person or a small number of people have the private key (e.g., a supervisor). Private Key is used for decoding messages.

15. Controlling Risks from Subversive Threats • Digital signature:electronic authentication technique that ensures that the transmitted message originated with the authorized sender and that it was not tampered with after the signature was applied • Digital certificate: like an electronic identification card that is used in conjunction with a public key encryption system to verify the authenticity of the message sender

16. Receiver's Location Sender’s Location Compare Text Message Encrypt Using Receiver’s Public Key Digest Digest Digital Signature Compute Digest of Message Decrypt Using Sender’s Public Key Compute Digest of Message Encrypted Message with Digital Signature Attached Digest Text Message Digital Signature Encrypt Using Sender’s Private Key Decrypt Using Receiver’s Private Key Digital Signature Digital Signature

17. Controlling Risks from Subversive Threats • Message sequence numbering • sequence number used to detect missing messages • Message transaction log • listing of all incoming and outgoing messages to detect the efforts of hackers • Request-response technique • random control messages are sent from the sender to ensure messages are received • Call-back devices • receiver calls the sender back at a pre-authorized phone number before transmission is completed

18. Controlling Risks from Equipment Failure • Line errors from noise on a communications. Two techniques to detect and correct such data errors: • echo check - the receiver returns the message to the sender • parity checks - an extra bit is added onto each byte of data similar to check digits • Backup control for networks • small networks - a single workstation • medium networks - a network server • large networks - multiple servers

19. Vertical and Horizontal Parity

20. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

21. Electronic Data Interchange (EDI) Risks • Authorization • automated and absence of human intervention • Access • need to access EDI partner’s files • Audit trail • paperless and transparent (automatic) transactions

22. Electronic Data Interchange (EDI) Controls • Authorization • use of passwords and VANs to ensure valid partner • Access • software to specify what can be accessed and at what level • Audit trail • control log records the transaction’s flow through each phase of the transaction processing

23. EDI Translation Software EDI Translation Software Communications Software Communications Software EDI System without Controls Company B (Vendor) Company A Sales Order System Application Software Application Software Purchases System Direct Connection

24. EDI Translation Software EDI Translation Software Communications Software Communications Software Other Mailbox Other Mailbox EDI System with Controls Company B (Vendor) Company A Application Software Audit trail of transactions between trading partners Sales Order System Application Software Purchases System Transaction Log Transaction Log Software limits vendor’s (Company B) access to company A’s database Use of VAN to enforce use of passwords and valid partners Company A’s mailbox Company B’s mailbox VAN

25. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

26. Personal Computer (PC) Controls • PCs… • are relatively simple to use • are frequently controlled and used by end users • usually employ interactive (v. batch) data processing • typically run commercial software applications • allow users to develop their own applications • PCs, in contrast to servers and mainframes, have weak operating systems. • makes them easy to use • but results in minimal security and weak controls

27. Access Risks in the PC Environment • PCs typically weak in controlling access data files • Techniques to prevent theft or tampering of data: • data encryption - must decode even if stolen • disk locks - software or physical locks to prevent booting from A:\

28. Inadequate Segregation of Duties • In PC environments, employees often have access to multiple applications that process incompatible transactions. • Controls: • increased supervision • detailed management reports • more frequent independent verification

29. PC Backup Controls • PC end-users often fail to appreciate the importance of backup procedures until it is too late. • Back up mechanisms: • tape--high capacity (3.2gb, inexpensive) • CD--about 650mb (>450 floppies) • dual internal hard drives (high capacity) • dual external hard drives (>12 gb) • USB memory attachments (portable, >64 mb)

30. Inadequate Systems Development and Maintenance Procedures in PCs • Commercial software should be used when possible for accounting applications, and these systems should be purchased from a reputable vendor. • Formal software selection procedures should be practiced by firms of all sizes.

31. Organizational Structure Internet & Intranet Internet & Intranet Data Management Operating System Systems Development Personal Computers Systems Maintenance EDI Trading Partners Applications Computer Center Security General Control Framework for CBIS Risks

32. Application Controls • Narrowly focused exposures within a specific system, for example: • accounts payable • cash disbursements • fixed asset accounting • payroll • sales order processing • cash receipts • general ledger

33. Application Controls • Risks within specific applications • Can affect manual procedures (e.g., entering data) or embedded procedures • Convenient to look at in terms of: • input stage • processing stage • output stage PROCESSING INPUT OUTPUT

34. Application Controls Input • Goal of input controls - inputted data are valid, accurate, and complete • Source document controls • use prenumbered source documents • auditing missing source documents • Data coding controls • transcription errors • check digits GIGO

35. Application Controls Input • Batch controls - used to reconcile the output produced by the system with the input originally entered into the system • Based on different types of batch totals: • total number of records • total dollar value • hash totals - sum of non-financial numbers

36. Application Controls Input • Validation controls - intended to detect errors in transaction data before the data are processed • field interrogation - data in individual fields; for example, missing data, data type, range • record interrogation - interrelationship of data in fields of a record • file interrogation - the correct file; for example, internal and external labels compared, version, dates

37. Application Controls Input • Input error correction techniques • immediate correction during data entry • error file creation • batch rejection

38. Application Controls Input • Generalized data input systems (GDIS) - centralized procedures to manage the data input for all of the organization’s TPSs • Five major components: • generalized validation module - standard validation routines common to different applications • validated data file • error file • error reports • transaction log

39. GDIS

40. Application Controls Processing • Run-to-run controls - use batch figures to monitor the batch as it moves from one programmed procedure (run) to another • Operator intervention controls - used to limit human involvement in certain actions in order to reduce error • Audit trail controls - numerous logs used so that every transaction can be traced through each stage of processing from its economic source to its presentation in financial statements

41. Transaction Log to Preserve the Audit Trail

42. Application Controls Output • Goal of output controls is to ensure that system output is not lost, misdirected, or corrupted, and that privacy is not violated. • In the following flowchart, there are exposures at every stage.

43. Output Report Output Report Output Report Output Report Output Run (Spooling) Data Control Output File Print Run Report Distri- bution Output Report Bursting Aborted Output End User Waste File STAGES IN THE OUTPUT PROCESS

44. Application Controls Output • Batch systems output: spooling creates a file as an intermediate step in the printing process that is a risk • Report distribution: for sensitive reports, the following are available: • use of secure mailboxes in which to place reports • require the user to sign for reports in person • deliver the reports to the user

45. Application Controls Output • End user controls: end users need to inspect reports and report any inaccurately produced reports • Highly sensitive reports should be shredded after their use. • Controlling real-time system output: the primary output threat is the interception, disruption, destruction, or corruption of the output message as it passes along the communications link