GAIT Guide to the Assessment of IT General Controls Scope Based on Risk A Top-Down, Risk-Based Approach to the Scoping of Key ITGC
GAIT Topics Covered: • Problems with IT SOX Compliance • Overview / Advantages • Four Principles • Methodologies – Five Phases • Implementation • Examples
The Problem • Challenge defining an effective and efficient scope for the annual assessments of ICFR • Internal control assessments and testing by management and external auditors was not focused on risk of material errors (e.g., not following a risk-based approach) • Lack of established guidance (i.e., inconsistency and subjectivity, reliance on checklists, etc.) • CobiT and ITGI provide more scope than SOX expects, causing companies to do too much • Significant cost overruns • Difficulty defining the key IT general controls required to address risks of material errors to financial reports
What is GAIT? • GAIT provides a set principle and methodology that facilitates the cost-effective scoping of IT general control assessments • GAIT is a reasoned thinking process that continues the top-down and risk-based approach to assess risk in ITGCs • GAIT focuses on identifying risk in IT processes that could affect critical functionality needed to prevent/detect material errors • Control objectives are identified in GAIT, but not specific key controls
Why was GAIT formed? Based on the problems described earlier, the IIA noticed the need to help companies identify key IT general controls where a failure indirectly result in a material error to the financial statements 5
Who helped with GAIT? Core team of 7 people wrote and edited the documents Christine Bellino, Jefferson Wells Ed Hill, Protiviti Fawn Weaver, Intel Gene Kim, Tripwire Heriot Prentice, The IIA Norman Marks, Business Objects Steve Mar, Microsoft – Team Leader Advisory Board CPA Firms – Big Four, Mid-sized Firms SEC Registrants Regulators 6
Who is a part of GAIT? The Institute of Internal Auditors IIA Support Staff Advanced Technology Committee Others American Institute of Certified Public Accountants (AICPA) International Federation of Accountants (IFAC)
How does GAIT work? • The GAIT document has two main parts: • Principles • Methodology • Four Core Principles • Define the relationship between business risk, IT general controls risk, and the IT general controls that can mitigate these threats as they pertain to financial reporting objectives • Methodology • Helps organizations to examine each financially significant application and determine whether failures in the IT general control processes at each layer of the IT infrastructure represent a likely threat to the consistent operation of the application's critical functionality – HOW TO APPLY THE PRINCIPLES
Advantages of Applying GAIT • Two Primary Advantages • Improves cost effectiveness of IT General Controls auditing by including within audit scope only the elements or layers of infrastructure and IT general control processes that are relevant to financial control risks. • Aids in the documentation of scoping decisions.
Overall GAIT Scoping Significant accounts Business processes Business controls Applications General Controls RISK of material misstatement/fraud to financial statements & disclosures Scope SOX according to RISK of material misstatement/fraud.
IT Risk Assessment and Scoping Significant accounts Business processes Business controls Applications IT Process Controls: Change Mgt, Operations, Security • Application • Database • Operating System • Network STEP 1: validate understanding STEP 2: perform risk assessment at each layer STEP 3: Conclude: is it REASONABLY LIKELY a failure in this IT Process area could impact application controls & result in a material misstatement? Risk is not eliminated; is it reduced to a REASONABLE level.
Controls may be assessed and tested that are not critical, resulting in unnecessary cost and diversion of resources Controls that are key may not be tested, or may be tested late in the process, presenting a risk to the assessment or audit Risk of not using GAIT By not applying a top-down and risk based approach starting at the financial statements and significant account level, there is a risk that:
The identification of risks and related controls in IT business processes should be a continuation of the top-down and risk-based approach used to identify significant accounts, risks to those accounts, and key controls in the business processes. The IT general control process risks that need to be identified are those that affect critical IT functionality in financially significant applications and related data. The IT general control process risks that need to be identified exist in processes and at various IT layers: application program code, databases, operating systems, and network. Risks in IT general control processes are mitigated by the achievement of IT control objectives, not individual controls. GAIT’s Four Principles
Financially Significant – Definition • Application: contains functionality relied upon to assure the integrity of the financial reporting process. • Should that functionality not function consistently and correctly, there is at least a reasonable likelihood of a material misstatement that would not be prevented or detected. • Data: data that, if affected by an unauthorized change that bypasses normal application controls (i.e., as a result of an ITGC failure), is at least reasonably likely to result in a material misstatement that would not be prevented or detected.
. . . guides you by asking three questions: What IT functionality in the financially significant applicationsis critical to the proper operation of the business process key controls that prevent/detect material misstatement? For each IT process at each layer in the stack, is there a reasonable likelihood that a process failure would cause the critical functionality to fail — indirectly representing a risk of material misstatement? If such IT business process risks exist, what are the relevant IT control objectives? The GAIT Methodology
Phases of GAIT Methodology Identify controls over financial reporting to provide reasonable assurance as to their reliability AS5 Identify and validate critical IT functionality Phase 1 Identify significant applications where ITGCs need to be tested Phase 2 Identify ITGC process risks and related control objectives Phase 3 Identify ITGC to test that meet control objectives Phase 4 Perform a reasonable person review Phase 5
AS5 Top Down Approach • Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. • The auditor should use a top-down approach to the audit of internal control over financial reporting to select the controls to test. A top-down approach begins at the financial statement level and with the auditor's understanding of the overall risks to internal control over financial reporting. Role of IT • The auditor should assess the extent of information technology ("IT") involvement in the period-end financial reporting process; • The identification of risks and controls within IT should not be a separate evaluation but, rather, an integral part of the auditor's top down risk assessment, including identification of significant accounts and disclosures and their relevant assertions, as well as the controls to test.
Methodology – Phase 1 Review key controls, reports, and other functionality in the company’s business processes and determine which are manual and which are automated. Develop a list of critical IT functionality. Confirm key automated controls. Determine whether there is additional critical IT functionality not identified as a key control. Identify and validate critical IT functionality
Sort the critical IT functionality by application. Identify the financially significant applications that are in scope for ITGC. Methodology – Phase 2 Identify significant applications where ITGCs need to be tested
Continue only with financially significant applications. Methodology – Phase 2
What is the likelihood of an IT process failure occurring and what is the potential impact? What is the likelihood of the IT process failing in such a way that it would cause the critical IT functionality to fail? Is it at least reasonably likely that the critical functionality would fail without prompt detection and result in a material error in the financial statements? Methodology – Phase 3 Identify ITGC process risks and related control objectives Risk of IT Process Failures
Consider the pervasiveness of ITGC . . . Are there risks that may affect multiple applications and their critical IT functionality? Select Key IT general controls to test. Link each key IT general control to the control objectives identified through GAIT. Methodology – Phase 4 Identify ITGC to test that meet control objectives
Confirm that the risks and key controls represent a reasonable view of risk to financial reporting. Ensure that the selection of risks is reasonable, given the organization’s risk tolerance in their 404 scope. Methodology – Phase 5 Perform a reasonable person review 23
Implementation GAIT Prior to implementing GAIT, companies should perform a top-down, risk-based assessment of their business processes and identify the key controls in those processes. GAIT will utilize the information gathered from this assessment and define what functionality within the IT applications is critical and to see what IT applications provide this functionality.
Risk Factors Factors that affect the risk associated with a control include: • The degree to which the control relies on the effectiveness of other controls (e.g., the control environment or information technology general controls); • Whether the control relies on performance by an individual or is automated (i.e., an automated control would generally be expected to be lower risk if relevant information technology general controls are effective);
Case Study 1 Energy Trading Company • Key IT general controls reduced from 48 to 20 • Able to consolidate many of the controls • Added 2 applications due to reliance of financial controls • Identified other risk areas related to a key application
Case Study 2 Financial Institution • Eliminated 3 systems from scope – no controls dependent upon the systems • Able to eliminate all Network related controls except for access • Some controls were added back at management’s request due to the immaturity of the processes
Case Study 3 Utility Company • Reduced key IT general controls from 49 to 18 • Reduction had significant potential for reducing administrative overhead • Paved the way for self assessment program • Able to provide good rationale for in-scope applications
Maximizing GAIT’s Implementation Tips and Techniques Start with a top-down, risk-based assessment of each risk and key control in the business process being evaluated Build a team of internal controls experts with both business and IT knowledge to complete or review GAIT results Engage external auditor Perform GAIT assessment early in the process Focus on getting scope right, not just on reductions Document results carefully and be sure to explain what is and is not in scope
More Information . . . GAIT Resourceswww.theiia.org Questions? Ask Dr. GAITdrgait@theiia.org
Feel free to contact me with questions: Bill McSpadden, CISA Protiviti 913-685-6200 or 913-661-7403 Bill.firstname.lastname@example.org