Information technology affects financial statements

Katharine Fraser
Katharine Fraser

Information technology affects business operations in several significant ways:

Increased volume of information, which requires businesses to select relevant and credible information to support decision-making.

Accelerated pace of change in technology, including the prevalence of e-commerce systems and the use of Web-based services.

Greater dependency on outsourced service providers.

The availability and widespread use of user-initiated and user-controlled IT solutions

Growing need to place reliance on controls, including IT controls, by businesses and auditors as a way of reducing risk.

As a result, there’s also a need to increase the controls over the IT function as well as understand the risks and implications to the organization’s financial statements. Businesses rely heavily on their financial statements for a variety of reasons, including making critical and strategic business decisions and monitoring the financial progress of the organization.  Producing reliable financial statements is vital.

Many businesses use a variety of software applications. There are five factors management should consider when reviewing the relationship of IT, applications and financial statements.

First, identify applications with significant effects on financial reporting and understand the accounts or transactions related to that application. Inventory applications, for example, generally would be significant to a manufacturer or wholesale distributor.

Second, understand within each application identified the volume of transactions processed. A coffee shop that processes 100 orders daily would be considered high volume compared to an automotive dealership that sells only a few cars daily that would be considered low volume. The higher the volume of transactions the application processes, the increased risk of error and related effects on financial statements.

Next is the significance of business processes handled by the application. An application generally would be considered significant if it handled one or more business processes critical to reliable financial reporting. This is likely to occur when the application is used to electronically initiate large transactions or perform complex calculations or processes affecting financial statements. Examples include an application that accepts customer orders for an online retailer or a job cost application for a construction contractor.

The fourth factor would be integration between the application and financial reporting function (the general ledger). An application that integrates with the general ledger and feeds critical data would have a significant effect on financial statements. Examples of this would be major revenue and expense figures as well as billing and inventory applications.

Some applications have various modules that integrate. It’s important these modules are reconciled on a regular basis. If you have a billing and accounts receivable module and general ledger module within the same application, reports out of the billing and accounts receivable module should be reconciled to the balance shown on the general ledger for the same period.

Finally, it’s important to safeguard assets. An application generally could be considered significant if it’s important in assuring proper controls over assets that are susceptible to misappropriation — an application that helps prevent unauthorized disbursements if a company might suffer fraud losses otherwise. Another example would be an inventory application that uses a bar code scanning system to track inventory and reduce the risk of theft or fraud.

Considering these factors will enable management to rely on financial data and related financial reports in making decisions, strategic planning and monitoring the financial performance of the organization.