Utilizing the computer in auditing, a case study;

              A Case Study
Utilizing the
Computer
in Auditing
The authors ivish to express their appre­ciation
to Firth Sterling Inc., for their
cooperation in preparing this article.
by Walter T. Porter and Joseph F. DiMario
Joseph F. DiMario Walter T. Porter
WALTER T. PORTER is currently a member of the firm's
Audit-EDP Study Project Task Force. He is also a Ph.D. candi­date
at the Columbia University's Graduate School of Business
where he is engaged in writing his dissertation, The Utilization
of the Computer in Auditing.
Mr. Porter received his B.S. from Rutgers University in 1954
and his M.B.A. from the University of Washington in 1959. He
was a member of the Management Services Staff of the Seattle
Office from 1959-1961.
He is a member of the AICPA, AAA, NAA and Beta Gamma
Sigma. He has taught accounting, auditing and statistics at
Columbia. He is married and has two children.
JOSEPH F. DI MARIO has been a member of the Pittsburgh
Management Services staff since 1960.
Mr. DiMario received his B.S. in engineering from Carnegie
Institute of Technology in June 1954. After a three year term
in the Air Force he returned to Tech where he received an
M.S. in Industrial Administration in June 1960.
He is an associate director of the NAA, Treasurer of TIMS
and is active in the Jaycees and other civic groups. He is mar­ried
and has a four year old daughter.
8
Articles written about auditing and electronic data pro­cessing
in recent years1 indicate that the auditor is going
to have to revolutionize his audit approach because of the
changed nature of the audit trail. There is no question
that changes will have to be made by those who audit
"through the computer" rather than "around the com­puter."
Before attempting to use the computer as an audit
tool, however, the auditor should be well aware of the
problems which will confront him. The purpose of this
article is to present some of the problems encountered in
using the computer in auditing and to indicate the results
obtained from such an approach. The empirical evidence
comes from work performed by an Audit-EDP team2 in
the area of accounts receivable, including order entry, in­voicing,
and cash receipts, at FIRTH STERLING Inc.,
a Pittsburgh Office client selected for case study work as
part of the Audit-EDP Study Project.
Summary of System
FIRTH STERLING, a specialty steel manufacturer,
with a sales volume of approximately $35,000,000, pro­cesses
accounting and operational data on an IBM 1401
Data Processing System. The Company converted its data
processing from a punched card unit record system to a
computer in July — starting with order entry, invoicing,
and accounts receivable updating.
The planning of this conversion began in January, 1962,
and was based upon recommendations incorporated in a
feasibility study performed by T.R. B.&S. During the
planning period, we met periodically with the client per­sonnel
to aid them in systems design and to provide man­agement
with an appraisal of progress.
The system includes a teletypwriter order entry net­work,
a 1011 paper tape reader, four 7330 magnetic tape
units, a 1402 card-read punch and a 1403 printer. The
central processing unit is a 1401 with storage capacity of
12,000 alphamerical characters of 8-bit core storage.
All orders are transmitted to the Home Office in Pitts­burgh
over the teletypewriter system and a paper tape is
prepared at Pittsburgh for the orders received in addition
to a seven-part sales order form. The paper tape is read
1 For an excellent survey of the subject, see "Impact of EDP
on Auditing," by Gregory Boni in The Journal of Accountancy,
September 1963.
2 This team consisted of Henry J. Rossi and Joseph F. DiMario
cf the Pittsburgh Office and Walter T. Porter, Jr., a member of
the firm's Audit-EDP Study Project team. William G. Johnson
cf the New York Office assisted in the development of computer
audit programs. Dennis E. Mulvihill, Manager — Computer
Systems and also a member of the Audit-EDP Study Project team,
gave excellent guidance during the planning stages of the case
study.
THE QUARTERLY