AUDIT ANALYTICS AUDIT

AUDIT ANALYTICS AND CONTINUOUS AUDIT:LOOKING TOWARD THE FUTURE
domain. In particular, AUDITAPE allowed nontechnical auditors the
increased ability to audit through the computer and facilitated the
creation of several general auditing software (GAS) programs from 1968
through the late 1970s. In conjunction with the development of these
initial audit programs, Davis (1968) alerted auditors to the idea that they
would simply not be able to ignore electronic data processing (EDP) in
accounting systems when performing audits. In addition, he explained
how and when auditing around the computer might be accomplished,
but advised that an evaluation of internal controls as both a review and
test of system reliability (audit of the computer) would still need to be
performed. Davis had a significant and positive effect on the evolution of
audit theory and practice. Moving forward, the 1970s saw 2 major
developments that dramatically altered the accounting and auditing
landscapes.
First, the Equity Funding Corporation scandal of 1973 is sometimes
perceived as the single most significant event in EDP audit history. In
particular, the organization committed acts of fraud between 1964 and
1973 (Seidler et al. 1977). Essentially, managers created false insurance
policies and commission income to artificially inflate profits and stock
price and used a variety of mechanisms to conceal the activities. For
example, when auditors attempted to confirm receivables via phone calls
to customers, switchboard operators at Equity Funding would simply
connect the calls to employees who would subsequently confirm the
balance information. When the fraud was eventually unearthed in 1973,
Equity Funding had $2 billion in phony insurance policies and this
reflected roughly 67 percent of the total balance in that general ledger
account. In reflection, it was determined that an EDP audit would
uncover the fraud much sooner. This determination was made primarily
because all of the false policies were posted to department number 99,
whereas legitimate policies were not applied there.
Whatever the case, the Equity Funding debacle was instrumental in
mandating a shift from auditing around the computer. Furthermore, the
incident prompted the review of existing audit processes in an effort to
address internal controls and audit procedures for information systems.
As a consequence, large accounting firms, previously known as the Big 8,
established units consisting of EDP specialists to audit information
systems. Smaller accounting firms often maintained contracts with
information systems professionals to assist in auditing such systems.
Second, the Foreign Corrupt Practices Act (FCPA) of 1977 had substantial
implications for accountants. Basically, the FCPA prohibited American
companies from bribing foreign officials to obtain business and required
these firms to have mechanisms in place to detect such activities. In
addition, the FCPA required companies registered with the SEC to
maintain their books and records such that transactions were accurately
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