Method for analyzing effectiveness of internal controls in a...

Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Accounting

Reexamination Certificate

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C705S031000, C705S032000, C705S034000

Reexamination Certificate

active

06311166

ABSTRACT:

BACKGROUND OF THE INVENTION
This invention relates to modelling of accounting systems and more particularly to mechanisms for analyzing the risk that internal controls fail to detect errors that occur in the processing of transactions in an accounting system.
Auditors have the task of determining whether financial statements of a company fairly represent a company's financial position. A problem is gauging how much reliance can be placed on the company's accounting systems. Accounting systems contain internal controls, i.e., procedures that are designed to detect and correct errors and irregularities that may occur during transaction processing. It is an extremely difficult task to anticipate errors that can occur, to determine subsequent effects and to evaluate the effectiveness of controls for detecting errors. Other tasks for which an effective evaluation of internal controls is important are a company's internal audit of its accounting systems, re-engineering of business processes implemented in an accounting system, and review of implementation plans for new accounting systems.
A model-based reasoning system has been under development at Price-Waterhouse Technology Centre in Menlo Park, Calif., as reported in “Modeling accounting systems to support multiple tasks: a progress report,” by Dr. Walter C. Hamscher, as found in the Proceedings of the Tenth National Conference on Artificial Intelligence, San Jose, Calif. July 1992. It described an approach to analyzing failures and their detection by controls without providing a quantitative assessment of the likelihood of detection. A further model-based reasoning system called Comet has formed the basis for further development of the quantitative analysis of accounting systems and their controls. A version called Comet IA without quantitative analysis was first released to licensees in early 1996. The Comet system is used to generate a class of hierarchically structured flowcharts that can be used to model the intended processing of transactions in an accounting system. It is a useful platform for providing a capability for quantitative analysis of control risk. Other systems for constructing flow chart models of accounting systems might also be used as a platform.
SUMMARY OF THE INVENTION
According to the present invention, a method is provided for assessing control risk in a model-based reasoning system used for analyzing financial accounting systems by decomposing and quantifying the risk factors in the model so that the risk factors can be used to determine areas in the accounting system where sufficient control is lacking and to determine which controls are key and thus should be subject to detailed testing. Factors quantified are failure impact risk, failure coverage risk, allowable risk, control detection risk, control strength, control defeat factor, attenuation factor, and control contribution. The present invention is used to enhance a hierarchical flow chart generating system, such as the Comet system, by providing risk analysis operative on a particular class of hierarchically structured flow charts of the type such as generated with a Comet system.
The invention will be better understood upon reference to the following detailed description and the accompanying drawings.


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