Review the literature and discuss some control and a possible material weakness that could result from not adequately managing that control. Demonstrate your

Abstract After the occurrence of numerous worldwide financial scandals, the importance of related issues such as internal control and information security has greatly increased. This study develops an internal control framework that can be applied within an enterprise resource planning (ERP) system. A literature review is first conducted to examine the necessary forms of internal control in information technology (IT) systems. The control criteria for the establishment of the internal control framework are then constructed. A case study is conducted to verify the feasibility of the established framework. This study proposes a 12-dimensional framework with 37 control items aimed at helping auditors perform effective audits by inspecting essential internal control points in ERP systems. The proposed framework allows companies to enhance IT audit efficiency and mitigates control risk. Moreover, companies that refer to this framework and consider the limitations of their own IT management can establish a more robust IT management mechanism. Keywords Internal control framework Enterprise resource planning IT control 1. Introduction The popularity of information technology (IT) applications has increased reliance on computers for processing business transactions. Companies adopt IT systems to improve their operations. Surveys on the collaborative operations of IT systems conducted by the Market Intelligence and Consulting Institute [42] indicate that the enterprise resource planning (ERP) system is the most widely adopted IT system among large companies. Given that ERP is a popular and all-encompassing information system utilized by many organizations and because of the increased consideration of the risks associated with IT, information system security and internal control related to information systems have greatly increased [17], [45], [63], [75]. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control as “a process, effected by an entity's board, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives such as effectiveness and efficiency of operation, reliability of financial reporting, and compliance with regulation” [15]. The internal control related to information systems is commonly referred to as IT control and is composed of controls (i.e., policies and procedures) over the organizational IT infrastructure and systems [47], [63]. IT control consists of general and application controls. General controls refer to the relevant controls designed to ensure that an entity's control environment is well managed and applied to all sizes of systems ranging from large mainframe systems to client/server systems and to desktop and/or laptop computer systems. Application controls include input, processing, and output control based on the flow of data processing. In other words, application controls focus on the accuracy, completeness, validity, and authorization of the data captured, entered in the system, processed, stored, transmitted to other systems, and reported [54]. Further, general controls can be used to support the application controls and, hence, allow the smooth operation of the information system [22]. Given that financial reporting in many entities is based on information systems such as ERP systems, IT controls help entities achieve the objective of internal control. Similar to information security, IT controls can also manage and protect information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction [68]. An attack on information generally leads to the theft of confidential data, financial fraud, incapacitated web servers, and corrupted operational data [27], which all influence the accuracy and reliability of the financial data derived from the information system [75]. If entities fail to establish proper information security, they cannot guarantee the accuracy and reliability of their financial data [51]. ERP built-in control features may positively impact the effectiveness of internal controls over financial reporting. However, ERP does not necessarily safeguard against some deliberate system manipulations, for example, a few control features might not be activated in a timely manner in the implementation stage [45]. Further, to manipulate the date to perform earnings management, top managers may attempt to override some control features [6]. Following a number of reported business scandals, investors are beginning to question the accuracy of financial reports, including those generated by major companies around the world. In fact, investor confidence in the accuracy of financial reports and the shared holding positions of large companies has collapsed over recent years [56]. Durfee [18] emphasizes that an announcement of material weakness in the internal control system may result in a drop in stock prices, an increase in share volume, and the loss of chief financial positions. Goel and Shawky [26] also indicate that announcements of security breaches would decrease the market share of firms. Conversely, effective internal control can help firms to achieve their expected financial goals, maintain precise records of daily transactions, and produce accurate financial statements [20]. The accuracy and reliability of data within the ERP system are critical to ensure the transparency of the company's situation at all times, to help rebuild investor confidence, and to ensure low cost of capital [3]. Software vendors establish “built-in” control within ERP systems [45]. Companies also have an internal control framework in their ERP systems. Management is required to establish the framework, especially when a company is publicly listed. Companies constantly audit the effectiveness of their ERP system's internal control. Thus, an increasing number of companies have started to focus on the implementation of effective controls in their ERP systems while simultaneously providing management and external auditors a suitable framework within which to assess the ERP system's internal control. COSO released a report entitled “Internal Control-Integrated Framework” [15] in 1992 in an attempt to illustrate a systematic framework for internal control. However, the report failed to list supplemental criteria in the implementation and assessment of IT controls [49]. Referring to specific control items would allow management and auditors to execute IT control procedures [29]. However, IT control procedures not only consider the environment within the entity but also control as it relates to the external environment [66]. In addition, given the minimal compliance guidance in the use of IT established by the government, the interpretation of the scope and nature of the IT environment is inconsistent [8]. These limitations increase the difficulty of compliance. Despite the importance of deploying proper internal control frameworks to fully develop the effectiveness of the ERP system, only a few academic studies have assessed this issue. Accordingly, this study derives its primary research question: what are the types of internal control that must be considered when auditing an ERP system? The primary objective of this study is to develop a preliminary internal control framework for application in an ERP system. 2. Research background The growing awareness of IT's role in managing knowledge derived from information systems has caused the production of accurate and relevant information to become the focus of studies on information systems such as accounting information systems (AIS) and management information systems (MIS) [76]. IT governance has been recently discussed and has gained attention; IT governance is “used to describe how those persons entrusted with governance of an entity will consider IT in this supervision, monitoring, control, and direction of the entity” [32]. Well-defined controls are considered to be an imperative and necessary part of IT governance. This study attempts to establish good internal control standards for ERP systems by proposing an internal control framework for such systems. Three subtopics are discussed in this section. The first subsection describes system security and internal controls in the ERP system. The second subsection introduces the audit and inspection challenges associated with the ERP system. The third subsection presents and discusses the internal control framework. 2.1. System security and internal controls in the ERP system An increasing number of firms depend on ERP to address operational transactions. Therefore, information system security must be emphasized, especially in financial transactions [70], [73]. Walters [75] states that many information system threats, such as unauthorized access and system vulnerability attacks, influence the accuracy and reliability of the financial data derived from information systems. Information security protects and controls IT resources and ensures the accuracy and reliability of information [1]. Van de Riet et al. [69] note a number of security aspects associated with an ERP system; these aspects include security policy, user authentication, authorization, time restrictions, log and trace, and database security. Information security control maintains the reliability of the information system resource and the availability and integrity of financial data. Thus, information security control is closely linked with information security and internal controls. After the occurrence of numerous worldwide financial scandals, company management teams and auditors are now required to take responsibility for their respective financial reports. The effectiveness of internal control has been emphasized during this decade [52]. If firms lack the proper level and types of information security, they cannot ensure the effectiveness of their internal controls and the integrity of their financial data [51]. Thus, identifying the necessary control-related considerations in an ERP system is an important initial task for management and auditors. 2.2. Audit and inspection challenges in the ERP system The introduction of a new information system in a company may generate a new risk that is different from the risks initially associated with the legacy framework: the risks that accompany new framework operations may not be similar to those of the original system [50]. Reengineering business processes and the organizational changes brought about by the introduction of a new system may also lead to changes in the control requirements of a company in terms of ERP [11]. Problems frequently associated with ERP systems are generally contained. Such issues include business interruption, process interdependency, network security, database security, application security, and overall internal controls [31]. Therefore, many key aspects of the risk control environment must be considered [56]. Glover et al. [25] suggest that internal auditors consider the relevant risks and controls required for system planning based on their knowledge of risk management and of the internal risks present in the company during the introduction of the ERP system. Auditors and inspectors should first understand the basic architecture of the ERP system to effectively exert internal control over it [2], [9]. In the comprehensive application of the IT environment, “owning” the control framework can help auditors to evaluate the effectiveness of IT control and decide on an auditing strategy and program. The control framework can also enhance the efficiency of IT control evaluation and mitigate the audit risk for auditors [29]. 2.3. Internal control framework Management and the auditors must follow a suitable and holistic internal control framework to ensure the effectiveness of internal control in a firm. COSO released a report entitled “Internal Control-Integrated Framework” and recommended that this report be utilized by companies, auditors, regulating agencies, and educational institutions [15]. The conceptual model of the report indicates that internal control objectives require five components of control, namely, the control environment, risk assessment, control activities, information and communication, and monitoring. However, the framework provided by COSO focuses on high-level guidance for internal controls and does not provide the detailed control objectives that auditors require in the design of audit tests [49]. Moreover, the framework does not address the specific risks and complexities of IT [14]. An organization and its auditor require a comprehensive framework to properly adapt to the current IT auditing environment and to comply with regulations [23], [66]. Transactions involving information systems require particular control standards and criteria because the computerization of business transactions leads to the digitization of audit evidence, resulting in difficulties in following audit trails [41]. Thus, IT internal control usually includes the following procedures: (1) general controls, which refer to the relevant control measures associated with EDP; and (2) application controls or the division of input, processing, and output controls based on the flow of data processing. In this digital age, the absence of information security in a particular company implies that the entire company is built on a fragile foundation such that it cannot survive any related internal control tests [4]. Information systems in enterprises require many internal controls due to the pervasive implementation of IT and the need to minimize problems. The complexity of modern systems can overwhelm auditors and management if no appropriate guidance is provided [66]. Hence, auditors and management should increase their understanding of the IT environment and related IT processes and controls because they must periodically perform control procedures [44], [47]. Given that the two control types utilized at present cannot effectively or completely regulate the robustness of an internal control framework, especially when incorporated in the current information systems, numerous institutions have established their own sets of criteria for information security. A series of standards and criteria such as the British Standard (BS7799) and the Control Objectives for Information and Related Technology (COBIT) are employed by organizations. COBIT complements the COSO enterprise framework by assessing internal control and balanced risks in IT-intensive environments [33], [53]. Huang et al. [29] established an IT control evaluation model that includes control objectives. Referring to specific control items allows management and auditors to execute control procedures. However, despite the importance of deploying proper internal control frameworks, only a few academic studies have been conducted to fully develop the effectiveness of the ERP system. The present study aims to develop a preliminary internal control framework for application in ERP systems to bridge this gap. 3. Research methodology and design The research flow presented in this study utilized a theoretical strategy based on the V structure developed by Gowin [48] (Fig. 1). The interactions between the two sides of the structure (i.e., theoretical and methodological) merge relevant concepts and methods to achieve the proposed research goals [48]. Following the procedures listed on the “theoretical” side, the items related to IT control were summarized by studying the previous research. A literature review is thus conducted prior to the development of an internal control framework for ERP systems. To this end, two steps were performed in the literature review: collecting literature from the related sources and conducting coding procedures. Specifically, the relevant literature was gathered from the following sources: (1)IT controls for the internal use of companies. The data gathered are expected to be within the scope of the internal use of companies and can be compiled with the current internal control bylaws of corporate information systems; (2)Information security organization bylaws. This study refers to the regulations and criteria of COBIT, and BS7799 in particular, and includes all information systems. Both references are important, as they have been adopted by many companies worldwide [66]; and (3)Academic literature. Upon the completion of the initially constructed theoretical model and prior to conducting the case study, control items were established that met the requirements for the application of the model to the ERP system. Expert questionnaires were administered in this process. The main purpose for utilizing the expert questionnaires is to ensure and enhance the content validity of each measurement construct and to bridge the gap between the presented literature for application and the control items in actual practice. The measurement constructs and item indicators were screened separately to determine the internal control issues prevalent in the ERP system and to enhance the quality of the examination process and gain deeper insights. Next, following the procedures outlined on the “practical” side, an empirical case study was then conducted to investigate the feasibility of the proposed framework derived from the literature review and the questionnaires. The case study included “how” and “why” questions [79] and a pre-identified company was selected for the case study. In addition, the case study included steps related to design, preparation, collection, analysis, and sharing [79]. Not only was the case design identified in the design step, but the unit of case study was also described in detail in this step. 4. Construction of the preliminary framework for the internal controls of the ERP system The Science Direct database was utilized to search for the relevant academic literature. The main criteria for this search include the following items: (1)The keywords or the abstracts must have the words “information security” or “internal control”; (2)Literature must be related to the information field; and (3)Studies should be published between 2003 and 2007 because numerous financial scandals emerged worldwide primarily after 2002, bringing the issue of internal control to the forefront during this aforementioned period. Consequently, several regulations that required management to assess their enterprise internal controls were proposed, and auditors were also asked to determine whether their client's internal control assessment reporting was adequate. Therefore, the studies collected in this research are limited to this aforementioned period to investigate what was discussed or explored during this specific time window. Conceptualized results from 30 relevant publications were collected based on the abovementioned criteria. The collected results are shown in Table 1. A detailed analysis was also performed to present a complete and consistent list of internal control items for ERP. The preliminary model was constructed based on the literature review. The entire process was roughly divided into three steps as follows: (1) open coding, (2) axial coding, and (3) selective coding. 4.1. Open coding Open coding was performed for the literature content that satisfied the criteria mentioned above. Section extraction was performed; the sections identified as relevant to the internal controls of the information operations or those that obviously indicate the components of IT control of the information operations are coded. Coding was conducted to classify the studies from A to C. The codes derived from IT control for the internal use of companies, information security organization bylaws, and academic literature were classified as A, B, and C, respectively. For example, “C Company – Computerized Information System ICE” includes a section that addresses internal regulations. More specifically, this section states, “going online requires test reports or passing of tests.” This description can thus be conceptualized and coded into three factors (i.e., A216 whether test documents exist, A217 whether independent test environments exist, or A218 whether they have been verified by users). A total of 670 concepts were derived through this process. Accurate and complex interpretations were established as particular phenomena. For instance, codes A78, A108, A114, A115, A177, A192, A252, B15, B16, B17, B31, B46, B104, B154, B162, C40, C61, C87, C114, C158, C170, and C219 describe anomalies in the information system, how the information department is contacted and informed, how the information department rules out anomalies, and how information security incidents are addressed. Thus, these codes (concepts) were grouped in the domain of “whether procedures exist to report disasters.” Other concepts were translated into domains according to the same rule; 66 domains were established as key internal control issues based on the 670 concepts determined in the open coding process. 4.2. Axial coding Axial coding is usually conducted after open coding. This stage aims to recompose the distributed data into new methods such that the classifications and sub-classifications become related to one another. The 66 domains of the coded entries were further classified into dimensions. For example, the domains “whether relevant control procedures exist regarding system outsourcing” and “whether contracts are signed for system outsourcing” are related to outsourcing operation control and are imperative for managing system outsourcing for an organization. Therefore, these domains were classified into the dimension of “control of outsourced operations.” The results of axial coding are summarized in Table 2. 4.3. Selective coding Axial coding consolidates complex data and is the foundation of selective coding. Selective coding is conducted to systematically explain a selected core category, verify the relationship of the primary and other classifications, and fill the gap for supplements or developments required for individual classifications [64]. Based on the internal controls and the analysis of relevant literature, 66 key domains that influence the internal control of information systems were identified. The domains integrated through axial coding were re-classified as single key domains in selective coding. For example, the domains “whether anti-virus measures are used” and “whether firewalls are used,” were merged into “whether information equipment is protected with security measures,” given that both are related to security measures for the information equipment. Subsequently, 51 key domains were established. These domains function as internal control items. 4.4. Expert questionnaires Upon the construction of preliminary internal control items based on the literature, the methodology and validation process developed by Lawshe [37] was adopted. The adoption of this methodology and validation process enabled the collection of opinions from experts with extensive experience in the establishment, maintenance, and auditing processes of ERP systems. Questionnaires were distributed to gather opinions from the experts who are responsible for corporate functions (including internal audit and information), handle external audits (accounting firms), and work in partner companies regarding the introduction of ERP systems. The backgrounds of the participating experts are shown in Table 3. The control dimensions and items were screened to determine those suitable for the ERP system. Both theoretical and actual application are expected to increase the validity, extent, and practicality of this study, thereby achieving the research purpose of constructing internal control in an ERP system. As described previously, a literature review was conducted and 51 key items were identified for the internal control of ERP systems. Fourteen items were considered to be unimportant and were deleted after calculating and comparing the CVR values derived from the questionnaires. The remaining 37 control items were generalized and consolidated. The preliminary internal control items were further modified by referring to the suggestions provided by the expert respondents. Table 5 shows the modified internal control framework. 5. Empirical findings on internal control for the ERP system This section provides a brief description of the practices employed by the case company. The selected company was established in 1996 and is dedicated to the development and manufacture of wireless telecommunication products. The company aspires to become the world leader in the area of wireless telecommunications by exerting efforts in research and development (R&D) that are aimed at improving technology. Its products are divided into three lines: satellite telecommunications, mobile telecommunications, and wireless network equipment. The managers in the company can keep abreast of the key technologies associated with their product lines in accordance with the changes occurring in the marketplace through their extensive experience and background in technology. The company is thus capable of developing relevant niche products to meet market demand by quickly integrating telecommunication technologies into their product lines. This company provides comprehensive wireless and telecommunication products and timely after-sale service to its customers. With its focus on R&D for new technologies and the extensive in-house development of the accompanying software and hardware, the company designs and develops its own products effectively. In fact, the company has achieved their best economies of scale by establishing an increasingly comprehensive product line. As a result, the company is capable of maintaining its competitive advantage in the wireless telecommunications industry. The computer auditors working for the accountant were invited to participate in this study. Interviews were also conducted to study the actual company's operations, collecting the current internal control information as primary data. The company was asked to provide secondary data (i.e., relevant operation documents and files) for the analysis and synthesis of the research findings. Table 6 summarizes the background of all of the interviewees. A select group of public companies that introduced ERP systems was filtered for the case study. The company targeted for interview is engaged in the R&D and manufacture of wireless telecommunication products. The company actually replaced its Baan computer system with an Oracle ERP system in 2006. The interviewees comprised an internal auditing supervisor who facilitates two different ERP systems, an assistant manager in the MIS Department who maintains and deploys these two different systems, and a computer auditing manager who works for the accounting firm to audit the information system of this company. These three individuals are responsible for the ERP audit. All three interviewees have relevant experience and background in the auditing and maintenance of ERP systems. A case study on a public company using the obtained audited financial reports was conducted. A manufacturing firm similar to this telecommunications company can be regarded to be a representative case for companies in other industries. For this reason, this case result can be employed and justified as a rationale for the use of a single case [79]. Specifically, the case study protocol was developed in the preparation step. Primary data about the actual operations of the company were gathered on-site in the collection step, while secondary data were utilized to address the main objectives of this research. Further, data were gathered, analyzed, and collated prior to conducting the interviews with personnel who are experts in IT control and have worked with the independent accounting firm that maintains a relationship with the company selected in the case study. The feasibility of the internal control items that were applied in the planning of the ERP system was evaluated in the analysis and sharing steps. Finally, the results and findings were presented. The control items and information auditing of the ERP system in the case company were reviewed. The feasibility of using the control items constructed for the company was also evaluated. 5.1. Practices within the case company Two auditors are employed in the audit department of the case company. Their tasks include inspecting domestic and overseas affiliates in the same group. In addition to adjusting the internal control framework originally based on the “eight major cycles,” the two auditors also perform internal audits and execute special projects assigned by their supervisors because these tasks are part of their job description. In auditing ERP systems, the focus is on soft control. The company's MIS department has established a division called “ERP System Services.” All seven employees in this division are responsible for the maintenance of the ERP system. Their major responsibilities include maintaining the normal operations of the system, solving all problems raised by users, and meeting the operational demands of users. These employees perform ordinary control tests and passive checks on requests from the auditing department as ERP system audits. 5.2. Control items within the case company The current audit checklist for ERP systems was originally based on the control items listed by the company headquarters. The checklist was later modified in accordance with the actual situations experienced by the company. The key control items comply with the criteria set by the authority. However, these control items are not fixed and are regularly reviewed for appropriateness. Director Chen said, “After the introduction of the new Oracle ERP system in 2006, the company conducted timely adjustments to ascertain control items.” 5.3. Information auditing of the ERP system The internal auditors of the case company focus their audit on soft control items in the ERP system such as accounts, passwords, authorization, and remote access. The auditors are only equipped to perform soft audits. Other forms of audit are delegated to the MIS department, as the internal auditors perform these tasks through collaborative procedures. The definition of the items pertaining to overall control is modified by referring to previous audit records. For example, each audit is performed on a regular basis (i.e., once a year) to minimize risk. However, the items with poor records have a high-risk profile and are therefore analyzed under strict standards (i.e., conducted quarterly or every semester). Given that financial reports are generated by the company's ERP system, the reporting accounts must be spot-checked as a form of internal control to reduce confirmatory audit risks. The computer audit personnel of the accounting firm check the system setups and the ordinary control measures of the company. Manager Li said, “Basically, auditing for the ERP system within the company is mainly focused on general and basic checking of the Oracle ERP architecture in the UNIX operating system, Oracle database, and network. These are the critical points of our audit.” If the audit results indicate that the internal control of a co

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