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NCJ Number: 66788 Find in a Library
Title: INTERNAL CONTROL SYSTEMS - HOW TO CALCULATE INCREMENTAL EFFECTIVENESS AND COST USING RELIABILITY CONCEPTS
Journal: INTERNAL AUDITOR  Volume:34  Dated:(OCTOBER 1977)  Pages:31-43
Author(s): M J BARRETT; D W BAKER; D E RICKETTS
Corporate Author: Institute of Internal Auditors, Inc
United States of America
Date Published: 1977
Page Count: 13
Sponsoring Agency: Institute of Internal Auditors, Inc
Altamonte Springs, FL 32701
Format: Article
Language: English
Country: United States of America
Annotation: A PROCESS IS DESCRIBED FOR MEASURING THE FAILURE PROBABILITY OF A GIVEN DATA PROCESSING SYSTEM AND COMPARING THE FAILURE PROBABILITY WITH THE COST OF INTERNAL CONTROLS REQUIRED TO REDUCE VULNERABILITY.
Abstract: A MATHEMATICAL CONCEPT CALLED 'RELIABILITY THEORY' CAN BE USED TO DESIGN AND EVALUATE INTERNAL CONTROL SYSTEMS INTENDED TO DISCOVER AND CORRECT UNINTENTIONAL DATA PROCESSING ERRORS. THE RELIABILITY THEORY MEASURES THE DEGREE OF CONTROL SYSTEM VULNERABILITY BY ESTIMATING THE PROBABILITY OF FAILURE. THESE FAILURE PROBABILITIES ARE THEN COMBINED WITH EXPECTED CONTROL COSTS SO INTERNAL AUDITORS CAN PRESENT MORE OBJECTIVE INTERNAL CONTROL RECOMMENDATIONS. THE THEORY VIEWS A SYSTEM AS A NUMBER OF SEQUENTIALLY RELATED PROCEDURES. EACH PROCEDURE OR SET OF PROCEDURES IS ASSUMED TO OPERATE PREDICTABLY SUCH THAT IT CAN BE DESCRIBED IN PROBABILISTIC TERMS. GIVEN THE SYSTEM'S CONFIGURATION AND THE PROBABILITY DISTRIBUTIONS ASSOCIATED WITH EACH PROCEDURE, THE OVERALL SYSTEM'S RELIABILITY CAN BE CALCULATED. THE PROBABILITY OF FAVORABLE AND UNFAVORABLE OUTCOMES FOR EACH CONTROL CHECK IS THEN FIGURED, FOLLOWED BY AN ESTIMATE OF THE COST FOR EACH OUTCOME. THE COST OF A SINGLE CONTROL MECHANISM INCLUDES THE DIRECT COST OF PERFORMING THE CONTROL CHECK, THE INCREMENTAL COST OF SEARCHING AND MODIFYING CORRECTLY PROCESSED DATA WHEN AN ERROR HAS BEEN SIGNALED BY MISTAKE, AND THE OPPORTUNITY COST OF PROCESSING INCORRECT DATA THROUGH THE SYSTEM. THESE ESTIMATED COSTS ARE COMBINED WITH THE PROBABILITIES ASSOCIATED WITH EACH POSSIBLE OUTCOME TO DETERMINE THE OVERALL EXPECTED COST OR SAVING OF USING A CONTROL MECHANISM TO CHECK A DATA PROCESSING PROCEDURE. THE APPLICATION OF THE ENTIRE PROCEDURE IS ILLUSTRATED FOR A PAYROLL SYSTEM. (RCB)
Index Term(s): Cost effectiveness analysis; Data integrity
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