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In-Line Electronic Accounting, Internal Control and Audit Trail
by Price Waterhouse & Co., New York, N. Y
Current interest in the area of in-line accounting on elec-
tronic accounting systems has focused attention on the
responsibility of the controller and the auditor in the
planning of such installations. We therefore asked the
accounting firm of Price Waterhouse & Co. to survey the
aspects of internal control and audit trail encountered in
early installations of the IBM 305 RAMAC and similar
aspects which it is anticipated will arise in the future.
The results of this survey are contained in this booklet
which should assist in the installation and operation of
in-line electronic accounting systems.
International Business Machines Corporation
Introduction data, the system is able to process as an uninterrupted
operation substantially all the accounting for a business
The increasing importance and use of electronic data transaction. As an example, in processing an order
processing systems in business have made essential the from a customer, the system could relieve the inventory
design of new techniques of control. The ability of large accounts (stored in memory) of the amount of ship-
and medium scale electronic data processing systems to ment, compute and print the invoice (using sales prices .
perform, at high speeds and with great accuracy, complex stored in memory), charge the customer's account
manipulation of data recorded on magnetic tape or other (stored in memory) and accumulate the pertinent cost
media has been demonstrated. The problems they pose and sales data (likewise stored in memory). The only
to controllers and auditors have been recognized and visual record that need be produced would be an in-
reported in various publications. Solutions designed to voice to be sent to the customer.
solve the problems of internal control and audit trail for Although it is not unusual in highly mechanized ac-
these systems have been, and are being, tested by actual counting systems to find these operations performed
operations. automatically, it is only in electronic accounting sys-
It might appear on initial consideration that these solu- tems with large internal data storage that this concen-
tions would almost automatically be applicable to all tration or consolidation of operations appears. Trans-
electronic data processing systems. However, this is not actions are processed through a series of uninterrupted
the case. Certain electronic accounting systems are now operations which directly alter permanent historical
available that make possible in-line accounting, which pre- records without intermediary machine processing runs
sents unique control problems for controllers and auditors. and summarizations. Further, the absence of interme-
In-line accounting differs significantly from the batch diary records reduces the opportunity for visual review
accounting method of tabulating card systems and most and other controls based on the conventional concept
electronic systems. A tabulating card system can perform of division of duties between employees, and eliminates
only a limited number of operations at one time and, one means of reconstructing the accounting transactions
therefore, requires that the punched card input be grouped for audit purposes. This concentration of accounting
and sorted into one or more logical sequences. Both tab- in the machine operation and the absence of visual
ulating card systems and most electronic systems require review requires that the machine system be carefully
historical or master information to be recorded in some controlled.
physical form outside of the system. For processing, his- 2. Data stored in the internal memory are continuously
torical or master records and the transaction records must altered as a result of the (intentional) posting of u p-
be brought into the processing system together. In con- dated data over the prior data, automatically erasing
trast, an in-line accounting system processes each trans- the prior data. The possibility also exists that such data
action, in the order of its occurrence, directly against the will be lost or altered by:
historical record continuously stored in the internal mem- (a) the deliberate or chance misposting to a wrong location
ory of the system. Grouping or sorting of like transactions in memory.
is not necessary to this method of processing, but a large (b) possible malfunctioning of the system.
memory device to store the historical records is required. 3. The original transaction documents need not be put in
To understand the problems presented by in-line elec- logical sequence for processing purposes and, accord-
tronic accounting, it is necessary to understand the charac- ingly, may not be readily available for reference pur-
teristics of such a system. Among the in-line electronic poses without additional sorting and filing. The
accounting systems available, one-the IBM 305 RAMAC- punched cards introducing the data may also be left in
has been selected to illustrate this discussion. Although random order and be as difficult to locate as the original
specific comments relating to the components of the 305 documents.
RAMAC will not apply to all other systems, the concepts of 4. In-line accounting is usually adopted where it is impor-
control and audit trail developed will apply to most in-line tant to maintain data on a current basis, and therefore,
electronic accounting systems. it may not be practical or economical to delay the
The operation of the system and the control challenges processing to establish advance control totals.
center about three features of the electronic system:
First, unlike most data processing systems, a large inter- It is the purpose of this study to consider the more sig-
nal memory is provided to store data on a continuing basis. nificant problems presented by in-line electronic account-
This eliminates the need for batching transactions and ing and to suggest means by which adequate controls may
discharging results on external records such as magnetic be established and suitable audit reference information
or paper tapes, punched cards or printed listings. provided, without unduly interfering with maximum effi-
Second, the system is designed to process efficiently ciency of the operation. The discussion is based upon a
data introduced in random order, obviating the need for review of electronic accounting systems now available and
presorting and collating incoming data. the limited in-line operating experience to date. ~t is not
Finally, in keeping with the reduced need to discharge possible to specify procedures applicable to every situation
information,. the ability to discharge data is limited to a or to anticipate future developments in machine design
printer, a card punc~, and a console typewriter, each of or operating technique. However, this study should pro-
which operates generally at speeds slower than the inter- vide a basis for each user, in conjunction with his internal
nal manipulation of the data. and independent auditors, to develop suitable techniques
To those conversant with establishing internal controls and procedures for internal control and audit trail.
and conducting audits, the challenges presented by an in-
line electronic accounting operation will be apparent:
1. By means of its processing abilities and internally stored
Components and Functions 3. Arithmetic computation.
of the IBM 305 RAMAC 4. The ability of the stored program to modify its own
~
instructions.
Preliminary to considering the problems outlined above, Upon receipt of an order from a customer, the perti-
it may be well to review briefly the components of the nent data from the order and the location address of the
30 5 RAMAC System. A more complete discussion of the customer's account in the disk memory are key punched
equipment and its operation will be found in the manu- into a card which is introduced into the system through
facturer's manual of operation. the card reader. Acting on instructions previously stored
The 305 RAMAC is an electronic accounting system with in the applicable section of the processing drum, and by
calculating abilities and a random access memory unit. the control panel, the system seeks the customer's record
Information in the form of punched cards is entered at the disk memory address indicated. The record, consist-
(input) into the system through a card reader which con- ing of name, address, credit limit and current account
verts the punched card coding into a code of electrical receivable balance, is recopied onto the working storage
impulses. The impulses are transmitted to, and stored on, area of the processing drum. The customer's name and
a magnetic drum in the processing unit of the system. address are transmitted to the printer, which begins the
Information is extracted (output) from the system in printing of the combination invoice-shipping notice on
reverse fashion by any of three means: card punch, printer, a multicopy carbon form.
console typewriter. These three components complete the Next, by reference to the stock number of the item
basic machine system. ordered, the system in the same fashion copies the appli-
Information to be retained in the system may be stored cable inventory record from the disk memory to the proc-
for indefinite periods in the form of magnetic spots on essing drum. A comparison is made of the quantity ordered
tracks of the memory disks. The disks have a capacity of with the quantity on hand:
5,000,000 alphamerical characters, in the form of 50,000 If the quantity on hand is greater than ordered, the
one-hundred-character locations. system extends the quantity ordered by the sales price
The system is directed in its operation by coded instruc- recorded in the inventory record and transmits the stock
tions stored on the magnetic processing drum and by con- part number, description, quantity and extended sales
trol panel wiring similar to that found in punched card price to the printer for inclusion on the invoice-ship-
equipment. The actual processing of the data occurs in ping instruction form. The sales value would also be
the storage area of the magnetic drum to which the data stored in working storage for accumulating an invoice
to be acted upon are transferred from the disk memory or total.
from other areas of the processing unit. If the quantity on hand is less than the amount ordered,
the system will, in accordance with established company
policy, either invoice the quantity on hand and punch
a back order card for the remainder, or back order the
entire quantity.
In those cases in which a shipment results, the inven-
tory record is relieved of the quantity shipped and its
cost. The remaining quantity on hand is compared with
a predetermined order point and, if less than the order
point, a purchase or production requisition card is punched.
The updated inventory record is then returned to its disk
memory location where it automatically erases the prior
data. The cost of the shipment and sales value are added
to the cumulative sales analysis stored in disk memory.
This inventory procedure is repeated for each item on
the customer's order. After the last item is processed, the
various sales values accumulated in working storage are
Schematic of mM 30S RAMAC
totaled and inserted on the invoice. The total is also added
to the customer's current account balance, previously
Other electronic accounting systems available differ in stored on the processing drum. A credit limit recorded in
the size of the internal memory, operating speeds, flexibil- the customer's record is then subtracted from the com-
ity, and use of magnetic tape for input and. output. Gen- bined total. If the result is a negative amount, indicating
erally, the 305 RAMAC may be considered a small to adequate credit, the customer's record is updated for the
medium size system. amount of the shipment and returned to disk memory, and
the invoice is released. If