Auditing EDI

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business information using a public standard.[1] EDI is a central part of Electronic Commerce, because it enables businesses to exchange business information electronically much faster, cheaper and more accurately than is possible using paperbased systems.

A key feature is EDI's freedom from paper: traditional source documents in a vendor-client relationship, such as purchase orders and invoices, do not exist in paper form. Another feature is that the business cycle often is compressed, resulting in lower yearend account balances for inventory, receivables and payables. Many times accounting transactions and other data are passed between trading partners by a value-added network (VAN), a third party provider of communication services.

EDI present numerous audit and control complications.[2]. The auditor needs to understand how the entity conducts business using EDI and to adjust audit procedures accordingly. EDI creates a dependence on the trading's partner computer system, so its errors and security breaches might affect the client's system. For example, the auditor's client might be a supplier to a trading partner. The client ships raw materials to the trading partner based on an electronic inquiry of the trading partner's inventory system. This system might contain errors and compute an incorrect optimum order amount, leading to a dispute if the client ships too few or too many raw materials.(This could happen in a traditional system, but auditors would have a paper trail to check). The auditor should be concerned that accounts receivable and revenue could be overstated if too many goods were shipped or that a contingent liability might exist if too goods were shipped.

Controls, such as firewalls, encryption and authentication, associated with communications technologies also apply to EDI. The auditor might wish to review trading partner agreements since traditional revenue and expense recognition concepts might be modified because of new business practices. For example, the agreement might state that a purchaser pays for goods when they are placed into production instead of on receipt. The supplier then becomes dependent on the purchaser's system to determine when to recognize revenue.

Useful links of information on EDI

Private company website. The EDI Group, Ltd. Getting Started with EDI. http://www.harbinger.com/resource/getting_started.html[back to text]

Private company website. Harbinger Group. EDI: a definition and perspective.http://www.edigroup.com/journal/sample1.html[back to text]

References

[1] Introduction to EDI. Dept. of Defence. Joint E-Commerce Progam Office. http://http://www.acq.osd.mil/ec/whyec_frame.html[back to text]

[2] "Auditing electronic data". Report of the Task Force on EDI Audit Isues, Tax Executive,March 1998, p146-152.[back to text]