audit tools for managers state of rhode island fourth annual accountants and auditors institute...
TRANSCRIPT
Audit Tools for Managers
State of Rhode Island Fourth Annual Accountants and Auditors Institute
October 3, 2001
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Today’s Objectives
Discuss- What’s in it for me? Outline an audit process for managers Describe some basic tools for documenting
and analyzing a process Walk through an illustrative example using
these tools Provide useful reference materials
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Every Manager is an Auditor (at least some of the time!)
Challenge- Better, Cheaper, Faster
Effective managers know:
How well their function performs
Whether they comply with applicable rules and policies
Where the opportunities for improvement are
PLAN
ORGANIZE
LEAD
MONITOR
MANAGEMENT PROCESS
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How does a manager audit a process?
Take a common sense approach- limited time available
Identify your critical process- payroll, contracting, etc.
Document & understand the “As Is” process
Compare the “As Is” process to required standards or objectives
Identify the gaps- “As Is” vs. “To Be”
Develop an action plan to address gaps
ICQ
SIS
CSA
Pareto Charts
Histograms
Flow Charts Stat Samples
Spaghetti Diagrams
Regression Analysis
ABC
Fishbone Diagrams
CAAT
Regression Analysis
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Identify Your Critical Process!
What is your unit’s mission?
Where are your business risks? What could prevent you from accomplishing the unit’s mission?
80/20 Rule/Pareto Principle- Look for highest payback
Don’t get sidetracked by the small stuff
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Process Documentation Tools
Data Collection Sheet- sequential narrative of activities
Flow Chart- visual sequence of activities Spaghetti Diagram- shows the geography
of process activities Linear Responsibility Chart- shows employee
responsible Same basic data for charts & diagrams Use them as stand alone tools or together for a multi-
faceted process analysis
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Document the “As Is” process Take a snapshot of how
work is actually processed
Generally processes are cross-functional, more than one department involved
Facts- not how it should be
Data from the operators- Ask & Listen
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Process Data Gathering
Define the process, first step to completion, e.g., user requisitions supplies to user receives supplies
List the activities involved sequentially, e.g., requisitioner, approver, purchasing agent, etc.
Interview operators on actual tasks performed & record answers
Validate-put interview data on flow chart, etc. and walk example through with operators
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Process Flow Charting ExampleYou are the manager of an Accounts Payable Department. Your department is legally required to pay vendor invoices within a specified period or be penalized for interest. Currently, your department cannot meet the time standards for payment and is being heavily penalized. Your boss doesn’t like this. The vendors don’t like this. Purchasing and your internal customers don’t like this. Your people feel overworked and underappreciated. They all let you know about it constantly. Oh and the auditors are coming.
What do you do (assuming you are not eligible for/willing to retire)?
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Define the Process
Requisitioner
Authorizer Purchasing
Vendor
Receiver Accounts Payable
Requisition
PO Copy
Goods
Goods
Receiver
InvoiceCheck
PO*Processes are Cross-Functional*
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11
XYZ Agency Purchasing Process for Materials
Step Elapsed Time 1/
Process Description
1 1 Day Painter fills out requisition for 50 gallons of Dutch Boy white interior paint to paint an office
2 2 Days Foreman approves and signs requisition 3 1 Day Facilities storeroom clerk reviews on hand stock. No paint in stock. 4 1 Day Foreman authorizes purchase of paint 5 3 Days Facilities Manager reviews and forwards requisition 6 1 Day Facilities Fiscal Clerk reviews budget for fund availability, OKs
purchase, and records requisition 7 3 Days Facilities Manager authorizes purchase 8 1 Day Purchasing Clerk logs requisition in and assigns priority 9 5 Days Buyer reviews requisition and returns to Facilities Manager for
justification of Dutch Boy versus generic white paint 10 2 Days Facilities Manager refers back to Foreman 11 .5 Day Foreman discusses with Painter 12 .5 Day Foreman deletes Dutch Boy requirement and amends requisition to
any commercial grade paint
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12
XYZ Agency Purchasing Process for Materials
Step Elapsed Time 1/
Process Description
13 3 Days Facilities Manager authorizes amended requisition 14 1 Day Purchasing Clerk logs requisition in and assigns priority 15 5 Days Buyer reviews requisition and approves 16 2 Days Buyer solicits three bids and selects Acme Hardware for $1,000
order plus 5% sales tax. 17 1 Day Purchasing Clerk prepares Purchase Order (PO) 18 1 Day Buyer signs PO 19 .5 Day Purchasing Clerk records PO, sends copies to Facilities, Receiving,
and Accounts Payable. Original mailed to Acme Hardware. 20 7 Days Acme Hardware sends a confirmation including their standard
terms and conditions, e.g., shipping charges apply and partial shipments can be made. The Purchasing Clerk files.
21 1 Day Receiving gets partial shipment of 40 gallons of paint from Acme Hardware.
22 2 Days Accounts Payable receives vendor invoice from Acme Hardware for $907 for partial shipment ($840 paint, $42 sales tax, and $25 shipping)
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13
XYZ Agency Purchasing Process for Materials
Step Elapsed Time 1/
Process Description
23 1 Day Receiving fills out Partial Receiver and records receipt. Copies to Facilities and Accounts Payable
24 1 Day Facilities storeroom clerk receives paint and updates inventory records. Holds paint awaiting remainder of order.
25 5 Days Accounts Payable receives vendor invoice from Acme Hardware for $1,152.50 for completed shipment ($1,050 paint, $52.50 sales tax, and $50 shipping)
26 W/I 5 Days above
Receiving gets remaining shipment of 10 gallons of paint from Acme Hardware.
27 1 Day Receiving fills out Final Receiver and records receipt. Copies to Facilities and Accounts Payable
28 1 Day Facilities storeroom clerk receives paint and updates inventory records. Issues paint to Painter.
29 5 Days Accounts Payable Clerk matches PO, receivers, and vendor invoices
30 1 Day Accounts Payable Clerk calls Buyer regarding the additional costs- $21/gallon versus $20/gallon and the shipping charges
31 2 Days Buyer contacts Acme Hardware about the differences 32 3 Days Acme Hardware sends a revised bill for $1,100 ($1,000 for paint,
$50 sales tax, and $50 shipping) 33 3 Days Buyer amends original PO to $1,100 34 1 Day Purchasing Clerk records amendment and sends an amended PO for
$1,100. to Facilities and Accounts Payable 35 1 Day Accounts Payable Clerk matches amended PO, receivers, and
amended vendor invoice
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14
XYZ Agency
Purchasing Process for Materials
Step Elapsed
Time 1/ Process Description
36 3 Days Payment voucher (without back-up documentation) is prepared and forwarded for approval.
37 W/I 3 Days above
Voucher package with supporting documents is filed alphabetically. Documents are not stamped paid.
38 2 Days Accounts Payable Supervisor reviews the voucher and signs off 39 14 Days Bi-weekly A/P voucher check register is prepared by Accounts
Payable Clerk 40 1 Day Accounts Payable Supervisor reviews the check register and signs
off 41 1 Day Accounts Payable Clerk takes blank checks and check signing plate
from office safe and runs checks. There is no blank check log for issuances.
42 1 Day Controller reviews vouchers over $2,500 and hand signs 43 1 Day Accounts Payable Clerk mails checks and files copies with voucher
packages 44 N/A Accounts Payable Clerk receives and reconciles monthly A/P bank
statements as time permits. No standard reconciliation format is used.
45 N/A Accounts Payable Supervisor “occasionally” reviews the reconciliations “informally”.
1/ Total elapsed time between receiving a transaction and completing it. Time can also be subdivided into queue (waiting) time and action time.
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Flow Charting Ranges From Simple to Sophisticated-
Flow charting not rocket science!
Free Hand Plastic Templates Office Application
Software- Excel & Power Point
Specialized Application Packages- Visio
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Pur
chas
ing
Rec
eivi
ngA
ccou
nts
Pay
able
Faci
litie
s
Requisition for 50Gallons of Paint Approves & signs
RequisitionPaint in stock?
Authorizespurchase
ReviewsRequisition
Fundsavailable?
Painter Foreman S/R Clerk
End
Yes
No
Foreman Facilities Manager Fiscal Clerk
No
Yes
End
Authorizespurchase & signs
Requisition
Facilities Manager
Log in Requisition& assign priority
Purchasing Clerk
P. 2
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Acc
ount
sP
ayab
leR
ecei
ving
Pur
chas
ing
Faci
litie
s
Reviews & rejectsRequisition
Refers Requisitionback to Foreman
Discusses DutchBoy requirement
with Painter
AmendsRequisition to
delete Dutch Boyrequirement
Approves & signsamended
Requisition
Logs in Requisition& assigns priority
Approvesamended
Requisition
Buyer
Facilities Manager Foreman Foreman Facilities Manager
Purchasing Clerk Buyer
P. 3
P.1
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Acc
ount
sP
ayab
leR
ecei
ving
Pur
chas
ing
Faci
litie
sP. 2
Awards AcmeHardware $1000
order plus tax
Solicits 3 bids.Prepares
Purchase Order(PO) Signs PO
Records POOrig to Acme
Cys to Facilities,Receiving, & A/P
Receives & filesconfirm from Acme
Hardware
Receives partialshipment of 40gallons of paint
from Acme
Receives & filesAcme invoice forpartial shipment
Receives copy ofPO
Receives copy ofPO
Receives copy ofPO
P. 3
BuyerBuyer Purchasing Clerk Buyer Purchasing Clerk
Fiscal Clerk
Receiver
A/P Clerk
Purchasing Clerk
Receiver
A/P Clerk
Acme Hardware
Acme Hardware
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Acc
ount
sP
ayab
leR
ecei
ving
Pur
chas
ing
Faci
litie
sP. 3
Completes &records partial
Receiver. Cys toFacilities & A/P
Receives & filescopy of paartial
Receiver
Receives copy ofPartial Receiver
Sends paint toFacilities
Storeroom
Receives paint &updates inventory
records
Receives finalbilling invoice from
Acme for$1,152.50
Receivesremaining 10
gallons of paintfrom Acme
CompletesReceiving Report.Copies to Facilities
and A/P
Receives 10gallons of paint.
Records & issuespaint to Painter
Receives copy ofReceiving Report
Receives copy ofReceiving Report
Matches PO,Receivers, &
Vendor Invoices
P. 4
Receiver Receiver
Fiscal Clerk Storeroom Clerk
A/P Clerk A/P Clerk
Receiver Receiver
Storeroom Clerk Fiscal Clerk
A/P Clerk A/P Clerk
Acme
Acme
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Acc
ount
sP
ayab
leR
ecei
ving
Pur
chas
ing
Faci
litie
sP. 4
Questionsadditional costs
Contacts AcmeHardware
Receivesamended Acme
invoice for $1,100
Amends POamount to $1,100 Records and
sends copy to A/P
Matches amendedPO & invoice with
receiver
Prepares PaymentVoucher Voucher back-up
filed alphabetically
VendorA/P File
Reviews voucher& signs
P. 5
A/P Clerk
Buyer
Acme
A/P Clerk
Buyer Purchasing Clerk
A/P Clerk A/P SupervisorA/P Clerk A/P Clerk
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XYZ AgencyPurchasing Process for Materials Flow
Chart10/3/01
Acc
ount
sP
ayab
leR
ecei
ving
Pur
chas
ing
Fac
ilitie
s
P. 5
Prepares Bi-Weekly A/P Check
Register
Reviews the Bi-Weekly A/P Check
Register
Runs and machinesigns A/P checks
Reviews &countersignschecks over
$2,500
Mails checks &files copies
A/PVendor
File
Reconciles A/Pbank statement
Occasional,informal review of
bankreconciliations
A/P Clerk A/P Supervisor A/P Clerk Controller A/P Clerk A/P Clerk A/P Supervisor
A/P BankBlankchecks& sigplate
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Validate the Flow Chart
Review the Flow Chart with the operators together
Make corrections Walk example(s)
through to validate Flow Chart
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Analyze the Flow Chart
Are all the tasks needed? Can tasks be eliminated or
combined? Are tasks arranged in an
efficient sequence? Is there adequate
segregation of duties? What changes are needed?
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Spaghetti Diagram
Maps the Flow Chart data on a floor plan of the workplace
Gives a visual overview “geography” of the process- efficient or not If really “spaghetti”, then process in trouble and needs to
be redesigned Good tool for organizational layouts Develop “To Be” process spaghetti diagrams and
evaluate
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XYZ Agency Purchasing Process Spaghetti Diagram
Facilities
XYZ Agency Headquarters
12
1Maintenance
Fiscal Manager
Storeroom
Accounts Payable
Purchasing
Controller
Receiving
1
Foreman
22
3
8
6
2
3
4
5
7
8
9
10
11
13
14
15 16
17
18
19 20
21
22
19
19
19
23
23
23
24
25
26
27
27
27
28
29
30
30 31
32
33
34
35
3637
38
39
40
41
42
43
44
45
36
Process is inefficient Too many touches Too many hand-offs Too much travel
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Linear Responsibility Charts
Use Data Collection Sheet Assign employees to the tasks performed Expand as desired- to include back-ups,
authorizers, compensating controls, etc. Use to determine:
Segregation of duties and/or compensating controls Need for backups & cross training Workload distribution & resource requirements
Plot your “To Be” process & analyze
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1. Determine the primary activities that are performed in a functional area, e.g., finance. This should be done with the assistance of the employees in that function. The exact activities will vary between types of businesses and location. Attached is an example of an LRC for a xxxxx operation. 2. Fill in the names of the employees who perform the activity, act as back-up (or are cross-trained in the activity), supervise, or reviews/approve the activity. Again, the employees in the function should be involved to make the chart as accurate as possible. 3. List any compensating controls that exist for the activity. For example, in smaller locations, there may not be enough personnel for a traditional segregation of duties. Payroll may be prepared, distributed, and reconciled by one individual. Compensating controls could include: Only allowing a separate individual to enter new employees and changes in wage rates to the system System controls that flag all changes in wage rates, payments over forty hours (or a regular work week), and new employees Having a manager review and certify the payroll register and the payroll bank account reconciliation 1. Review the LRC for internal control weaknesses, e.g., lack of segregation of duties with no compensating controls or lack of back-ups in critical activities (financial reporting). Internal control questionnaires are a quick way of reviewing for common control issues and are usually available from your auditors. 2. Determine the potential exposure or risk if the activity is not performed or performed improperly, i.e., could this cause a material financial, legal, operational, or public relations problem? 3. Estimate the cost to eliminate the potential exposure or risk. Control costs should never be more than the potential exposure. 4. Develop an action plan to correct internal weaknesses or inform management of potential exposures where the cost of internal controls exceeds the benefits or is beyond the location’s resources. Review the activities performed and individuals involved to determine where non-value activities can eliminated or reduced or where process improvement
activities should be focused.
Instructions for Using Linear Responsibility Charts (LRC)
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XYZ Agency Accounts PayableLinear Responsibility Chart
Activity Frequency
Performs Activity
Back-up Supervisor
Reviewer
Compensating Controls
Matches amended PO & invoice with receiver
Twice per week
Sally Quinn
Mary Hall
Prepares payment voucher Twice per week
Sally Quinn
Mary Hall
Voucher back-up filed alphabetically
Twice per week
Sally Quinn
Mary Hall
Reviews voucher & signs
Mary Hall
Reviews sample of voucher back-up documents
Prepares Bi-Weekly A/P Check Register
Bi-Weekly Sally Quinn
Mary Hall System does not pay dupe invoice number
Reviews the Bi-Weekly A/P Check Register
Bi-Weekly Mary Hall
Runs & machine signs A/P checks
Bi-Weekly Sally Quinn
Mary Hall
Mary Hall
Reviews & countersigns checks over $2,500
Bi-Weekly Nancy Smith
Reviews back-up for all checks
Mails checks & files copies Bi-Weekly Sally Quinn
Mary Hall
Reconciles A/P bank statement Monthly Sally Quinn
Mary Hall
Occasional, informal review of bank statements
Quarterly Mary Hall
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Summary
Effective managers need to understand & monitor their key processes
Simple documentation tools are very useful for understanding & monitoring processes
Once you understand how current processes work, other “audit” tools can be used to improve them
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Questions & Answers Are there areas you would
like: Clarified/more information To comment on Other?
Handouts Contact- Carl Toft
Phone 222-6560 x124 Fax 222-6111 Email [email protected] Presentation available on
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Session Exercise
Take 5 minutes and: Name your critical process Define the key process activities including
interactions with other departments Assess how much you know about how these
activities are actually performed and by whom Identify top business risks- resources,
compliance, operational, etc.
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