Audit Tools for Managers State of Rhode Island Fourth Annual Accountants and Auditors Institute...

Audit Tools for Managers

State of Rhode Island Fourth Annual Accountants and Auditors Institute

October 3, 2001

www.ribghe.orgwww.ribghe.org

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


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


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


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


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


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


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


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)?


Define the Process

Requisitioner

Authorizer Purchasing

Vendor

Receiver Accounts Payable

Requisition

PO Copy

Goods

Goods

Receiver

InvoiceCheck

PO*Processes are Cross-Functional*


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


12



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)


13



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


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.


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


Use Standard Flow Chart SymbolsUse Standard Flow Chart Symbolswww.ribghe.orgwww.ribghe.org

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



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



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



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

www.ribghe.www.ribghe.orgorg


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



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


Validate the Flow Chart

Review the Flow Chart with the operators together

Make corrections Walk example(s)

through to validate Flow Chart


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?


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


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


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


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)


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


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


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

www.ribghe.org


mailto:[email protected]

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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