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Audit Tools for Managers State of Rhode Island Fourth Annual Accountants and Auditors Institute October 3, 2001

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Presentation on theme: "Audit Tools for Managers State of Rhode Island Fourth Annual Accountants and Auditors Institute October 3, 2001"— Presentation transcript:

1 Audit Tools for Managers State of Rhode Island Fourth Annual Accountants and Auditors Institute October 3, 2001

2 Todays Objectives Discuss- Whats 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

3 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

4 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

5 Identify Your Critical Process! What is your units mission? Where are your business risks? What could prevent you from accomplishing the units mission? 80/20 Rule/Pareto Principle- Look for highest payback Dont get sidetracked by the small stuff

6 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

7 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

8 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

9 Process Flow Charting Example You 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 doesnt like this. The vendors dont like this. Purchasing and your internal customers dont 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)?

10 Define the Process Requisitioner AuthorizerPurchasing Vendor ReceiverAccounts Payable Requisition PO Copy Goods Receiver Invoice Check PO *Processes are Cross-Functional*

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15 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

16 Use Standard Flow Chart Symbols




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23 Validate the Flow Chart Review the Flow Chart with the operators together Make corrections Walk example(s) through to validate Flow Chart

24 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?

25 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

26 XYZ Agency Purchasing Process Spaghetti Diagram Facilities XYZ Agency Headquarters 12 1 Maintenance FiscalManager Storeroom Accounts Payable Purchasing Controller Receiving 1 Foreman Process is inefficient Too many touches Too many hand-offs Too much travel

27 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

28 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 locations 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)

29 XYZ Agency Accounts Payable Linear Responsibility Chart ActivityFrequenc y Performs Activity Back-upSuperviso r Reviewe r Compensating Controls Matches amended PO & invoice with receiver Twice per week Sally Quinn Mary Hall Prepares payment voucherTwice 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-WeeklySally 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-WeeklySally Quinn Mary Hall Reviews & countersigns checks over $2,500 Bi-Weekly Nancy Smith Reviews back-up for all checks Mails checks & files copiesBi-WeeklySally Quinn Mary Hall Reconciles A/P bank statementMonthlySally Quinn Mary Hall Occasional, informal review of bank statements Quarterly Mary Hall

30 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

31 Questions & Answers Are there areas you would like: Clarified/more information To comment on Other? Handouts Contact- Carl Toft Phone x124 Fax Presentation available on

32 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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