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Operations Auditing: Audit of Business Processes, Part 1

Order to Cash (Revenue to Collect) Process

• The revenue cycle includes activities and information processing to provide goods/services to customers and collect payments.
• Basic activities: order entry (soliciting and processing), filling orders and shipping, invoicing, maintaining accounts, and collections (handling remittances and deposits).
• The sales department gets order information from the customer via mail, phone, or in person.
• A sales order form captures details like customer name, account number, item descriptions, quantities, prices, taxes, shipping info, discounts, and freight terms.
• The sales order is prepared in multiple copies for credit approval, packing, stock release, shipping, and billing.
• The credit department authorizes transactions by approving customers for credit sales, returns, and allowances.
• The shipping department receives packing slips and shipping notices from the sales department.
• Warehouse staff reconcile documents with stock release papers when goods arrive.
• Goods are packed with the packing slip and labeled and a shipping notice is sent to billing.
• A bill of lading accompanies the shipment

Common Documents in Revenue Cycle

• Sales invoices notify customers of the amount due.
• Monthly statements summarize all transactions within a month.
• Credit memos authorize the billing department to credit a customer's account, issued by the credit manager.

Control Objectives for Pricing and Discount Policies

• Pricing is driven by strategic and operational goals, market share, competition, economic conditions, demand estimates, and price elasticity.
• Inelastic demand indicates that price increases may be feasible.
• Pricing and discount structures should be authorized and documented, and should be appropriately profitable.
• Pricing levels must be competitive, profitable, and cover costs.
• Market trends and competitor pricing must be monitored to enable appropriate commercial responses.
• Authorized prices and discounts must be correctly applied to invoices, including changes to them.
• Cost records should be accurate and reliable for determining pricing policy.
• Costing information helps identify potential cost savings.
• The effects of taxation and duty should be considered when setting prices.
• Geographic differentials and cyclical sales patterns should be taken into account.
• Pricing structures must align with distributors, agents, and retailers.
• Government, national, and international pricing restrictions must be considered.

Typical Controls for Pricing and Discounts

• Documented pricing and discount policies are authorized and consistently implemented.
• Management maintains an accurate awareness of market trends and competitor prices.
• Price, profit, and quantity of returns are determined with SME input, market information, and accurate company data.
• Value-ranges, access, and data transfer controls ensure amounts are within acceptable limits, authorized, and accurately captured in reports.
• Process controls guarantee the mathematical accuracy of cost, pricing, and billing info.
• System interfaces ensure accurate data input/output from other systems (e.g., product costing).
• Segregation of duties protects sensitive pricing information from unauthorized access.

Key Risks Related to Pricing and Discount Policies

• Prices and discounts can make products/services uncompetitive or unprofitable.
• Prices and related sales projections can be unrealistic.
• Prices and discounts can be applied incorrectly, or applied in an unauthorized manner.
• Individuals and organizations can use proprietary information inappropriately.

Key Issues Related to Pricing and Discounts

• Documented pricing and discount policies should be authorized and implemented and based on established profit margins.
• Steps should be taken to ensure that prices remain competitive, profitable, and sustainable.
• Management must ensure and confirm that correct prices/discounts are applied, with mechanisms to detect and report unauthorized variations.
• Management must confirm that product costing information is accurate, complete, and reliable to determine prices.
• Measures are needed to ensure changes to prices/discount structures are justified, authorized, and applied.
• Taxation (VAT/sales tax) duty, and price constraints must be considered when setting pricing levels.

Detailed Issues Related to Pricing and Discounts

• Management ensures the most appropriate form of product costing is applied.
• Management maintains an awareness of market trends, competitor prices, etc as determinants of pricing policy.
• Required profit levels and returns are realistically established.
• Processes link individual customers to the correct pricing/discount structure to ensure invoice accuracy.
• Parameters govern discount eligibility, ensuring correct application via mechanisms.
• Steps protect sensitive pricing information from unauthorized access and leakage.
• Management accounts for geographic pricing differentiation while ensuring correct application.
• For sales affected by cyclical patterns, the pricing structure should vary in relation to demand and this should be duly authorized.
• Where prices vary due to cyclical sales patterns, management ensures correct price application.
• Measures prevent the setting and application of invalid/unauthorized prices and discounts.
• Management verifies that the prevailing pricing structure complies with national/international regulations.
• The accuracy of data input from other systems (e.g., product costing) is confirmed.
• The accuracy of data output to other systems (e.g., accounts receivable or advertising) is confirmed.

Control Objectives for Order Processing

• Valid orders are correctly identified, accounted for, and processed, following the organization's policies.
• Official orders are only accepted from bona fide, authorized, and reliable customers.
• Orders are only accepted from creditworthy customers who have available credit.
• New customers are properly assessed and authorized for set-up with credit limits.
• Determining and amending credit limits is appropriately authorized.
• Effective credit control ensures that customer accounts are promptly followed up and payments are obtained.
• All order details are accurately captured for subsequent processing.
• All affected functions are coordinated so that order is quickly and efficiently fulfilled.
• Orders are acknowledged.
• Delivery specifics and special requests are identified and appropriately addressed.
• Orders must be fulfilled, delivered, and confirmed as received.
• Invoices are raised against fulfilled orders and accounted for within AR system.
• Terms, prices, and discounts must be properly reflected on invoices.
• Key order data is protected from unauthorized access and amendment.
• Export orders must be handled in accordance with regulations.
• Current laws and regulations are fully observed.

Key Issues Related to Order Processing

• Processes should ensure that all orders are identified, logged, reviewed, authorized, and accounted for.
• Measures should prevent acceptance of orders based on invalid/unauthorized terms that are outside of company policies.
• Measures should ensure that only orders from authorized customers are accepted.
• Mechanisms prevent order processing from customers with outstanding balances or insufficient credit.
• Management must assess new customers for financial stability/suitability, and prevent the acceptance of inappropriate customers.
• New customers and initial credit limits must be subject to suitable authorities.
• Management must ensure that credit limits are strictly observed and suitably authorized when amended.
• Measures should ensure the accurate capture of order data.
• Mechanisms should coordinate various functions in processing customer orders including sales, production, stock control, export, accounts receivable, credit control, dispatch/distribution, and after-sales support.
• Measures ensure all orders are acknowledged and efficiently fulfilled.
• Management must assure that accurate invoices are raised within the AR system.
• Management should assure all export orders are compliant with current regulations.
• Sufficient measures are in place to observe relevant legislation and regulations.

Detailed Issues Related to Order Processing

• There should be authorized and documented policies established for new customer acceptance, setting credit limits, credit control, pricing & discounting, standard terms/conditions, and export sales.
• Compliance with all authorized policies must be assured.
• Accurate and reliable records of authorized existing customers should be maintained and protected from invalid amendments.
• Assessments and verifications applied to new or potential customers should confirm acceptability.
• Measures should prevent the set-up of customer records when assessments and credit checks have not been applied.
• Procedures should govern the determination and amendment of credit/trading limits, complying with set procedures.
• Mechanisms should prevent the acceptance of an order where the customer has previous accounts overdue for payment.
• Measures should be in place to identify/cater for customer requirements (delivery dates, modified specifications).
• Measures should accurately identify the status of orders and highlight those outstanding for delivery.
• Processes should identify and advance outstanding orders.
• All deliveries are accurately recorded and documented as either received or rejected (in whole/part).
• Procedures link orders delivered to the accurate generation of relevant invoices.
• Mechanisms ensure that correct, appropriate, and authorized details (prices, discounts, quantities, terms) are on invoices.
• Processes should prevent the delivery of an order without the generation of invoices.
• Measures should protect key data from unauthorized access/amendment.
• All invoices must be accurately accounted for on the customer's AR accounting record.
• Measures ensure invoices are promptly dispatched to customers.
• To prevent malpractice and fraud, key duties should be segregated.
• Management should receive accurate and timely information about orders, etc.
• The accuracy of data from other systems (e.g., agencies or stock control) is confirmed.
• Output data accuracy to other systems (distribution/ accounts receivable) is confirmed.

Control Objectives for Accounts Receivable

• Ensure all income-generating activities are identified and accurately invoiced to customers.
• All amounts due to the company are subject to collection efforts.
• Transactions are posted accurately and timely in financial statements.
• Credit is granted based on the buyer's risk profile.
• Invoices must be paid, and the income correctly identified, accounted for, and reflected in the accounts.
• The extent of debt is minimized with the prompt follow-up on what is overdue.
• Integrity of the accounts receivable system and data must be maintained.

Typical Controls for Accounts Receivable

• Procedures are in place for authorization and setting of realistic customer credit limits.
• Credit limits are based on credit worthiness.
• Access controls prevent unauthorized employees from accessing/manipulating system data.
• Customer credits and bad debt write-offs are monitored and issued by authorized individuals with management approval.
• All customer complaints are researched and appropriately addressed.
• Delinquent and uncollectable balances are thoroughly researched and dealt with.

Key Risks Related to Accounts Receivable

• Posting sales transactions is inaccurate.
• Collection efforts become inefficient, ineffective, unlawful, or inconsistent.
• Deposit of customer payments is delayed
• Bills (invoices) are inaccurate or not sent promptly.
• Customers lacking credit worthiness and financial stability receive credit.
• Unidentified payments are not processed promptly.
• Credit limits are excessive.
• Unauthorized individuals obtain/modify customer info inappropriately.
• Fraud is perpetrated against the organization (embezzlement, skimming, kiting, credits for kickbacks, write-offs).
• Excessive and inappropriate credits get issued to customers.
• There are excessive account adjustments and write-offs.

Key Issues Related to Accounts Receivable

• Management ensures that all goods/services are correctly invoiced to customers.
• Steps are taken to avoid trading involvement with financially unstable/unsuitable customers.
• All invoices must be correctly raised with the appropriate prices/discounts, dispatched, and accounted for within the accounting system.
• Customer remittances must be correctly identified, recorded, and accounted for.
• Management should receive adequate information on debt cases to enable quick reactions.
• Overdue accounts must be promptly identified and dealt with.
• Output VAT (or equivalent sales taxes) must be applied per legislation.

Detailed Issues Related to Accounts Receivable

• All goods and services must be accurately identified for subsequent billing.
• Management verifies that all invoices are raised with the correct/appropriate prices and discounts.
• Processes should prevent the generation of duplicate invoices.
• What prevents generation/dispatch of incorrectly completed invoices?
• All invoices and credit notes must be ID'ed & accounted for.
• All invoices/credit notes are correctly posted to the individual’s customer account.
• Steps must ensure that the correct rate of output VAT is applied to invoices.
• Mechanisms need to ensure invoices are printed and dispatched.
• Potential customers must be appraised for creditworthiness and financial stability before trading.
• What other measures prevent debt situations?
• Procedures must be adequate for authorization and setting of credit limits for customers.
• Measures should ensure agreed credit limits are not exceeded.
• What action happens if an invoice is undeliverable by post?
• Management needs to make sure all invoice values are posted to the accounts receivable system.
• What prevents staff from raising invalid/false credit notes to manipulate accounts?
• All credit notes get tested and validated by someone accurate.
• All account adjustments need to be authorized before going through.
• All AR transactions need to be shown accurately in the records.
• Management needs to be confident that customer cash is entered successfully to the right place.
• Make sure someone is able to reconcile across accounts.
• Management to ensure accounts are good.
• Customer cash should hit the bank fast.
• Queries for accounts should be logged and resolved quickly.
• Unidentified cash needs to be investigated.
• Staff need to be limited in the data for accounts.
• Customer accounts should reflect accurately.
• An overdue account should be looked at.
• How are debts chased?
• Is debt followed effectively?
• Debt should be reported effectively.
• Should invalid debt exist?
• How should big debts be looked at?
• Good documentation is needed for accounting
• All accounting should have clear steps.
• Accounts data should reflect the correct data.

Procure to Pay

• Expenditure is from buying and paying and includes goods requests
• The process is ordering needed goods, recieving vendor invoices to pay stuff being brought and paying for what is needed.
• Restocking from control happens buying, Purchasing acts on purchasing with a written order the vendor receives it.
• Receipt counts stuff that is received and the blind order says what was needed.
• Accounts reconciliation needs the order, the purchase details and the receipt and the journal is created when all those reconcile. A journal voucher receives the AP and summary of inventory control
• For payments accounts look at the order. purchase report, and vendor details.
• Cash pays the check and send it as well as notifies payables it’s been sent

Purchasing Objectives.

• Ensure buying things follows procedures.
• Purchasing is aligned.
• Proper costs for services.
• Buying processes are valid.
• Vendors are financially strong.
• Services are in line with expectations.
• Vendor expectations are correct.
• Procurement is in compliance.
• Expenses are looked at.
• Deliveries should happen.
• Vendor management is looked at.
• Reporting is good.

Typical Controls for Purchasing

• Ensure buying things follows procedures.
• There are limits on purchases for employees.
• There should be proper data to suggest good is justified.
• There are things to note about the price.
• Contracts of purchases get documented.
• Vendors are checked.
• People send their insurance stuff before services.
• Appropriate needs should be reduced
• Orders are clear and priced.
• Changes are accounted for validly.
• Vendors need to be looked at.
• Purchase decision should be the highest.
• Restricted vendor listings exist.
• Vendor info should be high quality.
• Payment terms should be looked at.
• Ethical purchases should be noted - conflict checks are good.
• Staff should be made aware of ethics and people are ordering and getting and billing stuff.

Risks for Purchasing

• Overpaying.
• Overdue and poor stuff.
• Favoritism.
• Overstock.
• Illegal vendors.

What to Consider for Purchases

• Following procedures.
• Good needs should be noted.
• Fake orders are not allowed.
• Supply must be followed to make sure it's stable.
• Good sources are noted.
• Capable vendors must be looked at.
• Supplies quality must be tested.
• Deliveries quality must be tested.
• Purchase data must be accounted for.
• Good compliance is used.

Payables Key

• Limits exist.
• Process should be adequate.
• Only good orders are allowed.
• Policy usage must be followed
• All orders have justified.
• Purchases are balanced.
• Spending should be good.
• Make sure to avoid mistakes.
• Should we follow standards.

Bidding

• Bidding is from the vendors, a good process to have a system set up.
• Need a lot of details and requests and proposals.

Bidding Benefits

• No fraud.
• Value for services.
• No bias.
• Time management.
• Good accounting.

Things to note on bidding

• Details should be given.
• Storing and recording bids
• Competition is good with documentation showing the vendors are good.
• Policies should be up to date.
• The data must be protected by third parties.
• Bids should be looked at with neutral people.
• Incomplete bids should not be allowed.
• Judging should exist for people.
• Third parties are good.
• Docs of vendors exist.
• Amendments and additional info must be shared.
• The bidding team is neutral

Risks of Bidding

• Vendor provides wrong info.
• Bad selection occurs.
• Company uses wrong providers and suffers losses.

Payment Objectives

• Proper payments are made.
• Taxes are followed.
• All accounts are accurate.
• Staff fraud is lessened.

Control

• Authorize at high levels.
• Good detail
• Good controls make sure data reflects properly.
• Good documentation is provided.

Payables Overview

• Organization only pays for what is received.
• Employee fraud does not exist.
• Payments are good.
• Data is good.

Payables Info

• Ensure accurate payables happen by setting.
• Mechanisms to prevent payment of inaccurately priced invoices exist.
• Ensure that all invoices prior to payment are confirmed.
• Ensure correct VAT is applied Make sure a all accounts accurately have payable info
• Adequate processes.
• False invoices shall exist nor staff.
• Data shall be recorded accurately.
• Good should be checked out.
• Copying gets caught.
• Invoices are only for approved payments.
• Checks need to be signed off on.
• Tax should be accurate, and not fake, also ensure data is safe.

Petty Cash

• Ensure all expenditures is noted.
• Make sure that expenses is in proper accordance to the outside regulations and system.
• Invalid expenses can’t happen. clear policies should exist.
• VAT needs to be followed.

Key Points

• Data should have receipts.
• Limits exist.
• Floats need to be accurate and verified often.
• Petty cash levels should be tested to ensure accuracy.