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Operations Auditing - Business Processes

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Learning Objectives

• Identify internal controls related to financial reporting, revenue, and disbursement cycles.
• Recall fundamental tasks, departments, and documents in transaction cycles.
• Determine risks associated with processes.
• Enumerate best practices.
• Recommend business process improvement to transition processes from the current state of processes to a desired future state.
• Lay out a comprehensive implementation plan for the proposed recommendations.

Order to Cash (Revenue to Collect) Process

• The revenue cycle involves recurring business activities related to providing goods/services and collecting cash payments.
• Cycle activities include order entry, filling orders, shipping, invoicing, maintaining customer accounts, and collections.
• The cashier handles remittances and deposits, while accounts receivable credits customer accounts for payments.
• Sales departments receive order information from customers via mail, phone, or in person.
• Document used is sales order form which captures customer details, item information, quantities, unit prices, taxes, shipping details, discounts, and freight terms (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 dept, reconciles documents with stock release papers, packs, labels, and includes packing slip.
• Shipping notice is sent to billing, and a bill of lading accompanies the shipment.

Common Documents in Revenue Cycle

• Sales invoice notifies the customer of the amount to be paid.
• Monthly statement summarizes all transactions occurring during the month.
• Credit memo empowers the billing department to credit the customer's account and should be issued by the credit manager.

Control Objectives for Pricing and Discount Policies

• Pricing should align with strategic and operational goals and consider market share, competition, economic conditions, demand estimates, and price elasticity.
• Pricing and discount structures must be authorized and documented.
• Pricing levels should be competitive, profitable, and cover underlying costs.
• Maintain awareness of market trends and competitor pricing for a commercial response.
• Authorized prices and discounts must be correctly applied to invoices, and changes must be authorized and implemented properly.
• Maintain accurate and reliable cost records to support pricing policy.
• Provide adequate costing information to identify potential cost savings.
• Consider the effects of taxation and duty when setting prices.
• Account for geographic differentials and cyclical sales patterns when determining pricing policy variations, if applicable.
• Ensure pricing structures align with distributors, agents, and retailers and are competitive at each level.
• Government, national, and international pricing restrictions are taken into account when applicable.

Typical Controls for Pricing and Discount Policies

• Document, authorize, and implement pricing and discount policies consistently.
• Management maintains awareness of market trends and competitor prices.
• Required price, profit, and quantity of returns are determined with input from SMEs, market information, and company data.
• Value-range, access, and transfer controls ensure that price and discount amounts are within acceptable limits and authorized by individuals.
• Process controls ensure the mathematical accuracy of cost, pricing, and billing information.
• System interfaces ensure data input and output from other systems are accurate.
• Segregation of duties protects sensitive pricing information from unauthorized access.

Key Risks Regarding Policies on Pricing and Discount

• Prices and discounts make products or services uncompetitive or unprofitable.
• Prices and sales projections are unrealistic.
• Prices and discounts applied incorrectly.
• Excessive and unauthorized prices and discounts are applied.
• Individuals and organizations use proprietary information inappropriately.

Key Issues to Consider Regarding Policies on Pricing and Discount

• Are pricing and discount policies documented, authorized, and implemented based on established profit margins?
• What steps are taken to ensure prices remain competitive, profitable, and sustainable?
• How does management ensure correct prices and discounts are applied to invoices, and what mechanisms detect and report unauthorized variations?
• How does management confirm product costing information is accurate, complete, and reliable for determining prices?
• What measures ensure changes to prices and discount structures are justified, authorized, and correctly applied?
• Does management account for the effects of taxation, duty, and price constraints when determining pricing levels?

Detailed Issues to Consider Regarding Policies on Pricing and Discount

• How does management ensure the most appropriate form of product costing is applied?
• How does management maintain awareness of market trends and competitor prices as pricing policy determinants?
• Are required profit levels and returns realistically established?
• What processes link individual customers to the correct pricing and discount structure for accurate invoice calculation?
• What parameters govern discount eligibility, and what mechanisms ensure correct application?
• What steps protect commercially sensitive pricing information from unauthorised access and leakage?
• Does management account for geographic differentiation in pricing policy, and what assures variations are correctly applied to invoices?
• If cyclical patterns affect sales, does the pricing structure vary with demand, and is this process authorized duly?
• Where prices vary with cyclical sales, how does management ensure the correct price is applied?
• What measures prevent setting up and applying invalid or unauthorised prices and discounts?
• How does management verify the prevailing pricing structure complies with national or international regulations?
• How is the accuracy of data input from other systems confirmed?
• How is the accuracy of data output to other systems confirmed?

Control Objectives for Order Processing

• Ensure valid orders are correctly identified, accounted for, and processed per policies.
• Ensure official orders are accepted only from bona fide, authorized, and suitable customers.
• Ensure orders are accepted only from creditworthy customers with sufficient credit.
• Ensure new customers are assessed and authorized for setup with credit limits.
• Ensure determination and amendment of credit limits is authorized appropriately.
• Ensure credit control is exercised and customer accounts are promptly pursued and payments are obtained.
• Capture all order details accurately for subsequent processing.
• Coordinate all affected functions for prompt and efficient order fulfillment.
• Acknowledge orders promptly and accurately.
• Identify and address delivery and special requirements appropriately.
• Fulfill, deliver, and confirm receipt of all orders promptly.
• Raise invoices against fulfilled orders and account for them in the accounts receivable system.
• Reflect correct terms, prices, and discounts on subsequent invoices.
• Protect key data from unauthorised access and amendment adequately.
• Handle export orders in accordance with regulations.
• Fully observe current laws and regulations.

Risk and Control Issues for Order Processing

• Key isssues include ensuring orders from all sources are correctly identified, logged, reviewed, authorized to proceed, and accounted for.
• Measures are in place to prevent accepting orders based on invalid or unauthorized terms/conditions.
• Adherence to established, authorized, bona fide customers only.
• Prevention of processing orders from customers with outstanding balances or insufficient authorized credit.
• Assessment procedures for the financial stability of new customers.

Key Questions on Order Processing

• Are all orders correctly identified, logged, reviewed, authorized, and accounted for?
• What prevents accepting orders based on invalid or unauthorized terms?
• How to ensure acceptance only from established, authorized customers?
• Are there mechanisms preventing processing of orders from customers with outstanding balances or insufficient credit?
• Have new customers been assessed for financial stability/suitability?
• Are initial credit limits are subject to authorities?
• How is management assured credit limits are observed and amended only when authorized?
• What measures ensure accurate capture of order data?
• What mechanisms ensure coordination of sales, production, stock control, export, accounts receivable, credit control, dispatch, and after-sales functions?
• How are all orders acknowledged and fulfilled efficiently?
• How is that accurate invoices raised and accounted for within accounts receivable?
• Is it ensured that export orders are handled in accordance with regulations?
• Are all relevant regulations correctly observed?

Detailed Issues on Order Processing

• Are there authorized and documented policies for new customer acceptance, setting credit limits, credit control, pricing/discounting, standard terms, and export sales?
• How is compliance with all authorized policies assured?,How are accurate records of customers maintained, and protected from unauthorized access?
• What assessment/verification is applied to new customers to confirm acceptability?
• What prevents setting up customer records when assessment/checks haven't been applied?
• Are determination procedures in place when amending credit/trading limits; ensure compliance?,What prevents an acceptance of an order where a customer has previous overdue payments?
• Are measures in place to identify/cater to special customer requirements?
• What measures are in place to accurately identify the status of all orders and highlight those outstanding for delivery? What processes identify/progress outstanding orders?
• Accurate recording of all deliveries to document if received or rejected, and accurate linkage exists to delivery orders to generate invoices.
• Secure/accurate details regarding prices, discounts, quantities, terms, and a process that stops deliveries without relevant invoices.
• Security of data (prices, discounts, orders, etc.) must be protected from unauthorized access/amendments.
• Are all invoices correctly and accurately accounted for on the customer's debtors accounting record and promptly dispatched?
• Adequate key duty segregation is in place to prevent malpractice or fraud.
• Management should be provided with adequate, accurate, timely data regarding order in progress, with confirmed data outputs.

Control Objectives for Accounts Receivable

• Guarantee all income-generating activities are identified and accurately recorded.
• Guarantee every amount due is undergoing collection efforts.
• Transactions should be correctly recorded in the financial statements.
• Credit should be granted based on evaluating risk profile.
• Guarentee invoices are paid reflected in the accurrate accounts
• Minimize the risk of debt, and guarantee a prompt follow-up process for overdue accounts.
• • Guarantee the data within the accounts receivable system.

Typical Accounts Receivable Controls

• Procedures should be put in place for setting realistic credit limits and guaranteeing they are not going above them. Access controls prevent unauthorized employees From accessing and manipulating account data.

Risk and Control Issues for Accounts Receivable

• Key risks include the posting of inaccurate data for sales transactions
• Defective collection efforts will be inconsistent or unlawful
• Delayed deposits of customer payments. - Inaccurate billing sent out late to customer.
• Lack of credit worthiness
• Fraud , Excessive or poor credits issued, excessive account adjustments.

Key Accounts Receivable Questions

• Are they able provide full goods and services to invoice customers , with customers approved before trading?
• Correct raising of invoices. Recording shipment with an appropriate accounting system.
• Customer remittances are confirmed accurately to accounts
• Adequete timeliness to correct bad debt for prompt reactions;
• Overdue accounts can easily be advanced.
• Correct and appropriate vat/ taxes are in place.

Detailed Issues of Account Receivable

• All goods and services provided by the organization accurately identified as the basis for subsequent customer billing.
• How does management verify that all invoices are raised using the correct prices and discounts
• What processes to prevent duplicate invoices - Prevention of dispatch and generation - all invoices and notes - All processes to all -
• What steps to take to ensure a correct VAT for equivalent sales tax is applied to invoices?
• How to maintain all the right printables, and promptly communicate to customer. – Are consumers apppraised for crediworthiness is established -What steps to manage bad debt? Realistic credit limits are in place to stay correct . Action takens , and Invoice are returned by the postal service. – Is the accounts system properly applied? What actions prevent fraud related activities?

Procure to Pay (Expenditure) Process

• Recurring business activities and operations with purchase of goods and services- basic activities - Requesting and ordering goods - Receiving - Approving and paying

Inventory Control Monitors

• Monitor inventory and authorizes resting with a purchase requisition - purchase acting in requisition - a purchase order with Inventory control and accounts _ Receiving staff counts and inspected goods. Count is a significant staff check - other goes into the stores

Control Objectives for Purchasing

• To ensure that all purchasing activities are supported by authorized and documented policies and procedures.

• To ensure that purchasing appropriately supports the business objectives of the organization.

• To ensure that the appropriate goods/services are obtained at the optimum price and at the relevant time.

To ensure that all purchasing activity is valid, justified and authorized within the prescribed budgets.

Typical Purchasing Controls:

• Purchasing activities are supported by documented, up to date, and authorized policies and procedures.

• Authority limits and access controls restrict which employees can create and approve purchase orders and purchase requisitions.

• All purchases require documentation justifying the need for the items purchased and related budgets to be charged for the expenses.

Risk and Control Issues for Purchasing

• The organization overpays for items purchased.
• There are excessive, overdue, poor quality, and late deliveries.
• Vendors are selected inappropriately
• The organization buys more than it needs.

Unqualified or illegal vendors are used.

1 Key Issues

• Have authorized and documented purchasing policies, procedures, been. Developed, communicated effectively

- Detailed Issues

• Mechanisms should be put in place to prevent limits of exceeding purchase orders (financials and type)
• Are adequate procedures are in place?

-What procedures ensure that purchase orders are issued only from authorized source - -What mechanisms prevent the dispatch of purchase orders

• Ensure a proper accounting structure for all purchases of goods:
• How to make certain all purchases across organization are managed.
• That is not an authorized purchase? The data output accuracy also important. All purchases of organizations must align. Has policies in place to prevent fraud on purchasing orders.

Key Objectives

• The bidding process is competitive and prevents fraud and collusion.
• The bidding process is fair and the work is awarded to the vendor providing the best value for money.
• The bidding process is free from bias or undue influence.
• An adequate bidding timetable is used.
• Bids are correctly identified, recorded, accounted for, and protected from tampering.

•Bidders provide false information that result in selecting an inappropriate vendor.

•Nepotism, favoritism, or bribery results in inappropriate organizations being selected because individuals within the hiring organization steer business to preferred suppliers for personal gain.

Product Quality receipts:

• Quality is really important.

• incoming materials- Meet demands - inspect on receipt - - if the products did not meet requirements, take prompt direction. Inspect for materials ,

• the organization’s system should be accurate of payment processing.

Control Objectives for Accounts Payable

a. To ensure that all payments are for valid and suitably approved creditor accounts for goods and services actually received. b. Payments are for goods and services received in acceptable condition. c. Prevailing sales taxes regulations are complied with. d. Positive working relationships are maintained with key suppliers. e. Financial statements reflect all liabilities outstanding and paid.- typical controls also listed above.

1 - 2 Detailed Issues

1- How the management ensure that only valid invoices or fully recived. 2-The process behind preventing false invoices and fraudulent ones.

Petty Cash and Expenses( 1 Key Issues)

Has management monitor and approved accurate, valid expenses to account for.

• Has management set out clear and understandale policies?

1. Provide adequate training facilities and related resources cost effectively.
2. If the vat or salex taxes accounted, and how we prevent error?