Audit Tools for Managers
State of Rhode Island Fourth Annual
Accountants and Auditors Institute
October 3, 2001
www.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
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Every Manager is an Auditor
(at least some of the time!)
 Challenge- Better,
Cheaper, Faster
MANAGEMENT PROCESS Effective managers
know:

PLAN
MONITOR
ORGANIZE

LEAD

How well their function
performs
Whether they comply with
applicable rules and
policies
Where the opportunities
for improvement are
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How does a manager audit a process?
Fishbone Diagrams
Regression
Analysis
Pareto
Charts
CSA
ICQ
Histograms
Regression
Analysis
SIS
CAAT
Flow Charts
ABC
Stat
Samples
 Take a common sense approachlimited time available
 Identify your critical processpayroll, 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
Spaghetti Diagrams
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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 operatorsAsk & 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 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 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
Authorizer
Purchasing
Requisition
*Processes are Cross-Functional*
PO
Requisitioner
PO Copy
Vendor
Goods
Check
Goods
Invoice
Receiver
Accounts Payable
Receiver
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XYZ Agency
Purchasing Process for Materials
Step
1
Elapsed
Time 1/
1 Day
2
3
4
5
6
2 Days
1 Day
1 Day
3 Days
1 Day
7
8
9
3 Days
1 Day
5 Days
10
11
12
2 Days
.5 Day
.5 Day
Process Description
Painter fills out requisition for 50 gallons of Dutch Boy white
interior paint to paint an office
Foreman approves and signs requisition
Facilities storeroom clerk reviews on hand stock. No paint in stock.
Foreman authorizes purchase of paint
Facilities Manager reviews and forwards requisition
Facilities Fiscal Clerk reviews budget for fund availability, OKs
purchase, and records requisition
Facilities Manager authorizes purchase
Purchasing Clerk logs requisition in and assigns priority
Buyer reviews requisition and returns to Facilities Manager for
justification of Dutch Boy versus generic white paint
Facilities Manager refers back to Foreman
Foreman discusses with Painter
Foreman deletes Dutch Boy requirement and amends requisition to
any commercial grade paint
11
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XYZ Agency
Purchasing Process for Materials
Step
13
14
15
16
Elapsed
Time 1/
3 Days
1 Day
5 Days
2 Days
17
18
19
1 Day
1 Day
.5 Day
20
7 Days
21
1 Day
22
2 Days
Process Description
Facilities Manager authorizes amended requisition
Purchasing Clerk logs requisition in and assigns priority
Buyer reviews requisition and approves
Buyer solicits three bids and selects Acme Hardware for $1,000
order plus 5% sales tax.
Purchasing Clerk prepares Purchase Order (PO)
Buyer signs PO
Purchasing Clerk records PO, sends copies to Facilities, Receiving,
and Accounts Payable. Original mailed to Acme Hardware.
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.
Receiving gets partial shipment of 40 gallons of paint from Acme
Hardware.
Accounts Payable receives vendor invoice from Acme Hardware
for $907 for partial shipment ($840 paint, $42 sales tax, and $25
shipping)
12
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XYZ Agency
Purchasing Process for Materials
Step
23
Elapsed
Time 1/
1 Day
24
1 Day
25
5 Days
26
27
W/I 5 Days
above
1 Day
28
1 Day
29
5 Days
30
1 Day
31
32
2 Days
3 Days
33
34
3 Days
1 Day
35
1 Day
Process Description
Receiving fills out Partial Receiver and records receipt. Copies to
Facilities and Accounts Payable
Facilities storeroom clerk receives paint and updates inventory
records. Holds paint awaiting remainder of order.
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)
Receiving gets remaining shipment of 10 gallons of paint from
Acme Hardware.
Receiving fills out Final Receiver and records receipt. Copies to
Facilities and Accounts Payable
Facilities storeroom clerk receives paint and updates inventory
records. Issues paint to Painter.
Accounts Payable Clerk matches PO, receivers, and vendor
invoices
Accounts Payable Clerk calls Buyer regarding the additional costs$21/gallon versus $20/gallon and the shipping charges
Buyer contacts Acme Hardware about the differences
Acme Hardware sends a revised bill for $1,100 ($1,000 for paint,
$50 sales tax, and $50 shipping)
Buyer amends original PO to $1,100
Purchasing Clerk records amendment and sends an amended PO for
$1,100. to Facilities and Accounts Payable
Accounts Payable Clerk matches amended PO, receivers, and
amended vendor invoice
13
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XYZ Agency
Purchasing Process for Materials
Step
36
Elapsed
Time 1/
3 Days
38
39
W/I 3 Days
above
2 Days
14 Days
40
1 Day
41
1 Day
42
43
1 Day
1 Day
44
N/A
45
N/A
37
Process Description
Payment voucher (without back-up documentation) is prepared and
forwarded for approval.
Voucher package with supporting documents is filed
alphabetically. Documents are not stamped paid.
Accounts Payable Supervisor reviews the voucher and signs off
Bi-weekly A/P voucher check register is prepared by Accounts
Payable Clerk
Accounts Payable Supervisor reviews the check register and signs
off
Accounts Payable Clerk takes blank checks and check signing plate
from office safe and runs checks. There is no blank check log for
issuances.
Controller reviews vouchers over $2,500 and hand signs
Accounts Payable Clerk mails checks and files copies with voucher
packages
Accounts Payable Clerk receives and reconciles monthly A/P bank
statements as time permits. No standard reconciliation format is
used.
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.
14
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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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Use Standard Flow Chart Symbols
XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Facilities
Painter
Requisition for 50
Gallons of Paint
Foreman
S/R Clerk
Foreman
Facilities Manager
Authorizes
purchase
Review s
Requisition
Fiscal Clerk
Yes
No
Approves & signs
Requisition
Paint in stock?
Yes
Facilities Manager
Funds
available?
Authorizes
purchase & signs
Requisition
No
End
End
Log in Requisition
& assign priority
P. 2
Accounts
Payable
Receiving
Purchasing
Purchasing Clerk
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XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Buyer
Review s & rejects
Requisition
Facilities Manager
Foreman
Foreman
Facilities Manager
Refers Requisition
back to Foreman
Discusses Dutch
Boy requirement
w ith Painter
Amends
Requisition to
delete Dutch Boy
requirement
Approves & signs
amended
Requisition
Purchasing Clerk
Buyer
Logs in Requisition
& assigns priority
Approves
amended
Requisition
P. 3
Accounts
Payable
Receiving
Purchasing
Facilities
P.1
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P. 2
XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Receives copy of
PO
Buyer
Buyer
Solicits 3 bids.
Aw ards Acme
Hardw are $1000
order plus tax
Purchasing Clerk
Prepares
Purchase Order
(PO)
Buyer
Signs PO
Purchasing Clerk
Purchasing Clerk
Records PO
Orig to Acme
Cys to Facilities,
Receiving, & A/P
Receiving
Purchasing
Facilities
Fiscal Clerk
Receives & files
confirm from Acme
Hardw are
Receiver
Receiver
Receives copy of
PO
Receives partial
shipment of 40
gallons of paint
from Acme
Accounts
Payable
A/P Clerk
Receives copy of
PO
Acme Hardw are
P. 3
A/P Clerk
Acme Hardw are
Receives & files
Acme invoice for
partial shipment
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XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Fiscal Clerk
Storeroom Clerk
Storeroom Clerk
Fiscal Clerk
Receives & files
copy of paartial
Receiver
Receives paint &
updates inventory
records
Receives 10
gallons of paint.
Records & issues
paint to Painter
Receives copy of
Receiving Report
Purchasing
Facilities
P. 3
Receiving
Receiver
Completes &
records partial
Receiver. Cys to
Facilities & A/P
Receiver
Receiver
Receives
remaining 10
gallons of paint
from Acme
Sends paint to
Facilities
Storeroom
Completes
Receiving Report.
Copies to Facilities
and A/P
Acme
A/P Clerk
Accounts
Payable
Receiver
Receives copy of
Partial Receiver
A/P Clerk
Acme
Receives final
billing invoice from
Acme for
$1,152.50
A/P Clerk
Receives copy of
Receiving Report
A/P Clerk
Matches PO,
Receivers, &
Vendor Invoices
P. 4
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XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Facilities
P. 4
Buyer
Amends PO
amount to $1,100
Contacts Acme
Hardw are
Purchasing Clerk
Records and
sends copy to A/P
Receiving
Purchasing
Buyer
Accounts
Payable
A/P Clerk
Questions
additional costs
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A/P Clerk
Acme
Receives
amended Acme
invoice for $1,100
A/P Clerk
Matches amended
PO & invoice w ith
receiver
A/P Clerk
Prepares Payment
Voucher
A/P Clerk
A/P Supervisor
Voucher back-up
filed alphabetically
Review s voucher
& signs
Vendor
A/P File
P. 5
XYZ Agency
Purchasing Process for Materials Flow
Chart
10/3/01
Receiving
Purchasing
Facilities
P. 5
Accounts
Payable
A/P Clerk
Prepares BiWeekly A/P Check
Register
A/P Supervisor
A/P Clerk
Controller
A/P Clerk
Review s the BiWeekly A/P Check
Register
Runs and machine
signs A/P checks
Review s &
countersigns
checks over
$2,500
Mails checks &
files copies
Blank
checks
& sig
plate
A/P Clerk
A/P Supervisor
Reconciles A/P
bank statement
Occasional,
informal review of
bank
reconciliations
A/P Bank
A/P
Vendor
File
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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
Fiscal
Manager
27
28
23
10
5
13
6
Maintenance
1
11
1
27
7
19
23
Controller
42
14
21 19
Receiving
17
20
19
12
24
26
Purchasing
88
Foreman
2
4
45
40
Storeroom
33
30
38
36
37
36
9
18
15
33
31
16
34
39
35
29
27
Facilities 2
41
30
25
2
19
43
Process is inefficient
32
23
44
22
Accounts
Payable
Too many touches
Too many hand-offs Too
XYZ Agency Headquarters
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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Instructions for Using Linear Responsibility Charts (LRC)
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.
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XYZ Agency Accounts Payable
Linear Responsibility Chart
Activity
Matches amended PO &
invoice with receiver
Prepares payment voucher
Voucher back-up filed
alphabetically
Reviews voucher & signs
Frequenc
y
Twice per
week
Twice per
week
Twice per
week
Performs
Activity
Sally
Quinn
Sally
Quinn
Sally
Quinn
Back-up
Superviso
r
Mary Hall
Reviewe
r
Mary Hall
Mary Hall
Mary
Hall
Prepares Bi-Weekly A/P
Check Register
Bi-Weekly
Reviews the Bi-Weekly A/P
Check Register
Runs & machine signs A/P
checks
Reviews & countersigns
checks over $2,500
Mails checks & files copies
Bi-Weekly
Reconciles A/P bank statement
Monthly
Occasional, informal review of
bank statements
Quarterly
Bi-Weekly
Sally
Quinn
Mary Hall
Reviews sample of
voucher back-up
documents
System does not pay
dupe invoice number
Mary
Hall
Sally
Quinn
Mary
Hall
Mary Hall
Bi-Weekly
Bi-Weekly
Compensating
Controls
Nancy
Smith
Sally
Quinn
Sally
Quinn
Reviews back-up for all
checks
Mary
Hall
Mary
Hall
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 ctoft@etal.uri.edu
Presentation available on
www.ribghe.org
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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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