CHP 2- BUSINESS PROCESSES ensure that they are duly consulted about the review and so the auditor

about the review and so the auditor is clear

about the reporting lines for the report and auditor’s recommendations.
An Audit Universe of Business Process
How do auditors decide upon the most appropriate way to define their universe of The main benefit of this approach is that it should encompass all the relevant issues
audit review projects? and aim to provide reassurance to management on the effectiveness of the internal
control measures in place across the whole process. On the down side, this method
One way would be to separate the “productive” or commercial aspects of the requires auditors to plan very carefully how they approach the engagement and to
business (such as manufacturing or sales) from the support or infrastructure ensure that the fieldwork is adequately coordinated in order to initially identify and
activities (such as accounting, photocopying or security). consider all the risks and control issues, which will potentially span a number of
organizationally separate areas.
The simplest (although not necessarily the best) way to define the audit universe is
to look at the internal telephone directory. This will identify the discrete SIX UBIQUITOUS PROCESSES/ COMMONLY USED- six principal processes commonly
departments and may, if viewed alongside any organization charts, lend a definable found within organizations
form to the company. (UBIQUITOUS-something that is widely adopted and can be found nearly
everywhere)
Two apparent advantages of using this “departmental” or “functional” basis for
defining audit reviews are: 1. The REVENUE PROCESS
(1) the area under review is clearly bounded, and Related to those activities that exchange the organization’s products
(2) reporting lines to responsible management are clear-cut. and services for cash, and therefore include (inter alia) the following
elements:
It is unlikely that any one department, system or activity will operate in complete • credit granting (eventual A/R);
isolation, but each will need to interact with other data and systems in order to be • processing orders;
fully effective. Auditors should be aware of these points of interaction and satisfy • delivery and shipping;
themselves that the data moving between systems is consistent, complete and • billing to customers;
accurate, so subsequent processes are undertaken on a reliable basis. • maintaining accurate and reliable inventory records;
• the activities associated with accounts receivable;
However, dividing up the audit universe for review purposes into a number of • bad debt (including pursuing debtors and writing off balances);
business processes, rather than according to how the organization is structured into • reflecting the related transactions correctly in the accounting
departments, divisions, operating units, HQ functions and so on, has great potential systems. (recording the sales)
to reveal opportunities to improve economy, efficiency and effectiveness.
2. The EXPENDITURE PROCESS
The auditor who chooses the business process method of defining the scope of audit Those activities/systems that acquire goods, services, labour and
reviews is faced with the need to identify all the relevant managers responsible for property; pay for them; and classify, summarise and report what was
the activities within the scope of the engagement. This will be necessary in order to acquired and what was paid. For example:
 • ensuring that suppliers are stable, reliable and able to provide the • the outflow of cash to investors and creditors (i.e. dividends &
appropriate goods/services on time, at the right price and to the required interest)
quality;
• the requisitioning of goods, services, corporate assets and labour;
(request the needed goods/ services) 5. The FINANCIAL REPORTING PROCESS
• receiving, securely storing and correctly accounting for goods; This process is not based on the basic processing of transactions
• all the activities associated with accounts payable (e.g. matching reflecting economic events, but concentrates upon the crucial
orders to suppliers’ invoices and confirming the accuracy of pricing, etc.); consolidation and reporting of results to various interested parties (i.e.
(matching the sales invoices, purchase order and receiving report) management, investors, regulatory and statutory authorities)
• recruiting and correctly paying Preparation of FS/ reporting to decision makers
• ensuring that all taxes due are correctly calculated and disbursed; 1-5 processes also important in FS audit
• ensuring that all the related accounting records are accurate, up to
date and complete. 6. The CORPORATE FRAMEWORK PROCESS
This process incorporates those activities concerned with ensuring
effective and appropriate governance processes and external
3. The PRODUCTION/CONVERSION Process = raw materials -> labour/ WIP- accountability. It is to do with the development and maintenance of
> finished goods values, culture and ethics, and effective management, strategic,
In this context, the term “conversion” relates to the utilization and infrastructure and control frameworks that should aim to give form to the
management of various resources (inventory stock, labour, etc.) in the underlying direction, structure and effectiveness of an organization. This
process of creating the goods and services to be marketed by the category can also include issues such as specific industry regulations and
organization. compliance.

The key issues in this process include accountability for the movement
and usage of resources up to the point of supply which is then dealt with 10 ALTERNATIVE, MORE DETAILED CLASSIFICATION OF BUSINESS PROCESSES
in the revenue cycle. Conversion cycle activities include product
accounting/costing, manufacturing control, and stock management 1. CASH PROCESS: The flow of cash into the business principally through payments
from customers (receivables), the custodial function with regard to that cash and the
conversion of the cash in settlement of debts due principally to suppliers (sales to
4. The TREASURY PROCESS pay debts/interests?)
This process is fundamentally concerned with those activities relating - cash receipts (cash sales) and cash disbursements (pmt of transactions or A/P )
to the organization’s capital funds, such as: 2. INFORMATION PROCESS: The gathering of data and its conversion into
• the definition of the cash requirements and cash flow management; information; the analysis of that information leading to decisions which in turn result
• allocation of available cash to the various operations; in data on performance.
• investment planning;
gathering of data -> info conversion -> info analysis -> decision -> data result ->
performance 9. REVENUE PROCESS:* “Transaction flows relating to revenue generating and
collection functions and related controls over such activities as sales orders,
3. INTEGRITY PROCESS: “[the] controls over the creation, implementation, security shipping, and cash collection.” Sales order- shipping of goods- recording of sales –
and use of computer programs, and controls over the security of data files. These cash collection
controls, technically referred to as integrity controls, constitute a cycle because they
operate continuously from the time programs are instituted and data are introduced 10. TIME PROCESS:* “Not strictly related to transaction flows, this cycle includes
into the computer records.” events caused by the passage of time, controls that are applied only periodically,
certain custodial activities, and the financial reporting process.”
4. LAUNCHING A NEW PRODUCT PROCESS: The cycle that includes market research,
R & D, provision of necessary finance, tooling up (or the equivalent), THE HALLMARKS (certifying their standard of purity) OF A GOOD BUSINESS PROCESS
commencement of production and the sales launch. The following are some of the hallmarks of a sound business process:
1. designed to meet clear objectives;
2. has regard to competitive issues;
5. PAYMENTS PROCESS:* “Transaction flows relating to expenditures and payments 3. performance can be (and is) measured;
and related controls over (among other activities) ordering and receipt of purchases, 4. unsatisfactory performance is rectified;
accounts payable, and cash disbursements.” 5. activities are completed in a timely way;
6. cost effective processes;
Purchase order – receiving report – A/P (supplier’s invoice) – cash disbursement 7. controls are “preventative” rather than merely “permissive” ( great or excessive
freedom of behavior. );
6. PLANNING AND CONTROL PROCESS: Planning a course of action, executing that 8. as few “movements”/“stages” as possible;
action, measuring the results, comparing actual performance with planned 9. eliminated unnecessary steps;
performance and deciding upon corrective action. • nothing is done which is unimportant to the achievement of objectives;
10. proper authorizations;
Course of action -> execution -> results measurement -> actual vs. planned 11. controls positioned as early as possible in the process;
performance -> corrective action 12. documented/ documentation/ evidence;
13. has an audit trail;
7. PRODUCTION PROCESS:* “Transaction flows relating to production of goods or 14. right people doing the right job;
services and related controls over such activities as inventory transfers and charges 15. room for adaptation;
to production for labour and overhead.” Raw mats- WIP -finished goods 16. defines risks within the process itself
8. PRODUCT LIFE PROCESS: Commencing with the processes of launching a new
product, through the routine production phase, product revision and relaunch,
product price adjustments, and termination or decline of the product line.