EFFECT

CHAP 9: DOCUMENTING ISSUES

- The consequences of the conditions identified.
FINDING - the name given to the discrepancy between - The risk ore exposure the organization, program,
what is expected and what is actually in place, as or process will face because the condition isn’t
discovered by auditors during the course of their work. consistent with the criteria
- Impact resulting from the problem
It provides the details about the anomaly and is
- “so what?” “why should anyone care about
determined as a result of the procedures performed by the
this condition?” – a helpful approach is to ask
auditor.
these to document appropriate findings.
It is the difference between the condition and criteria. - It is helpful to quantify as much as possible the
effects of findings so it will be a yardstick to
It is SATISFACTORY if the conditions meet the criteria.
determine if the finding has merit or not.
CCCER/5C MODEL
RECOMMENDATION
- A systematic framework that is very helpful when
- The action, or collection of actions, that if
preparing findings
successfully implemented, will neutralize the
- Criteria, Condition, Cause, Effect,
cause, stop the effect, and restore the condition
Recommendation
in a desirable state.
CRITERIA - Its effectiveness will depend on the auditor fully
capturing the details about each of the
- The performance standards or expectations set
components of CCCER model.
by relevant stakeholders
- It will be more convincing and compelling if each
- It is used in making the evaluation or verification,
component is elaborated so the reader will come
and consist of the expected performance.
up with the same conclusion
- What should exist – the correct state
- What should be or what was expected. Poka Yoke
CONDITION - It focuses on mistake proofing a process or
activity so an operation cannot be performed
- What the auditor discovered as a result of
incorrectly.
applying audit procedures
- If the finding has to do with an operator making a
- Factual evidence that the internal auditor found
mistake while performing the task, it will be
during the review
particularly very helpful.
- Internal audit procedures may include testimony,
- For example. Poka Yoke is geared to:
reviewing documents, observation, and
performing calculations
1. Eliminate the possibility of error by redesigning
- It is what is in place
the process (the best course of action)
- It is the current state.
2. Replace or substitute the part, task, or process
- What actually exist/existing?
for a more reliable one (can be done through
CAUSE robotics and automating the activities)
3. Detecting the error before further processing
- The reason why the condition exists (preventive controls such as when wrong input is
- Explains why there is a difference between made or a checklist to prevent workers from
expected and actual conditions investing time and effort processing
- The root causes must be identified by the auditor incomplete/inaccurate transactions)
so they will not work with the symptom(s) of the 4. Minimize the effect of error (such as
problem and make inadequate recommendations authorization limits on service environment)
that provide insufficient solution. 5. Make work easier to perform by color-coding
Tools for Identifying the Root Cause items, combining steps, etc.
1. 5 WHYS – ask “why?” until you get to the root Making Findings and Recommendation Persuasive
cause of the issue. Findings and recommendation will be persuasive to the
2. Cause and Effect Diagram – the fishbone extent that they convince the reader that there is a real
diagram and Ishikawa Diagram that shows problem that requires correction. This can be through the
visually all the possible factors creating the issue following:
to see where it started.
3. Drill Down – break down the condition into 1. Quantify as much as possible (such as in
smaller parts to gain a better understanding of the monetary terms, percentage, or number of units
larger picture. This can include Data Analytics. affected)
2. Make sure findings are significant (they should
Note: One of the most common reasons for recurring not receive audit findings pertaining to minutiae
problems is misdiagnosing the cause of the problem because they are dealing with complex and
and focusing on correcting symptoms instead. worrisome risks already)
 3. Consider the cost/benefit involved (consider Forms and Documents
prudence and fiduciary responsibility. Both
1. Sales Order – contains the details of goods
quantitative and qualitative costs and benefits in
ordered including quantity and price. The order
shall be evaluated to prevent presenting
slip.
problems that are particularly insignificant and
2. Shipping Document – the bill of lading or
require higher cost to correct)
delivery receipt. It describes the goods to be
4. Use appropriate language (know who the
shipped and serves as the contract between
readers are and make the language appropriate
entity and carrier.
for the audience, some may be familiar with terms
3. Sales Invoice – the billing statement. It describes
on systems and methodologies while others
the goods sold, amount due and terms of
require simplified presentation of the material)
payment.
4. Remittance Advice – intended to facilitate the
accounting for cash collection
SUPP. LECTURE: TRANSACTION 5. Daily Summaries – summaries of transactions
CYCLES - TOC recorded during the day by different departments

TRANSACTION – an agreement between 2 entities to Important Notes to Forms or Documents

exchange goods or services 1. The department that initiated the processing
TRANSACTION CYCLES – means through which an approves the form and is accountable for unused
accounting system processed transactions of related forms. Access to those forms shall be limited to
activities. them.
2. Notification of form doesn’t necessarily mean aa
CATEGORIES OF TRANSACTION CYCLES hard copy; it can be thru e-mail.
Revenue and Receipt 3. The department that initiation, received, or
processed the form shall retain a copy (not
- Sales of goods or services to customers necessarily hard copy)
- Collection of cash
Departments on the Revenue Cycle
Expenditure and Disbursement
▪ Sales Department – aims to increase entity’s
- Acquisition of goods and services sales. They prepare the sales order and monitor
- Payment of the goods and services acquired order status. They have the exclusive function to
Human Resource and Payroll communicate with customers and maintains list of
authorized customers. They maintain the range of
- Acquisition of services from employees SP on products.
- Payment of the services acquired ▪ Credit Department – aims to maximize exposure
to high-risk customers. It is independent from
Product or Conversion
sales dept and also issues list of authorized
- Production of the entity’s product for sale customers. They approve the credit request by
preparing a memo with “approved” mark in SO.
Financing and Investing
▪ Inventory Control Department – aims to control
- Generation of capital funds from outside investors transfers of inventory in and out of the storage
- Investment of capital funds to other profitable areas, monitor the inventory levels, and report
activities slow-moving or damaged items. They monitor the
availability of goods ordered and authorize its
REVENUE AND RECEIPT CYCLE
issuance to shipping department by forwarding
Business Function the approved SO to shipping dept.
▪ Shipping Department – aims to provide
- Resources are distributed to customers in reasonable assurance that all shipments are
exchange for promises of future payments authorized and customers are billed. Compares
- Customers pay cash for resources distributed to the sales order with goods approved for sale in
them the inventory. They release the goods to carrier
- Affects the sales (including SRA and SD) and obtains the receipt then notify the sales dept
accounts, receivable (including allowances) that goods are shipped.
accounts, and cash o Shipping Documents – these are pre-
- Revenue affects SCISBA (sales, credit, numbered and assure that related billings
inventory/warehouse, shipping and accounting). are made on periodic basis.
- Receipts affects MTA (mail room, treasury, ▪ Billing Department – aims to provide reasonable
accounting) assurance that all billings are shipped. Compares
docs from sales and shipping department.
Prepares the sales invoice (pre-numbered). Note
that shipping document must be present before
preparation of sales invoice.
EXPENDITURE AND DISBURSEMENT CYCLE HUMAN RESOURCE AND PAYROLL CYCLE
Business Functions - It is a continuation of the expenditure and
disbursement cycle. This covers the entity’s
- Resources are acquired from vendors in
acquisition of services from its employees and
exchange for obligation to pay
personnel.
- The entity pays cash to vendors and employees
- Auditors are concerned because it includes
- Affects the PPPC (Purchases, PRA and D,
different categories of employee benefits that can
Payables, and Cash)
affect the FS and significant amount of resources
Forms and Documents are incurred in this cycle.
1. Requisition Slip – the purchase requisition that Business Function
contains the details of the user department’s
- Services are received form employees in
request
exchange for obligations to pay.
2. Purchase Order – describes the goods to be
- Entity pays cash to employees
acquired including quantity and description
- Affects the SPWIC (salaries and wages, premium
3. Receiving Report – describes the goods
exp and payable, WHT Payable, Inventoriable
received including quantity, description, and
salaries, and Cash)
condition
6. Shipping Document – describes the goods to be Forms and Documents
shipped and serves as the contract between
1. HR Records – the personnel records of the 201
entity and carrier.
File. It contains all info related to the entity’s
4. Vendors Invoice – describes the goods sold,
employees from time they are hired up to their
amount due and the terms of payment
eventual termination. Documents the salaries,
5. Daily Summaries – summarizes the transactions
deduction, etc.
recorded during the day by the different
2. Daily Time Record (DTR) – describes the
department.
number of hours worked by an employee during
Departments in Expenditure Cycle a day covered by pay period
3. Payroll Register – shows all related payroll
▪ User Department – prepares the requisition slip
information
to be forwarded to purchasing and accounts
4. Labor Cost Summary – shows payroll
payable department
information that are capitalizable or can be
▪ Purchasing Department – aims to meet the
attributed to a particular job or customer order
specific needs of the use at the least possible
5. Employee Earnings Record – cumulative year-
cost. They receive the PR and locate for the
to-date summary of earnings and deductions for
vendor. They prepare the purchase order and
every employee
monitor status of the order
6. Daily Summaries – summarizes transactions
▪ Receiving Department – aims to provide
recorded during the day by diff department
reasonable assurance that received goods are
based on approved purchase order. They retain Departments in Human Resource and Payroll Cycle
PO until goods are received. They compare the
▪ User Department – aims to ensure that time
purchase orders from shipping documents form
records prepared by employees represent actual
the carrier.
hours worked. Monitors and approves the DTR.
o Blank Purchase Order – a control that
▪ HR Department - ensures employees included in
they can implement.
the payroll are rendering services to the entity.
▪ Accounts Payable Department – aims to
The maintain the HR Records. The determine
provide reasonable assurance that payments will
terms of settlement (lump-sum or installment)
only be made to shipments received. It does the
during employee termination
3-way Match (Requisition Slip, PO, Receiving
▪ Payroll Department – aims to provide
Report, and Vendor’s invoice). They also prepare
reasonable assurance that the payroll calculation
vouchers.
in every period is valid. They consider any
o Voucher Package – includes the RS,
updates on payroll rates and prepares the Payroll
PO, receiving report, vendor’s invoice,
Register and updates the Employee Earnings
and voucher). This is filed by due date so
Record
as to pay liability on time and take
▪ Treasury Department – aims to provide
advantage of discounts
reasonable assurance that all payroll cash
▪ Treasury Department – for disbursements. They
disbursements are based upon a recognized
review the voucher package and prepare the
liability or actual services rendered by
checks with authorized signatories. The last
employees. They prepare the check, have it
person signing the check cancels the voucher by
signed, and distribute to employees. Unclaimed
marking “paid” or “cancelled” or check number.
payroll checks shall be re-deposited to the bank.
 ▪ Accounting Department – aims to provide Authorization
reasonable assurance that items related to
- Transactions shall be approved by BOD since it
payroll are appropriately classified and recorded
involves significant amounts.
in correct accounting period at appropriate
amounts. Recording
o In Inventory – they record inventoriable
- Transactions are recorded in GJ by personnel in
costs to appropriate jobs or customer
gen accounting. Their competency is reviewed.
accounts forwarded to general
accounting for daily summary Note:
o In General – reviews the daily
summaries and documents received. ▪ Regardless of the manner of safekeeping, access
Records the payroll related expenses to these certs is given to at least 2 high-ranking
and liabs. officers such as president or CEO. It is called
Dual Control or Joint Custody
PRODUCTION OR CONVERSION CYCLE
- It covers the production of entity’s product for sale
where materials, labor, and overhead are
converted to FG.
- Its primary objective is the proper valuation of
inventories and COGS.
Custody
- The physical custody of materials and labor
documents are held by production department.
Adequate physical controls must be
implemented.
- Auditors may have Confirmation Requests if the
custody is held by the other parties.
Authorization
- The production department is authorized to make
normal production runs.
- In the case of special runs such as when meeting
special orders, BOD or its authorized
representatives must give authorization
Recording
- Recorded by cost accounting
- Daily summaries are prepared then forwarded to
general accounting for reconciliation
- Normally, auditors review the competency of
individuals recording
FINANCE AND INVESTMENT CYCLE
- Generally involves the three major categories of
transactions: investment, long- term debts, and
SHE.
- Covers complicated accounting processes on
investing, mergers, long term liabilities, and
equity transactions
- Involves few but significant amounts of resources
- Control related duties and responsibilities is one
of the major considerations of the auditor.
Custody
- Unissued equity and debt certs must be kept by
internal official or independent external
custodian. If it is held internally, then the
accounting for it is observed.