Chapter 2 - Business Processess

Question 1

It is a set of discrete and definable activity areas, such as treasury, production, payroll, etc.

Answer 1

Organization

Question 2

One of the shortcomings of the functional approach

Answer 2

It often fails to identify very significant activities that naturally span departments.

Question 3

One way of avoiding loose ends or points of onward interconnection to consider

Answer 3

To consider the business operations as a series of “cradle to grave” processes or cycles, where a chain of interrelated events or activities is plotted form the origin to the conclusion.

Question 4

This type of subdivision is generally geared to the fundamental nature of the business or operations of the organization and tends to lend a natural priority to those more significant areas of activity.

Answer 4

Separate the “productive” or commercial aspects of the business

Question 5

Two apparent advantages of using this “departmental” or “functional” basis for defining audit reviews:

Answer 5

1. The area under review is clearly bounded, and
2. reporting lines to responsible management are clear-cut.

Question 6

It is unlikely that any one department, system or activity will operate in complete isolation, but each will need to interact with other data and systems in order to be fully effective.

Answer 6

True

Question 7

Factors that influence the way functions are mapped and interconnected across an organization:

Answer 7

best practice
sector-specific practice
requirements of legislation and regulation

Question 8

Ways that an organization can be divided up

Answer 8

1. Functional basis
2. Processes basis/ Business process Method

Question 9

Main benefit of Business Process Method

Answer 9

It should encompass all the relevant issues and aim to provide reassurance to management on the effectiveness of the internal control measures in place across the whole process.

Question 10

Down side or disadvantage of Business Process method

Answer 10

1. Require auditors to plan carefully
2. Ensure that the fieldwork is adequately coordinated -> initially identify and consider all the risks and control issues
3. Span a number of organizationally separate areas
   All of which have implications for the general manageability of the audit review project

Question 11

Control Self Assessment (CSA) provides a lesser level of objective assurance compared to the traditional internal audit approach.

Answer 11

True

Question 12

It is a workable alternative to the traditional internal audit approach

Answer 12

Control Self Assessment (CSA)

Question 13

Reasons for Process Weaknesses

Answer 13

1. Formal, laid-down procedures tend not to be so thoroughly defined to address requirements for coordination between sections of the business
2. Control is weaker between sections than within sections
3. An internal auditing function should have unrestricted rights of access and can follow an operation wherever it goes
4. Organization structure is always a subjective and often an evolutionary compromise and could have been done differently

Question 14

Categorization in a functionally-oriented approach

Answer 14

Management and administration
Financial and Accounting
Personnel and Human Relations
Procurement
Stock and Materials handling
Production/Manufacturing
Marketing and Sales
After sales support
Research and Development
Information Technology

Question 15

In reality, an internal audit activity is likely to have an audit universe where some of the potential audit engagements are of subjects which correspond to the organizational parts of the business while others are of business process which cross over the structural frontiers.

Answer 15

Hybrid Audit Universe

Question 16

Challenge of Hybrid Audit Universe

Answer 16

“Double Auditing” –> internal audit activity addresses the same issues as part of the process audit and also as part of a functional audit.

Question 17

It focuses on a number of related economic events that occur within an organization that in turn may generate transactions and interactions with systems.

Answer 17

“Business Cycle” Approach

Question 18

Prime aim of “Business cycle” Approach

Answer 18

Take account of the lifecycle of a series of events within the business operations and review them in their entirety across all functional and organizational boundaries.

Question 19

Six Ubiquitous Processes

Answer 19

1. The Revenue Process
2. The Expenditure Process
3. The Production/Conversion Process
4. The Treasury Process
5. The Financial Reporting Process
6. The Corporate Framework Process

Question 20

Related to those activities that exchange the organisation’s products and services
for cash, and therefore include (inter alia) the following elements:
* credit granting;
* processing orders;
* delivery and shipping;
* billing to customers;
* maintaining accurate and reliable inventory records;
* the activities associated with accounts receivable;
* bad debt (including pursuing debtors and writing off balances);
* reflecting the related transactions correctly in the accounting systems.

Answer 20

The Revenue Process

Question 21

Those activities/systems that acquire goods, services, labour and property; pay for them; and classify, summarise and report what was acquired and what was paid.
For example:
* ensuring that suppliers are stable, reliable and able to provide the appropriate goods/services on time, at the right price and to the required quality;
* the requisitioning of goods, services, corporate assets and labour;
* receiving, securely storing and correctly accounting for goods;
* all the activities associated with accounts payable (e.g. matching orders to suppliers’ invoices and confirming the accuracy of pricing, etc.);
* recruiting and correctly paying staff;
* ensuring that all taxes due are correctly calculated and disbursed;
* ensuring that all the related accounting records are accurate, up-to-date and complete.

Answer 21

The Expenditure Process

Question 22

It relates to the utilization and management of various resources (inventory stock, labour, etc.) in the process of creating the goods and services to be marketed by the organization.

Answer 22

Conversion

Question 23

Key Issues of the Production/Conversion Process

Answer 23

Accountability for the movement and usage of resources up to the point of supply which is then with in the revenue cycle.

Question 24

In this context, the term “conversion” relates to the utilization and management of
various resources (inventory stock, labor, etc.) in the process of creating the goods and services to be marketed by the organization.
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 in the revenue cycle. Conversion cycle activities include product accounting/costing, manufacturing control, and stock management

Answer 24

The Production/Conversion Process

Question 25

This process is fundamentally concerned with those activities relating to the organisation’s capital funds, such as:
* the definition of the cash requirements and cash flow management;
* allocation of available cash to the various operations;
* investment planning;
* the outflow of cash to investors and creditors (i.e. dividends).

Answer 25

The Treasury Process

Question 26

This process is not based on the basic processing of transactions reflecting economic events, but concentrates upon the crucial consolidation and reporting of results to various interested parties (i.e. management, investors, regulatory and statutory
authorities).

Answer 26

The financial Reporting Process

Question 27

This process incorporates those activities concerned with ensuring effective and appropriate governance processes and external accountability. It has to do with the development and maintenance of values, culture, and ethics, and effective management, strategic, infrastructure, and control frameworks that should aim to give form to the underlying direction, structure, and effectiveness of an organization. This category
can also include issues such as specific industry regulations and compliance.

Answer 27

The Corporate Framework Process

Question 28

The Four Cycles that form the internal accounting control system for most enterprises according to Johnson and Jaenicke

Answer 28

1. Payments Process
2. Production Process
3. Revenue Process
4. Time Process

Question 29

The flow of cash into the business principally through payments
from customers, the custodial function with regard to that cash and the conversion of the cash in settlement of debts due principally to suppliers.

Answer 29

Cash Process

Question 30

The gathering of data and its conversion into information; the analysis of that information leading to decisions which in turn result in data on performance.

Answer 30

Information Process

Question 31

“[the] controls over the creation, implementation, security
and use of computer programs, and controls over the security of data files. These controls, technically referred to as integrity controls, constitute a cycle because they operate continuously from the time programs are instituted and data are introduced into the computer records.”

Answer 31

Integrity process

Question 32

The cycle that includes market research, R&D, provision of necessary finance, tooling up (or the equivalent), commencement of production and the sales launch.

Answer 32

Launching a new product process

Question 33

Transaction flows relating to expenditures and payments and related controls over (among other activities) ordering and receipt of purchases, accounts payable, and cash disbursements.

Answer 33

Payments Process

Question 34

Planning a course of action, executing that action, measuring the results, comparing actual performance with planned performance and deciding upon corrective action.

Answer 34

Planning and control process

Question 35

Transaction flows relating to the production of goods or services and related controls over such activities as inventory transfers and charges to production for labor and overhead.

Answer 35

Production process

Question 36

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.

Answer 36

Product life process

Question 37

Transaction flows relating to revenue generating and collection functions and related controls over such activities as sales orders, shipping and cash collection.

Answer 37

Revenue process

Question 38

Not strictly related to transaction flows, this cycle includes events caused by the passage of time, controls that are applied only periodically, certain custodial activities, and the financial reporting process.

Answer 38

Time Process

Question 39

Why adopt a “cycle” or “process” approach to internal control design and review?

Answer 39

1. It affords a more natural, systems-oriented view by following a business process through its entire “life span” from inception to ultimate disposition.
2. Avoids the more limited perspective
3. Auditors have always appreciated the idea of natural processes or flows

Question 40

It implies the preparation and retention within an organization
(a) for an adequate period,
(b) in a reasonably accessible form, and
(c) in enough detail to satisfy the auditors, of records which allow each detailed element of any transaction to be tracked from its source through each intermediate stage to its final disposition (or dispositions); and vice versa—that is, the facility to use records to trace back in detail from the final outcome (or outcomes) through the intermediate stages back to the initial source (or sources) of the transaction.

Answer 40

Audit trail

Question 41

What are some of the HALLMARKS of a sound business process?

Answer 41

1. designed to meet objectives which are clear;
2. has regard to competitive issues;
3. performance can be (and is) measured;
4. unsatisfactory performance is rectified
5. activities are completed in a timely way
6. processes are cost-effective
7. controls are “preventative” rather than merely “permissive”
8. as few “movements/stages” as possible
9. unnecessary steps have been eliminated;
10. proper authorizations
11. controls positioned as early as possible in the process
12. documented
13. has an audit trail
14. right people doing the right job
15. room for adaptation
16. defines risk within the process itself

Question 42

What are the academic cycles in a university?

Answer 42

1. The course cycle
2. the student cycle
3. Teacher cycle
4. Teaching Space Cycle