ACCT 1163 – Professional Elective (Operations Audit)
2nd Semester Academic Year 2020-2021
Lesson 2, Week 2: Business Processes
Topics: a. Audit Universe of Business Process
b. Process Weaknesses
c. Identifying the Process on an Organization
d. The Hallmarks of a Good Business Processes
Learning Outcomes: At the end of this module, you are expected to:
1. Have a glimpse on how operations audit work
2. Know the reasons of process weaknesses and how to address it
3. Identify and explain the Six Ubiquitous Processes
4. Know the hallmarks of a good business processes
Lesson Proper:
AUDIT UNIVERSE OF BUSINESS PROCESSES
There are obviously a number of ways that an organisation can be divided up. One way would be to
separate the “productive” or commercial aspects of the business (such as manufacturing or sales) from the
support or infrastructure activities (such as accounting, photocopying or security). This type of subdivision is
generally geared to the fundamental nature of the business or operations of the organisation and tends to lend
a natural priority to those more significant areas of activity.
Two apparent advantages of using this “departmental” or “functional” basis for defining audit reviews
are: (1) the area under review is clearly bounded, and (2) reporting lines to responsible management are clear-
cut.
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 organisational parts of the business (departments,
divisions, operating units, HQ functions and so on) while others are of business processes which cross over
the structural frontiers. This poses a challenge to avoid “double auditing” where the internal audit activity
addresses the same issues as part of a process audit and also as part of a functional audit.
REASONS FOR PROCESS WEAKNESSES
Control is likely to be weaker between sections than within sections for behavioural reasons as well.
Staff are sociable people. Everyone values his or her membership of groups. Indeed, this intra-group loyalty is
likely to contrast strongly with inter-group rivalry. But by putting staff together in a single section, management
has divided them organisationally from a number of other staff in other sections with whom interaction, to some
extent, is still required. The implications of these group dynamics led to develop the idea of the linking pin. The
linking pin, who may not be the most senior person in any of the groups, does the following:
• helps a group achieve consensus;
• communicates the consensus to the other group(s);
• facilitates resolution of conflict between groups.
IDENTIFYING THE PROCESSES OF AN ORGANISATION
This approach focuses on a number of related economic events that occur within an organisation that in
turn may generate transactions and interactions with systems. It is often referred to as the “business cycle”
approach. Its prime aim is to take account of the lifecycle of a series of events within the business operations
and review them in their entirety across all functional and organisational boundaries.
ACCT 1163 – PROFESSIONAL ELECTIVE (OPERATIONS AUDIT) | 1
Six Ubiquitous Processes
1. The Revenue Process-Related to those activities that exchange the organisation’s products and services
for cash
2. The Expenditure Process- 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.
3. The Production/Conversion Process- the term “conversion” relates to the utilisation and management of
various resources (inventory stock, labour, etc.) in the process of creating the goods and services to be
marketed by the organisation.
4. The Treasury Process- This process is fundamentally concerned with those activities relating to the
organisation’s capital funds
5. The Financial Reporting Process- 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).
6. The Corporate Framework Process- This process incorporates those activities concerned with ensuring
effective and appropriate governance processes and external accountability.
An Alternative, More Detailed Classification of Business Processes
1. Cash process: 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.
2. Information process: 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.
3. Integrity process: “[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.”
4. Launching a new product process: The cycle that includes market research, R & D, provision of
necessary finance, tooling up (or the equivalent), commencement of production and the sales launch.
5. Payments process:* “Transaction flows relating to expenditures and payments and related controls over
(among other activities) ordering and receipt of purchases, accounts payable, and cash disbursements.
6. Planning and control process: Planning a course of action, executing that action, measuring the results,
comparing actual performance with planned performance and deciding upon corrective action.
7. Production process:* “Transaction flows relating to production of goods or services and related controls
over such activities as inventory transfers and charges to production for labour and overhead.”
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.
9. Revenue process:* “Transaction flows relating to revenue generating and collection functions and related
controls over such activities as sales orders, shipping, and cash collection.”
ACCT 1163 – PROFESSIONAL ELECTIVE (OPERATIONS AUDIT) | 2
10. Time process:* “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
THE HALLMARKS OF A GOOD BUSINESS PROCESS
In this chapter we have discussed understanding the organisation as a number of fundamental
business processes, each of which is likely to require involvement of several parts of the organisation. So far
we have not addressed the characteristics of a robust business process. The following are some of the
hallmarks of a sound business process:
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;
• nothing is done which is unimportant to the achievement of objectives;
10. proper authorisations;
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 risks within the process itself.
REFERENCES
1. Romney, M. and Steinbart, P. (2018). Accounting Information System. Times LT Pro by Cenveo
Publisher Services, Italy.
2. Chambers, A. and Rand, G. (2010). The Operational Auditing Handbook Auditing Business and IT
Processes John Wiley and Sons, Ltd., Publication, UK.
ACCT 1163 – PROFESSIONAL ELECTIVE (OPERATIONS AUDIT) | 3
