CHAPTER 2

Business Processes
AN AUDIT UNIVERSE OF BUSINESS PROCESSES

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.

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.

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

In this context, 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.
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.

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. It is 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 organisation. This category can also include issues such
as specific industry regulations and compliance.

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.”3

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.”3

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.”3

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.”3

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.”3