BUSINESS

PROCESSES
Chapter 2
Introduction
One of the shortcomings of the “cradle to grave” processes or
functional approach to defining the
audit universe is that it often fails
cycles
to identify very significant
activities that naturally span
departments.

 Where an internal audit engagement corresponds to an organisational part of

the business, the internal auditor should expect that many of the
opportunities for improvement will lie at the points of interface between that
part of the business and other parts of the business with which there needs to
be effective coordination.

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 AN AUDIT UNIVERSE OF BUSINESS
PROCESSES
 An audit universe represents a range of
potential audit activities to be carried out by
internal audit function. It consists of several auditable entities,
processes, systems and activities.
 The simplest (although not necessarily the best) way to define
the audit universe is to look at the internal telephone directory.

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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.

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 “
 A business process way of defining the internal audit universe of auditable
units is also likely to result in an audit universe of fewer auditable units
although each, corresponding to a process which requires coordination
between a number of parts of the organisation, is likely to be a more
complex audit engagement.
 The main benefit of this approach is that 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.

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SELF ASSESSMENT OF BUSINESS
PROCESSES
+ Reviewing business processes using the control self
assessment (CSA) approach can sometimes be a workable
alternative to the traditional internal audit approach though
CSA provides a lesser level of objective assurance.
+ A representative can be invited to attend the CSA workshop
from each of the parts of the organisation that need to
coordinate in the business process.

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A HYBRID AUDIT UNIVERSE
+ 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.

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 REASONS FOR PROCESS WEAKNESSES
+ Control is likely to be weaker between sections than within sections for
behavioural reasons as well.
+ Intra-group loyalty is likely to contrast strongly with inter-group rivalry.
+ Likert1 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.

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IDENTIFYING THE
PROCESSES OF AN
ORGANISATION

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 “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.
+ Each organisation is significantly unique.

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Six Ubiquitous
Processes

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

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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.

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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.
+ Conversion cycle activities include product
accounting/costing, manufacturing control, and stock
management.

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4. The Treasury Process
+ This process is fundamentally concerned with those
activities relating to the organisation’s capital funds,
• 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).

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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).

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6. The Corporate Framework Process
+ This process incorporates those activities concerned
with ensuring effective and appropriate governance
processes and external accountability.
+ This category can also include issues such as
specific industry regulations and compliance.

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 An Alternative, More Detailed Classification of
Business Processes
1. Cash process
2. Information process
3. Integrity process
4. Launching a new product process
5. Payments process

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6. Planning and control process
7. Production process
8. Product life process
9. Revenue process
10. Time process

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WHY ADOPT A ‘‘CYCLE’’ OR ‘‘PROCESS’’ APPROACH
TO INTERNAL CONTROL DESIGN AND REVIEW?
+ It affords a more natural, systems oriented view by following a
business process through its entire “life span” from inception to
ultimate disposition. This avoids the more limited perspective which
results if business activities are viewed (or audited) only to the extent
that they occur within a section of the business such as within a
department. To some extent, auditors have always appreciated the
idea of natural processes or flows, as one definition of “audit trail”.

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BUSINESS PROCESSES IN THE STANDARD
AUDIT PROGRAMME GUIDES
+ Standard Audit Programme Guides accommodate to the
concept of the business as a number of processes, in two
ways.
+ First, each SAPG indicates other SAPGs with which the
subject of the SAPG interacts—either because what happens
in that other area of the business impacts on the subject of the
SAPG, or what happens within the subject covered by the
SAPG impacts upon other areas of the business.

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+ Secondly, Appendix 2 classifies each SAPG as belonging in a
major or secondary way to one or more of the six
“ubiquitous” processes explained above. We recognise that
the first four SAPG process categories are built around a
range of related economic events which may in turn generate
transactions and interactions with systems. It should be noted
that there is likely to be selective interaction between the
defined processes.

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 THE HALLMARKS OF A GOOD 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”;

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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

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 “
ACADEMIC CYCLES IN A
UNIVERSITY

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The Course Cycle
Re)design

Review Implementation

Assessment

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The Student Cycle
Marketing

Alumni
Recruitment
Provision

Development
Graduation
and Care

Assessment

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Teacher Cycle
Determine Plan
Future Load Preparation

Revision Preparation

Design &
Review reproduction of
Handouts

Assessment Delivery

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Teaching Space Cycle
Estimate
future
need

Provide
Utilisation
space

Equip
Timetabling
space

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THANK YOU!

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