Question:
Introduction
Thomas Smith, a senior accountant with Dalen & Jay, CPAs, has recently been assigned as in charge auditor of Mathra Tool, Inc. (MTI), a long time audit client of his firm. MTI is owned by George Mathra, an experienced machinist. George established the business over 20 years ago, and it has grown into a $10 million-a-year business, with an excellent reputation for high quality machined parts. MTI has clients in the automobile sector and the health care sector and has recently begun producing parts for environmentally friendly products, such as recycling containers, due to the business’s versatility in dealing with a variety of metals as well as plastics.
Information Systems and Business Processes
The following description is based upon Thomas’s review of prior working paper files and planning discussions with personnel of MTI.
MTI has a broad range of equipment, ranging from grinders, stampers, cutters and small presses to numerically controlled machining and turning centers, some that individually cost over $250,000. This latter group of equipment is tied into the company’s computer aided design and manufacturing (CAD/CAM) system, used by the four senior tool and die personnel.
Machining and turning center suppliers have helped MTI develop efficient operations, by furnishing sample numerical control programs for standard machine operations and by providing training to employees. One of the suppliers unfortunately sent sample programs that had been infected with a virus. George’s daughter, Tiffany, had to cleanse the servers and each of the machines, using her copy of an anti-virus software. When contacted, the supplier did not know that his software was infected and apologized profusely.
The four CAD/CAM terminals and printers are connected to the company’s local area network (LAN), which is maintained by Tony Lee, the owner of a computer shop conveniently located three blocks away. All computer equipment, software and supplies are purchased from Mr. Lee, who is responsible for attaching and maintaining equipment, upgrading software and maintaining user security profiles on the network. There is one user identification and password for accounting (shared by Tiffany, George and the accounting clerk). Each of the plant supervisors has his own password, and a common password is used to initiate the timekeeping system. The two word processing staff members have their own password and use the common accounting password when they need to do data entry.
A standard routine has been set up to back up the accounting systems. One of the accounting staff inserts one of seven tape cartridges into the system at the end of the day (they are labeled with the day of the week), so that the company has a full set of backups for the week. Tiffany keeps these in her office. These are particularly important, since during the last office move, two years ago, the original disks for the accounting system were misplaced.
Tiffany Mathra, George’s youngest daughter, has been working in the business for 15 years. She started as a machine operator and has finished several college diplomas in numeric control and in accounting over the years. She is being groomed to take over the business in two years and is proving herself competent both on the shop floor and in administration. She works along with the tool and die machinists and the shop supervisors, discussing design problems, quality control methods and costing of quotes for potential orders. Wednesday morning 7:00 AM meetings are held by Tiffany and George to maintain a good working relationship with the supervisors (one purchasing, three production, one design, one quality control) and to review any problems that need to be addressed in the coming week. This includes any potential scheduling changes required due to “rush” jobs that have been accepted or are being quoted.
This good working relationship is extremely important for satisfying some of the company’s larger customers. MTI has paid for computer equipment for each of the supervisors, so that they have fully functioning microcomputers at home. If a rush job requires weekend work, then these senior personnel can work at home to get the necessary quoting or design work completed. Since the “at home” systems are identical with the office systems (Mr. Lee simply copied the image from the MTI systems to the home computer hard drives), diskettes can easily be taken home and then brought back to the office. It is understood that when work slows down, a day off can be taken to compensate for this weekend work.
Almost ten years ago Tiffany arranged for the implementation of the network and the purchase of a standard integrated accounting package (general ledger, order entry/accounts receivable, purchases/payable, payroll), and for the purchase of the job costing and timekeeping system. The job costing package is used to prepare and print quotes. For automotive customers, the quote is entered into the stand alone electronic data interchange (EDI) system for transmission. Customer purchase orders received via EDI are simply printed and filed. Once a quote has been accepted, the job is given a unique job number. The job control sheets include a list of the machining center, labor and quality control tasks, each with a unique optical scanning label used by the employees to “sign in” and “sign out” of particular tasks by machine type and by operation. Standard control sheets are also used for overhead tasks, such as cleaning or machine setup. Employees have plastic cards with their employee number coded. They use a laser pen to scan their employee number, the job number and the operation label for each activity, as it is commenced or completed. To sign out, they simply scan their employee card again.
Accounting Systems
A variety of reports are printed daily, weekly, or monthly from the costing system; these are used for monitoring employee hours, the status of jobs, the costs accumulated for particular jobs and the work-in-progress inventory. The weekly report of hours from the costing system is approved by the production supervisors and is used as a data entry input source into the payroll system for hours worked. The accounting clerk enters the hours into the accounting system, so that weekly payroll checks and reports can be produced. When volume is high, one or both of the administrative staff assist. The administrative staff also do filing or document matching, as necessary.
Tiffany is really pleased with her accounting clerk, Isabel, who has been with the company for three years. She insists that fate had a hand in getting Isabel for MTI. Isabel was “pounding the pavement,” having recently immigrated, and had no local business experience. Her accounting skills were rudimentary, but she quickly learned the accounting software and has reorganized the filing system. Tiffany considers her indispensable. When Isabel goes on vacation, many things simply don’t get done. Tiffany can do the payroll in a pinch, but Isabel always does accounts payable and cash disbursements. If she’s away, suppliers are simply told to wait, or Tiffany issues a manual check, which is recorded later. Isabel is very good at responding to queries from suppliers and ensuring that new suppliers are set up properly. The purchasing supervisor and his staff rely on Isabel, for she checks the account allocation of purchases and makes any necessary corrections. Isabel also ensures that necessary EDI acknowledgments are sent and reports printed.
Tiffany and George are signing officers, although Tiffany realizes that she checks supporting materials more thoroughly than George, who usually just queries Isabel verbally about larger purchases. George normally handles the bank deposits, while Tiffany does the monthly bank reconciliation. Every three months, an accountant from Dalen & Jay reviews the regulatory returns for reasonableness, as well as journal entries made in the last three months. He updates the recurring journal entries and advises Tiffany of any changes in procedures or modifications to monthly journal entries that are required to help ensure accuracy and completeness of transaction processing. Tiffany runs the standard financial statements every month from the accounting package, but normally some additional adjustments are required when the accountant comes in. These are adjustments to depreciation expenses, changes to prepaid expenses and some account reallocation (e.g., repairs and maintenance to capital accounts) based on discussions with Tiffany. The regular technician assigned to MTI is Louis Jaborwock, who has just completed the most recent month end entries.
Louis informed Thomas that MTI had a problem one of their systems on Friday. Apparently, one of the servers might have “crashed.” Luckily, this was the server with the accounting systems and was fully backed up on tape. A new server was to be installed the next day, and Mr. Lee was reconfiguring the network so that the remaining systems could function from the single server.
The engagement partner from Dalen & Jay believes that MTI’s growth may have expanded the company sufficiently to warrant increased levels of controls reliance during the audit. She is particularly interested in work-in-progress (WIP) inventory, the largest item on the balance sheet, typically close to three months’ sales. She has requested an updated controls analysis and that computer assisted audit techniques using the firm’s generalized audit software be considered. To this end, Thomas has updated the narrative description associated with WIP inventory.
To calculate the WIP inventory for any particular month, one of the purchasing staff transfers data from a report in the job costing system into a spreadsheet (exhibit 1). 2 Since the job costing system does not have sales information, progress billings are added manually, and the spreadsheet total is used for the monthly financial statement’s work-in-progress figure.
The purchasing clerk has explained the contents of her spreadsheet and described the origin of the information. Following is an explanation of the spreadsheet on a column by column basis:
Job number: A unique job number is assigned by one of the production supervisors. There is a manual log in the production area, and the supervisors write down the customer, purchase order number and the job numbers used. Where a purchase order lists multiple parts, a different job number must be used for each part produced.
Customer code: Each customer has a unique customer code. Tiffany assigns these codes, so that the same code can be used in the accounting and in the job-costing system.
Customer Purchase Order Number: These match the purchase orders received from customers.
Due Date and Scheduled Completion Date: The customer purchase order will indicate the date that an order is due. The production supervisors will schedule the job so that it is completed prior to the due date.
Customer Part Number and Part Description: MTI always uses the part numbers of its customers and the customer description when describing parts being produced. These must match customer purchase orders.
Quantity Ordered: The quantity ordered on the purchase order is entered into the job costing system.
Quantity on Hand: The quantity on hand is based upon the figures in the costing system. This is initiated with the first operation. For example, if component parts are purchased and then additional work is done on a component part, then the quantity on hand is based upon the parts purchased. If raw material is purchased and cut on the premises, then the person who completes the first operation notes the quantity cut, for subsequent entry by the production supervisor. Any damaged parts that cannot be passed on to the next operation are reported to the quality control staff, who enter the part into the system as damaged, thereby reducing the quantity on hand. All data entry is accomplished using the common job costing password. Such entries will show on a damaged-parts report, which is discussed every Wednesday at the supervisors’ meeting.
Percentage Complete: Each operation on the job control sheet is assigned a percentage of the job. The system tracks which operations have been completed and reports the percentage complete based upon the last operation that has been fully completed for all the parts.
Quoted Costs (labor center, materials, total): These costs are all listed at a rate-per-individual-unit part. Labor center rates are based upon standard rates that have been developed by George and Tiffany. They include the labor rate of the employee multiplied by a factor, depending upon the machine used. The factor incorporates both plant overhead charges plus machine charges. The lowest factor is 2.5, the highest 23. Thus, an employee earning $10 per hour would result in a labor center cost at the lowest factor of $25 per hour and $230 per hour at the highest factor. Material cost is based upon quotes from suppliers, plus a Thomasup. Some customers have a fixed arrangement with the Thomasup as low as 5 percent, while others are Thomased up as much as 150 percent. During the last year, the company has changed its costing and overhead allocation methods to absorption costing, based upon the accounting firm’s advice. MTI reduced its labor center factors by 10 percent and added a flat materials handling charge ($50) and ordering charge ($25) to each of its quotes.
Actual Cost-to-Date: As work is completed and supplier invoices are received, these costs are entered into the job costing system. Actual hours worked on an operation may be higher or lower than quoted. The hours worked are automatically posted using the timekeeping system. The production supervisors review each daily printout of hours worked, to ensure that employees have properly clocked out.
Production supervisors must approve any job cost system adjustments, which are entered by one of the purchasing staff. As supplier invoices are received, they are recorded into the job-costing system by the purchasing staff and then forwarded to Isabel for entry into the accounts payable system.
Sales Price: This is the price that the customer has agreed to pay, according to the purchase order.
Progress Billings: Normally, MTI does not request advance payments or progress billings. However, if a customer is new or a part requires a substantial material purchase, an advance payment is requested to cover the cost of the material. MTI then considers this material as already owned by the customer and deducts this progress billing from the cost of its WIP.
Work-in-Progress Inventory Value: Isabel updated the spreadsheet template this year, applying a formula to calculate inventory as follows: ([quantity on hand] x [percentage complete /100] x [actual cost to date]) – progress billings. She reviews the inventory list prepared by purchasing for one of two necessary adjustments. First, if a job has not been started it will show as zero percentage complete. Sometimes, parts have been ordered on a subcontract basis and been placed into production. Then, the WIP value must be increased from zero to the value of these parts. Second, if a job has an overrun and the actual costs exceed the sales price, then the value of the inventory must be reduced so that it does not exceed the sales price. Isabel makes these changes by manually scanning the inventory listing and changing the inventory value for these items.
Required
The engagement partner has requested a meeting tomorrow to discuss audit plan for MTI She has requested several documents for that meeting.
• A preliminary audit plan assessing internal control risk and providing preliminary judgment for detection risk.
• A description of specific substantive procedures that could be conducted for the WIP inventory.
Thomas Johnson, some sort of senior citizen accountant using Dalen & Jay, CPAs, has recently been allocated as in charge auditor of Mathra Tool, Inc. (MTI), a long time audit buyer of his / her agency. MTI carries a broad range of tools, starting from grinders, stampers, cutters as well as tiny squeezes for you to numerically governed machining as well as switching facilities, several that singularly charge more than $250, 000. This particular second item number of tools is usually attached in to the firm’s laptop or computer aided design as well as producing (CAD/CAM) technique, used by the actual four senior citizen application as well as expire personnel.
An ordinary program has become create for you to support the actual accounting devices. One of the accounting personnel inserts certainly one of 7 mp3 cartridges in to the technique right at the end with the day (they are branded with all the day with the week), so that the firm carries a total group of backups for that 7 days. Tiffany continues these within the girl business office. These include specially important, due to the fact over the last business office shift, a couple of years before, the original hard drives for that accounting technique were being misplaced.
The actual bridal lover coming from Dalen & Jay considers that MTI’s development could possibly have enhanced this company completely for you to warrant improved degrees of handles reliance through the audit. She is specially interested in work-in-progress (WIP) catalog, the most important piece within the harmony page, commonly all around about three months’ income. She gets asked for a current handles evaluation which laptop or computer aided audit tactics while using business’s generalized audit application be regarded as.
Our friendships using customers reveal that policies as well as techniques that need the actual participation of stakeholders in different audit task can certainly make sure every aspect of the audit is usually managed adequately. This method reduces the risk for needless delays within phoning owner or even auditor as well as within putting together an internal group. Effort in between stakeholders may result in important personal, professional as well as functional positive aspects, as compared using just talking depending on a audit relief account. The actual audit’s opportunity may be governed better, the actual concurrence position understood speedily, as well as the functional impression with the audit task as well as prospective noncompliance penalties totally looked at — many although dealer administrators make sure the actual functioning marriage in between buyer as well as dealer just isn’t ruined.
Motion Object: Draft web templates for that techniques, assignments as well as accountabilities linked to handling audits. Make sure everyone, coming from senior citizen business owners to support personnel, understands the process intended for working with audit demands, which info is usually easily accessible along the group through business intranets, in observe forums or even within personnel handbooks. In lowest, agencies must make sure hundreds of likely to end up questioned for you to attend a audit group know their assignments as well as willing to work.
Along with profiting from propagated experience as well as know-how, some sort of well-prepared audit group could have obvious techniques as well as assistance intended for precisely how a audit needs to be executed. Expressing the actual workload active in the audit, as well as making sure that hundreds of included prioritize this adequately, lowers the actual possibility of just about any adverse functional impression. Within the procurement procedure, just about any application licenses purchase should include negotiation of audit words. This particular will help to slow up the admin over head with the pre-audit stage intended for foreseeable future audits as well as shorten both bridal as well as closure periods.
The first step within improving management of vendors’ application audits is to determine the true secret stakeholders as well as acknowledge control with the procedure. Obligation intended for handling governance as well as procedure concurrence ranges, with respect to the group. Conversations using Gartner customers reveal that the majority of agencies handling audits successfully assign control with the procedure as well as governance for you to possibly dealer management or even SAM personnel, as well as all of us observe an escalating inclination for you to contract some sort of project manager for you to direct the actual audit. In this article all of us review important stakeholders to consider including in the operation. In numerous agencies many these assignments might be filled by way of individual specific, nevertheless they are recorded independently due to the way organizational buildings change.
Motion Object: Any time choosing the actual construction of your audit group, make sure accountabilities are adequately allocated to prevent just about any spaces within insurance policy coverage:
Interesting the actual fund group first tends to make fast audit relief more attainable. Maintaining the actual fund group totally educated with the rank with the audit enables them to produce as well as alter personal supply while fresh files comes to mild. They are able to harmony just about any prospective licenses shortfall using how much chance, using the development with the audit, the connection with all the dealer, as well as external files in dealer audit conduct as well as results. The actual fund group must make sure personal supply is good for the actual audit end result.
The actual commitment or even procurement manager guarantees appropriate entitlement info can be purchased. The individual supplies info coming from deals, purchase order placed, commitment efficiencies or even different resources (including noncontractual info, including electronic mails, meeting units, income sales pitches or even different sales and marketing communications offering versatility, credits or even particular documents that release the customer coming from just about any licensing requirements becoming brought up by auditors) to ascertain application entitlement. The actual commitment or even procurement manager must conduct just about any buying necessary, as well as be responsible for contractual closure with the audit.
Illustrating in great dealer relationships can certainly decrease the actual impression of your dealer audit. If the application dealer takes people to be a arranged buyer, this particular increases ones capacity to exercise handle over the audit procedure. Employing great relationships as well as traditional truth can result in more rapidly popularity of essential ways with your audit procedure prepare. Seller administrators must get a alternative watch with the dealer as well as, while needed, make use of verbal exchanges channels to address escalations, boost co-operation as well as negotiation, as well as help techniques. The connection manager for that dealer (if just one exists) must provide being a individual stage of speak to for you to consolidate as well as coordinate sales and marketing communications.
Interesting lawyer from your beginning lessens the prospect of audits concluding within suit. As well as composing, talking as well as signing the actual audit nondisclosure contract (see “Toolkit: Guidelines intended for Nondisclosure Deals intended for Software package Seller Concurrence Audits” ), lawyer needs to be included during the entire procedure in the event of argument, to examine many correspondence, also to advise within the meaning of fine print. In case in-house lawyer usually are not experts within mental house as well as copyright laws legislations, or even within application licensing fine print, it may be necessary to take part specialist appropriate consultants.
Near cooperation using info safety personnel inhibits delicate files becoming leaked. Review techniques must mandate the actual management as well as move of files in accordance with business files category policy. Checks needs to be created in respect of if thez files asked for is suitable intended for giving using an unauthorised (if suppliers request information on equipment IDs, Web Method addresses or even user files, there could be safety or even regulating concerns). The spot that the dealer carries a requirement for files for being offered actually or even in electronic format for you to itself or even an unauthorised, info safety personnel must affirm the actual techniques necessary to secure the results, including encryption, use of FTP services instead of e-mail, signing as well as relationship of difficult replicates, as well as methodologies intended for handling passwords intended for encrypted files.
Utilizing interior audit lowers opportunity slip as well as guarantees adherence for you to auditing guidelines. Various other audit gurus, including quality management personnel, are often employed to produce oversight with the audit procedure, as well as to make sure that guidelines are used as well as the opportunity with the audit is usually followed.
Recruiting some sort of project manager guarantees effective handle as well as management with the audit. Purchaser encounters indicate improved good results prices using audit management while project management guidelines are applied to the actual audit procedure. Venture administrators hold the ability, instruments as well as experience needed to make sure that every thing obtains completed by the appropriate men and women, on the appropriate moment as well as in the appropriate get. Employ some sort of project manager for you to coordinate, manage as well as handle the actual audit management procedure coming from will finish off.
|
Time |
Activity / Process |
Auditor |
Auditee |
|
09.00 – 09.30 |
Opening meeting With senior management team to explain scope of audit, methodology of audit and reporting, risk based certification, confidentiality |
DPAU/DEDU/SKD |
All Concerned |
|
09.30 – 10.00 |
Senior Management Policy, objectives, priorities, resource management, customer focus, confirm focus area |
DPAU |
COO / MR |
|
10.00 – 13.00 |
Quality Management & Human Resource Focus Area: FA1 Verification of action taken on DI findings, control of documents, control of records, management reviews, internal audit, customer satisfaction, analysis of data, corrective and preventive action, Determination of competence, training need assessment, evaluation of effectiveness, competence records, process performance |
DPAU |
MR |
|
09.30 – 11.00 |
Project Execution and Quality Control Focus Area: FA1 Process planning for projects under Managed Fund, Asset Finance, Structured Finance, Corporate Finance, Public Finance & Local Govt., RMS projects, Covance projects, Back office for other group companies, operations, feedback / complaint resolution, customer relations, control of records, corrections, corrective and preventive actions, process performance, monitoring and measurement of product, confirmation and re-confirmation of application software etc. |
DEDU/SKD |
Process Owner |
|
11.00 – 13.00 |
Customer related processes Focus Area: FA1 Determination and review of requirements, customer communications, customer satisfaction, process performance |
DEDU |
Process Owner |
|
13.00 – 13.30 |
Lunch |
||
|
13.30 – 15.00 |
Purchase & Administration Focus Area: FA1 Control of outsourced processes to ensure maintenance of workspace, lights and air-conditioning system etc. |
DEDU |
Process Owner |
|
13.30 – 15.00 |
Data Storage & Service Delivery Focus Area: FA1 Storage of process data, access control, Data protection, data back-up, non-disclosure, service level agreement, physical transfer of output files, client’s networks, post- delivery corrections, process performance |
DPAU |
Process Owner |
|
15.00 – 16.00 |
IT Infrastructure Focus Area: FA1 Maintenance and security of network, functioning of hardware, systems software, application software, computer related configurations, backup, selection, evaluation and re-evaluation of suppliers, adequacy of purchasing information, verification of purchased items |
DPAU/DEDU |
Process Owner |
|
16.00 – 16.30 |
Preparation of Audit report |
DPAU/DEDU |
|
|
16.30 – 17.00 |
Closing meeting Reporting of findings, categorisation, agree on corrective actions and timelines, conclusions, next steps etc. |
DPAU/DEDU |
All Concerned |
References:
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