Week 1c

1. Week 1c

2. Documentation • Why? • Understand system • Communicate system • Evaluate system Note: System can refer to either a manual or automated process.

3. Requirements – 1/3 • Documentation techniques are necessary tools for auditors: • SAS-94: Auditors must understand the automated and manual procedures an entity uses. • This understanding can be evidenced via internal control/system documentation

4. Requirements – 2/3 • Documentation techniques are necessary tools for auditors: • Auditing Standard No. 5 promulgated by the PCAOB requires that the external auditor express an opinion on the client’s system of internal controls.

5. Requirements – 3/3 • Documentation techniques are necessary tools for auditors and accountants: • SOX requires that publicly-traded corporations and their auditors document the company’s internal controls.

6. Documentation • Accepted Types? • Narrative • Data Flow Diagram (DFD) • Flowchart

7. Why important? • DFDs and flowcharts are used extensively for systems development and for internal control documentation • 62.5% of information professionals use DFDs. • 97.6% use flowcharts. • Both are tested on professional exams. • You need to know them both.

8. Narratives • Generally for accounting/audit use • Extensive detail • Can be data overload • Text descriptions of existing processes –who, what, when, source, reporting requirements, etc. • Main Benefit: Readily understood

9. Narrative Example The ABC Companies Process: A1 - Cash Reconciliation General: The ABC Company maintains six bank accounts. Four of the Accounts are with US bank. They consist of a general fund (used for deposits, wire transfers and funding the zero based accounts transactions) and three zero based (funded only to cover checks presented for payment) accounts (Accounts payable, Small Warehouse Disbursements and Payroll). The remaining two accounts are with Piper Jaffrey (ST Investments and Money Market). The general ledger general fund cash balance is reconciled to the US Bank statements monthly. The Senior Accountant reconciles outstanding Checks for the zero based accounts as part of the general account reconciliations.

10. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Objective: To ensure proper controls exist over cash accounts, bank accounts are reconciled and reviewed by staff independent of the cash receipt and disbursement function. Business Owner: Assistant Controller-Finance (Jane Doe) Senior Accountant (John Smith) Process: Step 1: The Senior Accountant accesses the US Bank website using a unique ID and password to download the ‘Account Reconciliation Plan’ payroll account. This report is the month-end payroll account statement and lists all cleared account transactions. The bank mails hard copies of the statement to the Senior Accountant as backup monthly.

11. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Process (cont): Step 2: The Senior Accountant obtains copies of the following reports from accounting staff for use in performing the monthly cash reconciliation: • ‘Cash Management’ spreadsheet prepared by the Accounting Manager (Jane Jones) the ‘Cash Management’ spreadsheet is comprised of checking account, sweep account, money market and US Bank cash account activity. The types of data included in the worksheet are account transfers, checks, wire transfers and ACH transactions. • ‘General Fund US Bank’ spreadsheet summary prepared by the Accounting Manager. This spreadsheet is a summary of general ledger detail by subsidiary location.

12. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Process (cont): Step 3: The Senior Accountant also creates a ‘Weekly Payroll Reconciliation’ spreadsheet that reconciles the ADP report to the US Bank ‘Account Reconciliation Plan’ statement on a monthly basis. Step 4: All reports identified above are used to create a ‘Monthly Bank Reconciliation’ spreadsheet by transaction type. This spreadsheet is used to reconcile the cash balances in the reconciliation reports to the bank statement balances. Step 5: As a part of the cash reconciliation process, outstanding transactions are researched and resolved by the Senior Accountant in a timely manner. Journal voucher cash adjustments are created if needed.

13. DFDs • When: Used extensively for systems planning and development • 62.5% of information professionals use DFDs. • What: Graphical description (i.e. drawing) that utilizes 4 universally recognized geometric symbols to describe source of data and destination of information associated with a system/process

14. Data flow diagram • Pros: • “Sufficient” detail • Simple, uncluttered • Visual • Cons: • “Sufficient” detail – ignores controls, imbedded parts of process • Must understand data flows, symbols

15. DATA FLOW DIAGRAMS • Subdividing the DFD: • Few systems can be fully diagrammed on one sheet of paper, and users have needs for differing levels of detail. • Consequently, DFDs are subdivided into successively lower levels to provide increasing amounts of detail.

16. Context DFD • The highest level of DFD • It provides a summary-level view of the system. • It depicts a system/process and the external entities that are: • Sources of its input • Destinations of its output

17. DATA FLOW DIAGRAMS Components: Data Processing What system is being documented: e.g. payroll processing, Check generation, Invoice recording

18. DATA FLOW DIAGRAMS Components: Data Source/ Info Destination Where data originated or information is distributed: e.g. Customer, Upper Management, Vendor, Bank NOTE: Data Source can also be a destination. Can not connect directly to each other, must go through process.

19. DATA FLOW DIAGRAMS Components: Data/information What data is being generated, processed; information provided: e.g. Payment, Deposit, Expense data NOTE: Data/info can flow both ways (two headed arrow); if data/info stays together through process, then one line is sufficient, otherwise two lines required.

20. Context DFD • Must determine what is internal to the process being depicted. The related data inputs/outputs are then excluded. • Data inputs/outputs identified and excluded are documented in lower level DFDs.

21. DATA FLOW DIAGRAMS Govt. Agencies Departments W/H report s Time cards Payroll Processing System Employees Employee checks Personnel changes Human Resources Payroll report Management

22. Context Diagram – Example A/P Process – Tory, Inc. • Before Tory, Inc. pays a vendor invoice, 3 way matching (Purchase Order vs. Receiver vs. invoice) must occur. Because the three documents required enter the AP Dept. at different times, a separate alpha-betical file is kept for each type. • The P.O. are received from the Purchasing Dept. upon ordering. The Receiver is sent to the AP Dept. when the goods ordered have been received by the Warehouse. The invoice is received from the vendor to collect payment.

23. Context Diagram – Example A/P Process – Tory, Inc. • The AP clerk records the amount due in the AP sub-ledger upon receipt before filing in Invoice file. • When it is time to pay a vendor invoice, the AP clerk retrieves the vendor invoice, P.O. and Receiver from their respective files and ensure what was ordered, was received and billed for.

24. Context Diagram – Example A/P Process – Tory, Inc. • The documents are bundled and sent to the controller for review. • He reviews the AP packet to ensure complete-ness and validity. (assume successful review). • The controller then prepares a 2-part check. The check amount is recorded in the Cash Disbursement Journal.

25. Context Diagram – Example A/P Process – Tory, Inc. • The checks and AP packet are sent to the VP of Finance for review, approval and signature. (assume signed) • The VP of Finance forwards the original check to the vendor. The • The copy of the check and the AP packet are combined and returned to the AP clerk. • The AP clerk files the completed AP packet alphabetically in the Paid Invoice File.

26. Context Diagram – Example A/P Process – Tory, Inc. A/P Process – Tory, Inc. • At the end of each month, the AP clerk uses the information from the AP S/L to prepare an AP aging report. This report is distributed to the VP of Finance. • She reviews the AP Aging Report to verify appropriate turnaround times for payments. Once reviewed, the Report is filed chronologically in her M/E File.

27. Your turn: SLP Corporation - Case Get into your groups of approximately 6 members: • Context Diagram of the Fixed Asset Procurement Process. You have approximately 15 minutes. Will turn in. Be sure to list names on work.

28. DATA FLOW DIAGRAMS • The next level of DFD is called a Level 0 diagram. • It breaks down a system into sub-systems (major components) • It depicts the data processing sub-systems, sources of data, destinations of information and internal storage locations

29. DATA FLOW DIAGRAMS Additional Component: Data/Info Storage Where data is stored temporarily or permantely (i.e. Where data/information can be retrieved internally), e.g. Customer S/L, General Ledger, Personnel file, AP payments NOTE: Data flow does not need to be labeled into data store (usually obvious).

30. Employee/ Payroll File DATA FLOW DIAGRAM – Level 0 Human Resources Departments Time Card data Personnel Changes 1.0 Process Employee time 2.0 Update Payroll File Employee paychecks 4.0 Generate reports 3.0 Generate Paychecks Payroll register W/H reports Govt. Agencies Employees Manage- ment

31. Level 0 Diagram • Example: Tory, Inc.

32. SLP Corporation - Case Get into your groups of approximately 5 members: • Level 0 Diagram of FAA Form process. You have approximately 20 minutes. Will turn in. Be sure to list names on work.