Week 2

1. Week 2

2. Documentation • Why is it useful? • 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. Narratives • When: Generally for accounting/audit use to describe a specific process within an AIS that already exists • What: Text descriptions of a process –who, what, when, sources, reporting requirements, etc.

8. Narratives • Pros: • Extensive detail • Readily understood • Cons: • Extensive detail • Can be data overload

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 The ABC Companies Process: A1 - Cash Reconciliation General (cont): The Senior Account and Accounting Manager review the cash, money market, and short term investments during the close process and make reclassifications entry to properly reflect cash and cash equivalents, and investments in accordance with GAAP. The Assistant Controller-Finance reviews the cash reconciliation monthly. (See A2-Perform Monthly Closing process narrative for further discussion of controls and procedures related to the close process). The ABC Company complies with State Reporting for Unclaimed Property (ORS 098.352). The Accounting Manager performs several duties that do not provide for a proper segregation of duties with regards to cash and investments. The review of the cash reconciliation by the Assistant Controller-Finance, who does not have access to cash or investments, is the key mitigating control relied upon by management. (John Smith)

11. 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.

12. 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.

13. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Process (cont): Step 2 (cont): The Senior Accountant obtains copies of the following reports from accounting staff for use in performing the monthly cash reconciliation: • ‘Payment Register’ and ‘Voided Check’ reports provided by the Senior Accounts Payable Clerk (John James). The ‘Payment Register’ report provides information of all checks written on the US Bank account for vendor payments and the ‘Voided Check’ report lists all checks that were voided during the Accounts Payable process. When received, the Senior Accountant faxes the Voided Check report to US Bank to void the checks listed. • ADP payroll ‘Check Reconciliation Listing’ provided by the Payroll Accountant (Dana Smith) This is a weekly ADP payroll report.

14. 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.

15. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Process (cont): Step 6: The ‘Monthly Bank Reconciliation’ spreadsheet and journal vouchers are reviewed for accuracy and are approved by the Assistant Controller- Finance. A copy of the spreadsheet is maintained in the Senior Accountant’s office. The Asst Ctrl-Finance ensures that outstanding reconciling items are resolved in a timely manner. Step 7: The Accounting Manager monthly reconciles the Money Market and Short-Term investments accounts. (See C3 Investment Reconciliation/ Processing for further discussion of controls and procedures related to investment account reconciliations). Step 8: Journal vouchers are given to the Accounting Manager for entry into the general ledger. (See A2 Month-end Close for further discussion of controls and procedures related to month-end journal vouchers).

16. Narrative Example (cont) The ABC Companies Process: A1 - Cash Reconciliation Process (cont): Step 9: The Accounting Manager verifies that the correct cutoff date is used for all cash receipts and disbursements transactions. Accounts Payable closes the last working day of the month. Accounts Receivable closes the first working day of the month or once the cash is posted for the last working day of the month. Step 10: The Senior Accountant reviews and researches any stale-dated checks quarterly to determine the reason for the items not clearing. Issues are resolved which could include the appropriate functional department, contacting the vendor or the employee, voiding the check(s), issuing stop payments, issuing replacement checks and requesting bank corrections.. Step 11: At year,-end, the Senior Accountant performs an analysis of outstanding checks. For checks greater than $100, a written notice will be sent to payee along with research to determine the owner. Any check outstanding greater than one year will be reclassified to a liability accounts. The liability accounts will be reviewed and all check outstanding greater than three years will be remitted to the State by October 31st. The Senior Accountant maintains documentation noting efforts to locate payee. The ABC Company maintains record for five years in accordance with state regulation.

17. 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

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

19. 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.

20. 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

21. DATA FLOW DIAGRAMS Components: Data Processing What system is being documented/process transformation: e.g. payroll processing, check generation, Invoice recording

22. 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.

23. DATA FLOW DIAGRAMS Components: Data/information What data is being generated, processed; information provided: e.g. Payment, Deposit, Expense data

24. 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.

25. DATA FLOW DIAGRAMS Govt. Agencies Departments Tax report & payment Time cards Payroll Processing System Employees Employee checks New employee form Payroll check Bank Employee change form Human Resources Payroll report • This is the context diagram for the S&S payroll processing system (Figure 3-5 in your textbook). Management

26. Problem 3.7, Page 83 • Context Diagram only

27. DATA FLOW DIAGRAMS • The next level of DFD is called a Level 0 context 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

28. 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

29. Employee/ Payroll file General Ledger DATA FLOW DIAGRAM – Level 00 Depart- ments Employees Employee paychecks Human Resources New employee form Time cards 1.0 Update employee Payroll file 2.0 Pay Employees Employee Change form Payroll check Bank Payroll Disbursement data 3.0 Prepare reports 5.0 Update Gen. Ledger Payroll tax disb. voucher Payroll report 4.0 Pay taxes Manage- ment Tax report & payment Govt. Agencies

30. Problem 3.7, Page 83 • Level 0 Diagram only