By Deepjee Singhal, Manish Pipalia, Chartered Accountants
Internal Audit
Preface :
Dhruva is a Practice Director — Data Analytics with M/s.
Assurance & Associates. M/s. Assurance & Associates are Practice leaders in the
field of governance, risk management and control analytics for the last 5 years.
In a short span of 5 years this dynamic firm had managed to establish a
footprint in the accounting and finance segment which was the erstwhile arena
for large accounting and audit majors. This fast-paced growth was fuelled by a
small group of ‘razor sharp’ smart professionals who delivered consistent value
propositions to all their clients by riding on the backbone of contemporary
audit technology.
M/s. Assurance & Associates leveraged audit technology like
general audit softwares, audit administration tools and enterprise risk
management applications to deliver above-the-board, high-return results to all
the clients from retail to manufacturing, to logistics and healthcare.
Dhruva was solely responsible for overseeing all data
analytic projects, assignments and academic ventures for the firm.
In a recent meet of mid-rung audit firms, Dhruva was
presenting on the role of ‘The Power of Analytics’ and ‘Analytics made Simple’.
Dhruva spoke firmly, confidently and charismatically about his association with
general audit tools and the outstanding benefits which accrued to him and the
firm over the last 5 years through the power of analytics. There was a twinkle
in his eye as he drew a colorful picture about his journey with general audit
softwares. His oration captivated the audience and laid the foundations for
prolific use of CAATs by all audit firms in the days to come.
Dhruva presented on general audit softwares and their lineage with
manufacturing entities :
Manufacturing companies have many of the standard ledgers;
purchasing and payroll can be key concerns. However, the main business area is
inventories.
Inventories (stocks) and work-in-progress :
There is normally a master or balances file that contains
details of inventory holdings at a particular date. Costs may be held in a
separate file. Transaction history can be particularly useful although file
sizes are often quite large. Selling prices normally have to be picked up from a
separate file.
Tests conducted included, but were not limited to :
Analysis :
- Age stock by date of receipt
- Compute the number of month’s stock of each item held, based on either sales
or purchases. Produce a summary of this information
- Stratify balances by value bands
- Statistically analyse usage and ordering to improve turnover
- Summarise products by group, location, type, etc.
- Report of products in order of profitability
- Reconcile physical counts to computed amounts
Calculations :
- Total the file, providing sub-totals of the categories of inventory
- Re-perform any calculations involved in arriving at the final stock quantities
and values
- Re-perform material and labour cost calculations on assembled items
Exception tests :
- Identify and total stock held in excess of maximum and minimum stock levels
- Identify and total obsolete or damaged stock
- Identify any items with excessive or negligible selling or cost prices
- Identify differences arising from physical stock counts
- Test for movements with dates or reference numbers not in the correct period
(cut-off)
- Identify balances which include unusual items (e.g., adjustments)
- Identify work in progress which has been open for an unreasonable period
- Identify stocks acquired from group companies
- Isolate products with cost greater than retail price, with zero quantities or
with zero prices
Gaps and duplicates:
- Test for missing stock ticket numbers
- Test for missing transaction numbers
- Identify duplicate stock items
Matching and comparing:
- Compare files at two dates to identify new or deleted stock lines or to identify significant fluctuations in cost or selling price
- Compare cost and selling price and identify items where cost exceeds net realisable value
- Compare value of physical counts to generate ledger amounts
- Check work orders for accuracy against original sales orders
Other typical areas of tests include:
Cash disbursements:
- Reconcile intercompany transfers
- Summarise cash disbursements by account, bank, group, vendor, etc.
- Generate vendor cash activity summary for contract negotiations
Purchase orders :
- Extract pricing and receipt quantity variations by vendor and purchase order
- Track scheduled receipt dates versus actual receipt dates
- Identify duplicate purchase orders or receipts without purchase orders
- Reduce inventory by comparing projected receipts to available stock
- Analyse late shipments for impact on jobs, projects or sales orders due
- Reconcile receipts by comparing accrued payable to received items
Work-in progress:
- Use net demand analysis against inventory and purchase orders to generate a quick material requirement planning report
- Check work orders, by size, priority, for lease to shop floor
- Produce shop floor activity report by any item
- Generate comparison of planned versus actual labour, materials and time
- Reconcile job tickets or time cards to work order line items
Dhruva glorified general audit software and its power in working analysis with retail entities:
Retailers often have point-of-sale systems which collect large volumes of useful data which audit tools can analyse. The main tests on inventories are similar to manufacturing companies with perhaps more emphasis on movement, margins and shrink-age.
Additional tests include:
- Gross profit analyses
- Items past their shelf life
- Comparisons between stores on holdings and inventory turnover per product line
- Price adjustment transactions
Other typical areas of tests include:
Cash disbursements:
- Monitor cash disbursements for stores
- Track cash disbursements for contractor and vendor services
- Summarise cash disbursements by account, bank, group, vendor, etc.
Loss prevention:
- Compare ‘No Sale’ transactions to cash voided transactions by associate
- Identify stores with significant allowances
- Isolate duplicate return transactions
- Identify incomplete exchange transactions
- Look for check purchases and refunds within 15 days
- Find credit card purchases and refunds to different credit cards (same day)
- Identify potential fraudulent or improper transactions through selling price differences between stores
Purchase order management:
- Reconcile order received to purchase order to identify shipments not ordered
- Extract pricing receipt quantity variations by vendor and purchase order
- Track scheduled receipt dates versus actual receipt dates
- Compare vendor performance by summarising item delivery and quality
Compare accrued payable to received items to reconcile to general ledger
Distribution and Service:
Typical areas of tests include:
Sales analysis:
- Generate sales/profitability reports by sales representative, product, customer
- Recap product sales by region, customer, category, etc.
- Identify high volumes by region, customer, category, etc.
- Extract all sales data for audit by customer, product, region, etc.
- Compare ratios of current sales to open receivable (high-low; low-high)
- Summarise shipments by warehouse for product distribution analysis
Sales order control:
- Report on correlation between items shipped and items ordered
- Analyse open orders and open invoices by customer for credit control
- Isolate detail and average backlog by customer, item, location, etc.
- Reconcile booked items to inventory reserved (on hold) items
- Control profits by calculating line item margins before shipment
- Analyse product demand by summarising products ordered by due date
Service management:
- Create real-time service tracking reports in any format to manage fieldwork
- Co-ordinate multiple service personnel to maxi-mise performance in real time
- Quickly recap routes and times of service calls by employee, area, etc.
- Compare arrival and service times for field service representatives
- Calculate cost of service by call for labour, materials and transportation
- Compare service report time to time-sheet hours from payroll
Dhruva exemplified general audit software and their relevance to the healthcare segment:
Typical areas of tests include:
Accounts receivable, Patient billing and Managed care:
- Calculate average days from discharge to bill, bill to payment, by payer or department
- Determine appropriate level of contractual allowance and doubtful accounts reserves
- Age receivables on date of service rather than invoice date to recalculate cash flow
- Analyse rejected payments by financial class, procedure code, cost centre
- Evaluate managed care payer performance
- Identify underpaid managed care accounts
- Determine profit margin by physician, financial class, etc.
Charges:
- Identify late charges by department, by month, etc.
- Look for invalid, high dollar or duplicate charges on patient bills
- Look for lost charges by matching supplies used to supplies billed
- Check procedure codes and billed charges to identify inappropriately billed charges
- Clinical subsystems:
- Compare patient visit data on clinical sub-systems to patient master
- Identify interface failures
- Identify pricing discrepancies between sub-systems and master
Marketing:
- Develop patient statistics by post codes or other demographic data
- Look for incomplete or miscoded patient demographic information
- Identify profitable segments of patient population
Materials management:
- Analyse usage and ordering to improve inventory reordering
- Report on stock and high-value balances using any selection criteria
- Identify obsolete inventory by turnover analysis
- Compare speed and accuracy of delivery by product and vendor
- Profile supply usage by month, by department, etc.
Medical claims :
- Analyse timeliness of claims payments by comparing claim date, date claim received, and date claim paid
- Look for duplicate billings and claim payments based on patient, provider, date of service and amount
Medical records :
- Identify duplicate medical records for same patient
- Track diagnosis coding deficiencies, incomplete records, etc.
- List incomplete records and incompatible coding
- Report on procedure codes by physician, department or patient
Specialists:
- Determine specialist! doctor contract compliance
- Evaluate specialist! doctor practice history by patient type, payer, etc.
- Report on incomplete specialist! doctor profiling information
Purchase order management:
- Report on purchasing performance by location
- Identify pricing and receipt quantity variations by vendor and purchase order
- Identify duplicate purchase orders and receipts without purchase orders
- Reconcile receipts by comparing accrued payables to received items
Compare vendor performance by summarising item delivery and quality
Brilliant ending:
Dhruva received a standing ovation from the group. He ended his presentation in all humility by citing that General Audit Tools are time-tested, stable, robust, powerful, internationally acclaimed and user-friendly applications. He added that no Tool is a ready substitute for the auditor’s acumen and judgment, but is a powerful, cost-effective facilitator. He encouraged all the members present to embrace Tools and reap the benefits of an idea whose time has come.
