Process review or process audit is an examination of significant process/processes i.e. business and operational key risks and the controls established to mitigate those risks, including compliance with laws, regulations & established policies.
Process audit stages & deliverables-
|Pre-planning||Determining the scope, area & period of process to reviewed|
|Planning||Understanding the process including walk through (if required) & going through Risk Control Matrix (RCM) & preparation of audit checklist|
|Evaluation||Thorough testing of the process by applying audit procedures as specified in the checklist & highlight the potential issues|
|Reporting & Issue Tracking||Highlight the root cause of issues & suggest system improvement points if possible|
Pre-planning: Understand the objective of process to be audited & review available audit documents such as prior year work papers, IFC etc
Planning & Evaluation: The audit team interacts with the client in order to have a thorough understanding of the process in order to understand how the process functions in order to achieve its objectives.
Post walkthrough, the next step is identifying key risks-
– For each major process/functions, brainstorm as to what can go wrong & highlight the areas with greatest potential vulnerabilities
-Identifying gaps between expected & existing controls by applying various audit procedures & test results are required to be adequately documented & testing documentation is required to be sufficient to support conclusions reached.
Reporting & issue tracking: Potential audit findings should be discussed as they are identified to ensure timely communication with the management. Potential findings are required to be carried forward to the Audit report as an issue or Process Improvement Opportunity (PIO) after analysing the root cause of the issue.
S Limited is one of the leading manufacturers of Games & has 3 major segments – Sporting Games Division, Board Games Division & Computer Games division. The management of S Limited was quite unhappy from its payables management process of the organization as it had no proper internal process followed & hence had affected the working capital cycle of the company too.
The top management of S Limited approached MASD & Co to have a thorough process review and audit in regards to the payables management.
The MASD team approached the assignment as follows-
I. System/Process Walkthrough- In-depth understanding of the entire process followed for the payables management in the company was done. Also, the policies with regards to the payment terms etc were referred & the entire process right from PO creation till final clearance of payment was understood. Further, discussion with the relevant SPOCs from PO creation team, accounting team & Payment team was done so as to have a thorough understanding.
So to recapitulate, the entire payables process was segregated into various sub-processes for detailed analysis.
II. Applying the review procedures- After the walkthrough/process understanding, MASD & Co also had a detailed report developed & designed from the IT Team of S Limited for the payments made from the period Sep’20 to Sep’21 to identify the issues & suggest controls.
The MASD Team then started applying their review procedures to figure out the areas of significant risks. Here, the intention was not only to highlight the issue but to find out its root cause. For e.g. If there is postponement, find out where the issue actually lies & then determining its root cause as postponements could be due to any of the following issue-
a. Delay in receipt of invoice copies/supporting documents from the Vendor itself
b. Invoice received in time but accounting skipped
c. Incorrect due date getting captured in the system
d. Inputting error while accounting the invoice or creating PO
e. Prioritising certain payments in case of shortage of funds etc.
III. Findings/Conclusion–After performing the review procedures, MASD Team not only highlighted issues to the management but found out the root causes & suggested Process Improvement Opportunities as follows-
|Sr. No.||Issue||Root cause||Process Improvement|
|i.||Mismatch in payment terms as per PO vis-à-vis System||The PO preparing team was not appropriately entering the payment term in the system||Maker-checker process to be followed so as to avoid errors related to incorrect inputting of data [Preventive check & Policy level control ]|
|ii.||Incorrect due date calculation||The Due date mentioned in the invoice was not linked with the payment terms entered while entering PO details.||While creating/raising an invoice, the payment terms should be auto populated from the payment terms entered while creating PO. This will avoid not only alteration of payment terms at PO & invoice level but also appropriate calculation of due date.
[ System level control ]
|iii.||Payment was made first however the accounting of the same was done later leading to non-adherence of proper procedure||In cases of extreme urgencies, the payment is released first||Management to make appropriate policies so that proper procedure is adhered to. [Process level control ]|
|iv.||Unauthorised payments were made to outsiders||There was no approval mechanism in the system||All payments to be mandatorily approved by the F&A HOD. Also, payments in excess of Rs. 10 L to be also approved by the CFO of the company. [ System level control & Policy level control]|
|v.||Payment was made without adjustment of advances||System configuration was not available wherein the outstanding amount is reflected after adjusting the advances.||System configuration was updated so that outstanding amount is seen after adjusting advances. [ System level control ]|
|vi.||No proper tracker of outstanding payable amount||Payables ageing analysis report was not available in the system||Payables ageing report was developed & configured in the system. Also, management to review the ageing analysis periodically/on a monthly basis.
[ System level control & Policy level control ]
As evident from the table above, the top management of S Limited now had a proper process followed in relation to its payables since not only the lapses in the process were highlighted but also with the root causes & process improvement opportunities at system level, process level & policy level, the company will be able to function more effectively & efficiently.
A thorough in-depth analysis of the processes enables an organization’s functioning in the most efficient and effective manner so as to achieve its mission, goals and objectives.
Process reviewers should be viewed throughout an organization as a valuable independent resource, comprised of experienced individuals with specific skill sets to solve problems, analyse the processes and help develop potential solutions.
CA Aakash Mehta | Partner | Email: [email protected]
Poojan Joshi | Associate Consultant | Email: [email protected]