Auditing in the ERP

Environments

AGENDA

1. GENERAL OVERVIEW - ERP - Any Business,ERP solutions,SAP R/3 –Architecture & Application components

2. MODULES IN ERP-Logistics,Accounting – Navigation of Screen,Core Business Cycle in Manufacturing unit

3. RISK ASSESMENT IN ERP -Methology – Quantification Model , Impact-Severity X Detection,exposure,Statements – SD/MM/FI/ Common-Examples,Registers and Heat Maps – Module wise, Revenue, expenditure & Inventory cycles-Summing up

4. TECHANICAL RISK IN ERP - Basis application infrastructure,Risks-in Installation management,ABAP/4 work bench & transport (se38/sa38) computing center management systems,Profile Generator ( PGFC).

5. AUDIT IMPLEMENTATION IN ERP - Learning for auditors, Excellence Model/ Global best practices (COBIT /COSO) and New Directions in ERP Auditing

General Overview -Any Business Purchase

Qty. Value

Vendor

Payable

FA

Sales

Order

Bill

Customer

Receivable HR

Wages Salary

Statut.Bodies

Share Holders

Other BusinessAssociate

s

Production/Service Enterprise

ERP solutions–What do they enable

1-Managing & Supporting the resources of organisation efficiently

-Employees

-Customers

-Vendors

-Share Holders

-Production Process

-Material & Services

2-.Increasing Competitiveness

3-.Reducing Costs

4.-Improving operational reporting

5.-Improving Quality decision making

6-.Enhancing customer service

7-. Improving profitability

8- Providing integrity of data

9-Enhancing productivity of value chain

10-Speed

ERP solutions-what do they enable

-ERP solutions are integrated ,Configurable,Real time and often available as Cross Industry solutions

-Today’s presentation is primarily based on SAP Although many ERP solutions are in use :e.g.- Oracle , J.D edward,Baan,Mfg Pro etc with similar concepts.

-SAP = Systems ,Applications,Products in Data processing

– ERP cost/user-Licence - Info-users – Rs. 60K +

‘ (Approximate) Operational-users – Rs. 90K+

Developers – Rs. 350K+

AMC - Rs. 17 ~ 20%

ERP at Eicher = SAP 4.7c (375 users)

ERP solutions-what do they enable

SAP R/3 –Architecture -3 Layers

Presentation

Layer

Application

Layer

Data Base

Layer

- SAP R/3-S/W-GUI ( Enterprises 4.7c/ECC5) with which users interact

- Application Servers-with SAP R/3 Kernel that run ABAP/4 programms(WIN 2003/Server Pack 1)

-RDBMS (eg Oracle 9i with (Patch level 4)-ABAP/4 Dictionary,source &executable program.

-TCodes-se16/tstct=120314 nos

- Tables(DB02) =35650 nos

SAP -R/3 Enterprises - Application components

ERPAM

PS

CO

SD

QM

PM

HRISWF

FI

MMPP

Modules in Logistics – Navigation of Screen 1. Logistic General (LO)2. Product Life cycle Management (PLM)3. Sales & Distribution (SD)4. Material Management (MM)5. Logistics Execution (LE)6. Production Planning & Control ( PP)7. Plant Maintenance (PM)8. Customer Service (CS)9. Quality Management (QM)10. Project System (PS)11. Environment Health & Safety ( EH&S)12. Retail13. Agency Business (LO-AB)14. Global Trade 15. Country Versions

Modules in Accounting - Navigation of Screen

1. Accounting General (AC)2. Financial Accounting (FI)3. My SAP Banking4. Corporate Finance Management(CFM)5. Treasury (TR)6. Controlling (CO)7. Investment Management(IM)8. Project System (PS)9. Incentive & Commission Management10. Enterprises Controlling11. Rural Estate Management12. Public Sector Management13. Flexible real Estate Management (RE-FX)14. Production sharing accounting systems15. Country version

Core Business Cycle in Manufacturing

Create Customer Relationship

Sales Qty.

Sales Order

Goods issue

Delivery Note

Our Invoice

A.R.

Collection

MRP Producing Inventory

Create Production Order

Create Vendor Relationship

Production

Inventory

Manage-ment

Handling FGS

Raw Material Management

Purchase requisition

Purchase Order/ SchedulingAgreement

Goods Receipt

Vendor InvoiceVerification

AP

PaymentReporting

Key business processes in Sales and Distribution (SD), Materials Management (MM) and Financial Accounting (FI) need to be studied in detail to identify their vulnerability to threats from within and outside. Based on this and experience of internal audit team, risk statements relevant to businesses are to be captured.

For each risk statement, risk impact and risk exposure is to be assessed as under

RISK ASSESMENT METHODOLOGY – BY A QUANTIFICATION MODEL

RISK

IMPACT

HIGH100 Y1

 R2 

R1 

MEDIUM

40

G1 Y2 R3

LOW

20

G3 G2 Y3

 0 2 4 10

  

LOW MEDIUM HIGH

RISK EXPOSURE →

Risk Registers and Heat Maps – Module wise

Using the risk impact and risk exposure scores as worked out above,all possible risk statements ( like 3 examples given for each SD/MM/FI ) need to be prepared in the form of a RISK REGISTER of many pages and ultimately ,all risk statement Sr nos to be plotted on 1 page HEAT MAP.

Risk impact ( Severity x Detectability) to be assessed on a scale of 1 – 100 (100 being the highest adverse impact.

A-Risk Severity ( on a scale of 1- 10 ) is determined based on weighted average affect on 5 parameters ie

i- PBT, ii- Statutory / regulatory compliance iii- Strategic value iv- Financial statement accuracy , v- Reliability/ operational effectiveness .

B- Risk Detectability ( on a scale of 1 – 10 ) is determined based on the stage of detectability of adverse event ie with in the co.or from outside customers.

Risk impact-Severity X Detection

Risk exposure (likelihood of occurrence) to be assessed on a scale of 1-10 (10 being most likely).

Risk exposure is determind based on weighted average effect of 10 parameters,responsible for the exposure ie

I-Incorrect source data/ data entry ii Incorrect incomplete execution iii-Incorrect/ non verification of output iv-Skill/ resource constraint v-Inadequate segregation of duties vi-Lack of system documentation vii-Authority norms not defined/ followed viii- Inappropriate configuration/ process logic ix-Weak internal/ compensating controls x-Others (i.e.: process complexity, frequency of changes, software limitation, unassignable causes etc.)  

Risk exposure

S. No

Risk statement

Risk

Risk exposur

e

Heat zone

Severity

DetectabIlity

Impact

1 Invoice may be raised without effecting physical delivery of the goods from depot/ plant (bill and hold)

7 8 56 5 R1

2Sales order may not be executed in time and in full

4 6 24 3 Y2

3 Debit / credit notes sent to customers may not contain adequate supporting details

2 4 8 4 G2

RISK STATEMENTS – SD-Examples

S. No

Risk statement

Risk

Risk exposur

e

Heat zone

Severity

DetectabIlityImpac

t

1Financial authority norms for release of PO may not be mapped into SAP

4 8 32 6 R3 

2 GR may be prepared for a quantity lower/ higher than vendor delivery challan

4 6 24 4 Y2

3 CENVAT credit availed may be lower than CENVATABLE excise duty credited to vendor through invoice verification

3 6 18 4 G2

RISK STATEMENTS – MM-Examples

RISK STATEMENTS – FI-Examples

S. No

Risk statement

Risk

Risk exposur

e

Heat zone

Severity

DetectabIlityImpac

t

1 Depreciation rates may have been incorrectly set up

5 6 30 5 R3

2 Vendors account may not have been reconciled/ confirmed as per laid down frequency

5 6 30 4 Y2

3 Line items (individual entries) clearing may not have been carried out in vendor accounts

3 6 18 4 G2

RISK STATEMENTS – Common to all functions Examples

S. No

Risk statement

Risk

Risk exposu

re

Heat zone

Severity

DetectabIlity

Impact

1SAP transaction authorizations granted to users may not relate to their assigned role/responsibility

8 8 64 8 R1

2

SAP transactions may be carried out using group IDs resulting in non traceability of transactions to any specific individual (employee)

8 8 64 8 R1

3Audit trails (chronological log of changes) may not be reviewed/ analyzed by process owners

5 8 40 7 R3

Imp-table mappings &Concepts

• SD-Sales orders=vbak/vbap/vbpa-different types• SD-Shipping=vblk/likp/lips-different types• SD-Billing=konv/vbrk/vbrp/vbuk—different types,PRICING procedures• SD-Cust mast used in AR=knvp/knvv/kna1/knb1,sales organisation

• MM-Purc requisition=eban/ebkn• MM-PO/SA=ekko/ekpo• MM-Deliv sch=eket/ekkn• MM-GR=mkpf/mseg/ekbe• MM-Mat Mast=marc/mlan/makt/mara/mbew• MM-PO inf record=konh/konp/eina/eine• MM-BOM-STKO/STOP• MM-Mat-types ,Material Movements,Material groups,Material types,purchase

groups

• FI-Paym=payr, Acctg=bkpf/bseg,-open/closed items-Cust=bsid/bsad,Vend=bsik/bsas,G/L=bsik/bsas

• FI-Mast-G/L=skb1/ska1/skat,CC=csks/cskt,profit c=cepc/cskt • FI-Vend mast-used in AP=pur-lfm1/lfm2/gen-lfa1/lfb1/lfbk • FI-Document types-30 types- AB-acctg, BR-bank recp,KR-vend inv, RV-sale inv • FI-Acct types-5-A-Assets,D-Cust, K-Vend,M-Material, S-G/L ,• FI-COA-Chart of accts

Risks in –Revenue, expend,inventory cycles-overview -400+

Configuration :-

Authorisation :-

Masters :-

Procedure manuals:-

Audit Trails :-

SAP System land scope ,R/3 customizing ,organ objects,currencies, Tax procedures,charges in customer /vendor master.Document types ,depreciation keys, overhead cost allocation,PO release,Payment terms ,Pricing procedures in SD, credit controls,outgoing invoice posting/Free goods ,Automatic account determination.

Authorization objects ,user management,Tolerance groups,Work flows,Conflicting combinations,owned developed transactions,super user ,change management.

GL Masters-,Customer Masters,Vendor Masters, Material masters, Selling price,Tax codes,Quota arrangement,BOM.

Risk based queries (SD,MM,FI) Using SAP +MS access /AIS/Critical tools/tables/LDB-SAP—eg At Eicher—

SAP-Querries=106+133+25, MSAcc-Querries=103+135+39

Configuration control,Authorization ( change management,Master & Application ( PO/Sales order credits /FI documents)

Technical - Basis application infrastructure in SAP R/3.

4 Key Basis Tools + Utilities A. Installation Management guide-IMG- SPROB. ABAP/4 Work Bench &Transportation System ( Development

+ Test + Production.)C. Computing center management system (CCMS) - Utililities to monitor ,Control & Config. R/3 …. Start up ,shut down,NW monitoring,security ,back ups,alerts

trouble shooting,system Config.& system profile management,DBA, Profile security.)

D. Profile generator & security Adm.(PG&SA) ( SUIM-Authorisation ,Information

System,SU03-.Maintainence& Authorisation.

Risks-in Installation management

1-The organisation Models :-

2-Critical no . Range:-

3-Modif of critical tables

SPRO & SCC4 –control production client settings.---Risks are:

- Incorrect consolidation /Inadequate reporting /Incorrect MIS/Manual work around.

Assigned to individual DB record – Internal No by SAP & external no by users (snro+suim+spro).

SAP –Tables –Other than X* Y*

-Tables fields (SE16/SE11/DD03M)

Risks in ABAP/4 work bench & transport(se38/sa38).

•Change Control Procedure(Programme,Queries).

•Development & Testing Servers.

•Transport system testing.

•Logs.

•Emergency change procedures.

Risks in - computing center management systems

Batch processing control :-

Application server parameters:-

Locking transaction codes :-

Restricted Password. :-

SAP Router :-

On Line Support systems :-

(SAP Market place ,Web)

Remote function call :-

Batch input (SM35) ,Administration SM(64) Processing (SM36)

a) Login IPW expiration 180 day b) Min pw length 6-8 (C) Login /fails to session end (incorrect pw-3 times)

SM 01 (Users who have access to lock /unlock T.code)

Default PW , Name

Permission table authorization with valid IP address (port 3200)

Remote Access to SAP vendor

Programme inter faces (SM59) Use of E-SCORE , /EPIC /DMS/ITS/ etc

Risks in -Profile Generator ( PGFC) :-

• Security Admin probel ( Create /change/display)

•Super user SAP* ,SAP all

•Authorisation documentation (Biggest risks )

•Log + Trace file

ERP implementation- Learnings for auditors Managing Incharge :-

•Higher no of IS auditors than traditional profile auditors.•ERP trained –Auditors ( Functionally /Query)

Audit Methodology :- •Risk assessment of audit universe (H/M/L)•Audit Manuals ( Query ) Excel ,M.S.Access •Segregation of duties.•User authorisation ( object level security)•Customized to fit each organisations’ unique needs.

Role of Auditor :- •Integrated approach ( involvement in project early stage for design + Controls of systems ) •Pre implementation review – Before go live ( Business case , project risks,Application security design). •Post implement review – (Application)•Quality assurance – BPR Programme.

Audit involvement in project :-

•During selection & implementation ( Contribute towards establishing control environment ).

Audit respons :- •Environment evaluation from risk prospective,•Subject specials ( SD,MM,Tax) & ERP competent team •Efficient audit•Audit universe ( Business application + Basis appl.infrastructure)•Use HELP

Audit Excellence Model/Global best practices (COSO)

Mapping in COSO (Committee of sponsoring Organisation of tread way commission)

A :- 3 Objectives Identifications : 1 Operation

2 Financial Reporting

3 Compliances.

B :- 5 Components of Internal Controls :-

1. Control Environments :- Ethics,Values,Standards,

2. Risk Assessment :- Technology,Operation,Finance,Heat Maps( Risk Impact vs ‘ Exposure).

3. Control Activities :- KPI, Polices,Procedures,TQM,Physical,Safe guards.

4. Information & Communication :- Up & down , Adequacy ,Q,Timeliness

5. Monitoring & controls :- Internal controls, Physical verification, Overheads, MIS, . , Feed backs,Forums etc

Audit Excellence Model/Global best practics (COBIT)

Mapping to COBIT (Control Objective for Information and related Technology ).

MAIN PROCESSESS No of Key Processes

•Planning and orgainsation 11

•Acquisition & Implementation 6

•Delivery & Support 13

•Monitoring 4

LEVEL OF CONTROLS -ASSESMENT

0. Non Existance

1.Initial /Adhoc

2.Repeatable but person dependent

3.Defined –Standardized & documented.

4. Managed – Monitoring OK & Feed back system.

5. Optimized Control- Industry Best Practices

New Directions in ERP Auditing :- • Risk Based Auditing linked to COSO& Cobit

•Professional ethics& standards

•AIS (Materiality )+ Queries development(Table down load+MS access)

•Auditing tools- ACL/IDEA etc and many more

•On –line continuous audit(Remote-desk top auditing)

•E enabled applications (vendors/Dlrs, P2P, B2C)

•Outsourcing – Competence/costs – benefit based

100 % transaction Audit/AUDIT thr computers

•Continuous enhancing ERP competencies

•Qualified Auditiors-CIA/CISA….

References

www.theiia.org

Internal auditing :- Guidance for the profession

:- Code of Ethics

:- International Standards for the professional practices of internal auditing

:- Practice Advisories

:- Development & Practice Aids.www.isaca.org

IS Auditing standards

IS Auditing guidelines

IS Auditing Procedures

Standards for Professional information system control

http://www.sapgenie.com/ (google search based)

http:/www.sap.com services / education

http://www.sap.com/ Community

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