UWCISA Symposium 2005

UWCISA Symposium 2005

J. Mack Robinson College of Business / Georgia State University

Due diligence on fast-fashion inventory through data querying

A. Faye BorthickGeorgia State University, [email protected]

Mary B. CurtisUniversity of North Texas, [email protected]

mailto:[email protected]

mailto:[email protected]

Simulation in response to learning needs


1. From three decades’ of audit judgment research, auditors have difficulty:

• Finding unusual conditions, including those associated with fraud

• Generating explanations of conditions to test

2. Demands are increasing on auditors to:

• Audit more effectively

• Be more productive with software tools

The challenge


Design and implement learning experiences for novices to develop IS audit expertise

• Create authentic tasks (tasks that IS auditors would perform on the job) to simulate learning on-the-job

• Analyze performance and learning by audit sub-task

The approach

The task: Threadchic inventory audit


• Theadchic: Fast-fashion retailer

• Objective: Perform due diligence audit on inventory account with database querying

• Approach: Audit the account through analysis of the provided data in the context of the situation

Threadchic: An authentic task in a simulation


1. Situation narrative: Context in conversation

2. Transaction data: For analysis with database or audit software querying

3. Prior audit program/existing results

4. Reporting template

5. Questions for Saving Sergeant Pabletti epiphany

Situation narrative: Context in conversation 1


Bradlei (engagement partner): “As usual for due diligence work, we didn’t have advance notice. Because of the short time frame, the site team observed the company’s year-end inventory count, which is why we have count results before we developed the rest of the audit procedures. The team also downloaded copies of the full client data files for us. In addition to the data, here are data attribute definitions (Figure 1), results to date on the engagement (Figure 2), and the audit program for a due diligence engagement similar to this one (Figure 3)...”

Sumit (audit senior): “This is my first due diligence assignment. How does it differ from a financial statement audit?”

Shantor (audit manager): “About two months.”

Sumit: [looking puzzled]

Shantor: “Instead of 75 days after year end to sign off on the audit, there might be two weeks from offer to closing, hence two months’ difference.”

Situation narrative: Context in conversation 2


Sumit: “Why so short?”

Shantor: “It’s the nature of the M&A [mergers and acquisitions] business—urgency to do the deal before anybody gets cold feet or other suitors spoil the duet.”

Bradlei: “To be specific, closing is ten days away, giving us a week for our work. Another difference is that our client is the acquiring company, not the company being audited...”

Roseyrl (first-year audit staff member): “So that’s why we keyboard jockeys are on this job—to analyze the data electronically in just a few days.”

Jantor (second-year audit staff member): “I’m ready! We didn’t do inventory in last month’s query course, but I’ve got some ideas to get us started.”

Bradlei: “Good! We need your query expertise and the analysis it affords for jobs like this where there’s only enough time for doing the most crucial analyses with software. As companies have to accelerate their financial statement filings over the next few years, I believe we’ll be increasing the proportion of audit hours devoted to analysis of whole data files with query tools. More of our training will soon be oriented this way.”

Transaction data: Tables


1. inventoryCount (268 rows)

2. invoices (19 rows)

3. markdowns (268 rows)

4. payments (12 rows)

5. purchases (633 rows)

6. trialBalance (72 rows)

Audit results to date


Objective Results

Existence

Count inventory Counts taken with sufficient accuracy; counting errors random

Perform cutoff test on inventory transactions

All sampled receipts recorded in proper period; all sales transactions recorded in proper period.

Completeness

Count inventory Counts taken with sufficient accuracy

Rights and obligations

Determine whether inventory is pledged

No pledges of inventory found

Four-column reporting template


1. Assertion and audit objective

2. Audit procedure

3. Results from execution of queries

4. Matters warranting follow up: Unresolved conditions and explanations of how to investigate them


Threadchic inventory account reportAssertion

and audit

objectiveAudit procedure

Results from execution of queries

Matters warranting follow up

1. Manage-ment assertion

2. State-ment of the audit objective

Explanation of the audit procedure for implementing the audit objective in terms of the data attributes

1. Names of queries

2. Statement of query results

3. Explana-tion of results

1. Unresolved conditions

2. How to investigate them

Prerequisite skills and knowledge


1. Querying proficiency

2. Data analysis

3. Knowledge of management assertions in financial statements

4. Business process modeling

Analysis tool choices


• Microsoft Access QBE

• ACL

• SQL

Readiness questions: Sergeant Pabletti epiphany


Saving Sergeant Pabletti: Video game played by 80,000 Army recruits each year

1. Recruits inept in first play of game

2. With learning, recruits save the sergeant

3. Vicarious experience for the twitch generation on the value of learning and thinking

4. Objective: Afford learners in IS audit a Saving Sergeant Pabletti epiphany about the value of thinking deeply about the situation

Threadchic readiness question


SKUs appearing in the purchases table but not in the inventoryCount table is most likely attributable to:

1. Threadchic having sold all the inventory for those SKUs

2. Inventory not being accounted for or counted properly

3. Inventory being lost before being placed on store shelves

4. Inventory records being lost sometime during the year

5. Inventory being stolen before or after reaching store shelves

Learning objectives


1. Model business process

2. Perform audit steps

1. Develop audit objectives

2. Design audit procedures

3. Execute audit procedures with querying

4. Interpret results

5. Identify matters warranting follow up and how to investigate them


Ve

nd

or

Th

rea

dch

ic

Purchase garments (SKUs)

FIGURE 1Threadchic Inventory-Related Processes

YesSelect styles & vendor

Make SKUs

Prepare & send

payment

Last sale > 21 days

ago?

Daily for all SKUs:

Empty cartons to shelves

Send SKUs

Record responseS

tore

cu

sto

me

r

Select SKUs

Receive purchase

order

Update inventory and G/L, files at corporate

Sto

res

Co

rpo

rate

Pay for SKUs

Receive payment

Record sale

Alert store staff

Mark down SKU

Update selling price

Record SKUs purchased

Record invoice

Receive payment

Record payment

Leave with

SKUs

Receive invoice

Send SKUs & invoice

Why should process modeling be helpful?


Modeling a process graphically:

• Makes explicit how all of it works, bringing to consciousness more aspects of the process

• Distinguishes a process from similar ones, decreasing the likelihood of making false assumptions about the process

• Creates a situation model in memory from the inferences required to construct the graphical representation

Why should process modeling be helpful? (cont.)


Without explicitly modeling the whole situation, one is more likely to:

• Have only a partial understanding of the process but not realize that

• Make inferences based on incomplete or erroneous understanding of the situation

• Fail to consider important aspects

References for business process modeling


• BPMI, Business Process Management Initiative. 2004. Business Process Modeling Notation (BPMN) Version 1.0. Aurora, CO: BPMI. http://www.bpmi.org/downloads/BPMN-V1.0.pdf

• White, S. A. 2004. Introduction to BPMN. Aurora, CO: BPMI. http://www.bpmi.org/downloads/Introduction_to_BPMN89.pdf

http://www.bpmi.org/downloads/BPMN-V1.0.pdf

http://www.bpmi.org/downloads/Introduction_to_BPMN89.pdf

http://www.bpmi.org/downloads/Introduction_to_BPMN89.pdf

References for situation model building


• Barsalou. 1999. Language comprehension: Archival memory or preparation for situated action? Discourse Processes 28 (1): 61-80

• Zwaan and Radvansky. 1998. Situation models in language comprehension and memory. Psychological Bulletin 123 (2): 162-185

The task: Threadchic inventory audit


Conditions to find:

1. Paid-for merchandise supporting only 71% of claimed sales

2. Inability to vouch for purchases of all inventory

Outcomes


1. Paid-for merchandise supporting only 71% of claimed sales:

A few participants find this condition.

2. Inability to vouch for purchases of all inventory:

A few more participants find this condition.

Why are these conditions hard to find?


1. They are unexpected.

2. The default join on the invoices and payments tables does not show invoices for which there is no payment.



Analyzing performance


• Visually from tables

• One for each audit sub-task

• One by performance lapse

• Analysis of covariance as a function of prior performance


Development of audit objectives ● = reasonable statement; = marginal statement; blank = none

Participant 1 2 3 4 5 6 7 8 9

Existence

Verify payment for purchases ● Verify paid-for inventory covering sales

Completeness

Verify adjustments per year-end count ● ● ● ● Verify inclusion of purchases in inventory ● ● ●

Rights/obligations

Verify that all inventory was purchased ● ●

Valuation

Verify lower-of-cost or market value ● ● ● ● ● Verify cost agreement: inventory & invoice ● ●


Performance lapses by participant ● = reasonable statement; = marginal statement; blank = none

Participant 1 2 3 4 5 6 7 8 9

Audit objective

1. Not phrased as an assertion

2. Insufficient to develop audit procedure

3. Incomplete or unconvincing 1 4 2 4 1 2

4. Irrelevant to the application 1 5 4

4. Missing 3 3 3 4 4 4 6 5 4

Identifying condition (6 possible)and how to investigate (4 possible)

1. Condition not identified 6 5 6 4 6 5 5 6 6

2. Investigation approach not specified 4 4 4 2 3 4 4 4 4

Analysis of covariance (ANCOVA)


• Performance: Proportion attained on the four audit sub-tasks

• Contrast: With and without business process modeling

• Covariate: Students’ course average before the simulation


ANCOVA on business process modeling (BPM)

Task

Mean (out of 1.0)

F value p valueNo BPM With BPM

Develop audit objective

0.33 0.45 5.49 0.018

Design audit procedure

0.39 0.42 0.64 0.215

Execute audit procedure

0.36 0.40 0.58 0.226

Interpret results 0.27 0.33 2.13 0.078

Learner reaction to Threadchic


1. Exasperated at the messiness and ambiguities in the situation but engaged by its authenticity—really engaged!

2. Crestfallen when they were unable to:

• Detect all the unusual conditions

• Imagine potential explanations for them

• Explain how to investigate potential explanations

3. Wanted a complete, detailed report including a database with queries so they could debug their analysis

4. Insisted on readiness questions for subsequent simulations

Reactions to Threadchic


IS auditors:Delighted at students having this kind of experience

Auditing faculty:Believed this kind of learning experience is overdue but that they (faculty) need more technical skill

AIS faculty:Convinced the learning experience is excellent but cautious about the simulation’s difficulty

Authors:Intrigued at performance range, which creates opportunities to detect effects of different learning strategies

What is Threadchic’s contribution?


1. Help develop students’ querying and analysis skills in an authentic, engaging situation

2. Help bridge the understanding gap between IS auditors and general auditors by enabling novice auditors to:

1. Apply IS audit tools to verify internal consistency of data and detect unusual conditions

2. Perform an audit of financial statement assertions based on data analysis

Access


Web staging of the simulation including a link to the database:

http://www.gsu.edu/~wwwsys/pro/project/Threadchic/site/Threadchic.htm

Use name = ac863 and password = Qd0319



Documents

UWCISA Symposium 2005