UWCISA Symposium 2009 J. Mack Robinson College of Business / Georgia State University Extending and using graphical representations of business processes

UWCISA Symposium 2009

J. Mack Robinson College of Business / Georgia State University

Extending and using graphical representations of business processes in evaluating internal control

A. Faye BorthickGeorgia State University, [email protected]

Gary P. SchneiderQuinnipiac University, [email protected]

Anthony O. VanceBrigham Young University, [email protected]

Rationale for the learning experience


1. Business on the cusp of a shift from flowcharts to business process diagrams (BPDs)

2. Scarcity of cases that afford students opportunities to:

1. Represent processes in diagrams from authentic sources, e.g., conversations

2. Evaluate internal control in highly automated situations

Learning activities/objectives


1. Extend graphical representations of business processes from conversations: modify flowcharts or BPDs

2. User process representations to evaluate internal control

1. Identify information that the auditor should have obtained in the interviews

2. Identify control weaknesses

3. Explain potential effects of control weaknesses on the financial statements and operational effectiveness

3. Answer multiple-choice questions for 1 and 2 based on the case

Situation: Context in conversation


The scene:

Corporate and store managers of the convenience store chain 24-Seven Company mulling over the implications for accounts payable processing in moving from their current system based on batch processing to a more customer-driven model for merchandise in the stores as a way to increase same-store sales over time.

Flowcharts vs. BPDs


• Experiment:

Where are controls easiest to recognize?

• Flowchart

• BPD

• BPD with Krishnan et al. (2005) control notation


Differences in systemsAspect Current: Batch Contemplated: Customer driven

Store manager role Passive Active

Store reporting to Corporate

Weekly from manual sales reports

Automatic daily polling

Ordering to replenish store shelves

Weekly based on sales reports, by Corporate

Daily based on store manager orders and Corporate enhancing

Deliveries to stores At vendors’ convenience, throughout the day

5 am daily from Corporate distribution center

Vendor-managed inventory

High-volume snacks and drinks

None

How vendors receive orders

Large vendors Over leased lines Programmatically

Local vendors None Web browser


24-Seven: Missing information relevant to payablesQuestion that Kiran should have asked Reason for asking the question

1 How often are suspended transactions cleared?

Suspended transactions create potential for understated payables

2 How do you know EFT payments were made?

Ensure completeness of payables

3 How do you ensure correctness of spreadsheet calculations of payables adjusting entries?

Evaluate integrity of payables adjusting entries

4 To what extent are edits of payables transactions logged?

To ensure accountability for changes to transactions

5 How are no longer needed access privileges removed?

Ensure that incompatible access privileges are avoided

6 How connected are the servers and what vulnerabilities does that enable?

Evaluate access control

7 What vulnerabilities do personal technologies enable?

Evaluate access control


24-Seven: Effects of control weaknesses in payables

Control weaknessesSys-tem Financial statements

Operational effectiveness

1 Potential for inaccurate route driver delivery tickets

Cur-rent

Potential for existence error in paying for goods not received

Potential for stockouts; overpaying for goods not received

2 Potential for souvenir vendor and store manager collusion to inflate delivery counts

Con-tem-plated

Potential for existence error in paying for goods not received

Potential for stockouts; overpaying for goods not received

3 Suspended payables omitted from adjusting entries

Both Understated payables

Cash needs underestimated

4 Inability to assure correctness of spreadsheet calculation of adjusting entries

Both Understated or misstated payables

Cash needs underestimated

FIGURE 524-Seven Company Procure-To-Pay System Flowchart: Current System

Enter store

Scan items; accept payment

Leave store

Customer Clerk Manager

Store

1. Count shelf inventory

2. Update store inventory

Daily

Corporate

Corporate inventory and sales

1. Update corporate inventory and sales

2. Prepare POs by store

Send POs to vendors (leased

lines)

Vendor:Low to medium volume

Corporate Local office

Receive orders (leased lines)

Prepare shipments and ship to stores

Prepare invoices and send to 24-

Seven Corporate (leased lines)

Receive invoice:‘R’

Route driver

Visit store

1. Inspect shelf quantities

2. Replenish stock3. Create delivery

ticket

Vendor:High volume

Transfer delivery tickets at end of

route

Record delivery tickets

Monthly, prepare invoices and send

to 24-Seven Corporate (leased

lines)

Shipments

1. Complete receiving report

2. Replenish shelves from shipments; put excess in back room

24-Seven Company

Weekly

Sales report

Prepare and send sales report to corporate

Weekly

Analyze overall sales

Enter sales

24 hours a day7 days a week

Store sales

Store inventory

Select items

Update store sales

Delivery tickets

PO #s and amounts

match?

1. Suspend invoice: ‘S’

2. Resolve discrepancy

Mark payable: ‘A’

5th & 20th of month

No

Yes

10th & 25th of month

EFTs

To bank

Receive EFT confirmation

From bank

1st of month

Finish

Sum ‘R’ invoices

Post adjusting entries

Prepare EFT: ‘P’

Send request to bank: ‘R’

Find confirms with no request

Monthly

FIGURE 624-Seven Company Procure-To-Pay BPD: Contemplated System

Cu

stom

er

Cle

rk

Noon-2 pm daily


2. Update store sales

Make daily

deliveries to stores

Shelve items

After 3 pm daily

Before 5 am daily

Select items 24/7

Scan items; accept

payment

Man

ager

Co

rpor

ate

Dis

trib

utio

n

cent

er

Ven

dor

Sto

re24

-Sev

en

Com

pan

y

Take shelf inventory with

handheld computer

Update inventory from handheld

computer

Predict next day demand and prepare

orders

Signoff on

orders

Poll stores electronically

for sales, inventory, and

orders

Analyze scanner data by store,

region, and overall

Enhance store

orders based on

sales analysis

2 pm daily

Accept and record

delivery

Prepare deliveries by store

Accept and

record delivery

Organize orders by

distribution center and

deliver

Pre-pare

orders

Retrieve orders

program-matically

Retrieve orders

with web browser

Manual

Auto-mated

Pre-pare items

Deliver items to store at

specified time

Shelve items

Accept and

record delivery

Post orders

for vend-

ors

Prepare and send invoice

PO#s & amounts match?

No

Yes


2. Resolve discre-pancy

Mark pay-able: ‘A’

1. Prepare EFT: ‘P’; create EFT request: ‘R’

2. Send to bank

3. Post to cash

Receive invoice:

‘R’

1st of month5th & 20th of month: 10th & 25th of month

Receive EFT

confir-mation

1. Sum ‘R’ invoices

2. Post adjust-ing entries

Find pay-

ments with

no re-quest

Monthly

Order retrieval

type?

FIGURE 724-Seven Company Procure-To-Pay Process BPD: Contemplated System With Explicit Controls

Cu

stom

er

Cle

rk

Noon-2 pm daily


2. Update store sales

Order retrieval

type?

Make daily

deliveries to stores

Shelve items

After 3 pm daily

Before 5 am daily

Select items 24/7

Scan items; accept

payment

Man

ager

Co

rpor

ate

Dis

trib

utio

n

cent

er

Ven

dor

Sto

re24

-Sev

en

Com

pan

y

Take shelf inventory with

handheld computer

Update inventory from handheld

computer

Predict next day demand and prepare

orders

Signoff on

orders

Poll stores electronically

for sales, inventory, and

orders

Analyze scanner data by store,

region, and overall

Enhance store

orders based on

sales analysis

2 pm daily

Accept and record

delivery

Prepare deliveries by store

Accept and

record delivery

Organize orders by

distribution center and

deliver

Pre-pare

orders

Retrieve orders

program-matically

Retrieve orders

with web browser

Manual

Auto-mated

Pre-pare items

Deliver items to store at

specified time

Shelve items

Accept and

record delivery

Post orders

for vend-

ors

Prepare and send invoice

PO#s & amounts match?

No

Yes


2. Resolve discre-pancy

Mark pay-able: ‘A’

1. Prepare EFT: ‘P’; create EFT request: ‘R’

2. Send to bank

3. Post to cash

Receive EFT

confirma-tion

1. Sum ‘R’ invoices

2. Post adjusting entries

Receive invoice:

‘R’

1st of month5th & 20th of month: 10th & 25th of month

1. Match PO#s2. Match amounts

Find payments with no request

Objective questions: Performance objectives


• Identify control strengths and weaknesses

• Design controls to mitigate control weaknesses

• By control objectives

• By financial statement assertions

• In business processes

• In SDLC

• In access control

6 practice questions and 30 assessment questions

Sample question: Identify control strength


Verifying that each EFT confirmation has a corresponding EFT request would ensure the:

1. Validity of payments

2. Completeness of payments

3. Valuation of payments

4. Validity and completeness of payments

Learning theory: Situation model building


• The best experience for future action is constructing mental models in current situations, i.e., comprehending.

• Ambiguities and conflicts are needed to prompt inferences and elaborations required to develop robust situation models.

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

Learner reaction


1. Realized “a ha” moments about payables weaknesses where they worked

2. Struggled with random positioning of utterances

1. Current vs. contemplated systems

2. Temporal sequence of processing

3. Recognized weaknesses more readily if they identified missing information first

4. Wished they’d developed better flowcharting/BPD skills on earlier assignments

5. Preferred BPDs: Easier to prepare and use

24-Seven’s contribution


• Practice in evaluating internal control in a highly automated situation from conversation with assessment questions

• Introduction of notation

• BPMN in BPDs

• Krishnan et al.’s (2005) controls notation

Access


Case on the Web: http://www2.gsu.edu/~wwwais/pro/24-Seven/site/24-SevenPart2.htm

Use name = acct431 and password = Pr2378

Krishnan, R., J. Peters, R. Padman, and D. Kaplan. 2005. On data reliability assessment in accounting information systems. Information Systems Research 16(3): 307-326.

Documents

UWCISA Symposium 2009 J. Mack Robinson College of Business / Georgia State University Extending and using graphical representations of business processes