Figure 12-9 contains a listing of tests of operating effectiveness for internal controls related to the supply chain and production management process. For each type of control activity (performance reviews and overall process management, information processing controls, physical controls, and segregation of duties and process design), describe the impact on the audit for each of the following results of controls testing.

a. Controls are found to be operating effectively

b. Controls are found to be operating ineffectively

Figure 12-9

Transcribed Image Text:

Performance Reviews and Overall Process Management Review policies for establishing strategy, goals, and budgets for supply chain management and production. Evaluate whether policies and decisions related to supply chain management and production are consistent with the overall strategy and objectives of the organization. Review and evaluate internal analyses on competitors, production trends, and technology. Examine documentation in support of key decisions related to supply chain man- agement and production. Review acquisitions, expense, and cash budgets, and verify that variances have been investigated. Review payables reports and verify proper and timely handling of adjustments. Review standard costs are developed based on analysis of product design, re- source needs, and the production process. Verify that cost accounting variances are monitored and resolved on a timely basis. Verify that slow-moving inventory is monitored and realizability is periodically assessed. Verify that waste, scrap, and by-products are monitored for disposal. Evaluate the competence and training of key individuals within the process. Discuss performance measures and process evaluation with appropriate management personnel and evaluate whether process oversight is effective. Identify and review appropriate process performance indicators relevant to key risks. Information Processing Controls Proper Authorization Procedures Verify existence of general authorization for purchasing goods and services (e.g., purchasing policy manuals, purchasing limits, standardized quality requirements, standardized payment terms). Review the process for revising general purchasing authorizations. Reperform information systems commands associated with automated controls to ensure that they are operating effectively Obtain a sample of vouchers, and verify that all required approvals are present. Obtain a sample of disbursement checks, and verify that all required approvals are present. Verify that the movement/transformation of inventory is properly authorized (including new acquisitions, materials placed in process, and sales). Verify that standard costs are properly authorized. Verify that dispositions of obsolete inventory are properly authorized and recorded. Verify that dispositions of waste, scrap, and by-products are properly authorized. Use of Adequate Documents and Records Verify that documents are prenumbered and used in sequence including purchase orders, receiving reports, vouchers, checks, time cards, job tickets, and inventory movement documents. Observe that master inventory files are maintained on a perpetual basis. Independent Verification of Employee Responsibilities Verify that all exception reports and computer edit listings are investigated and cleared on a timely basis. Obtain a sample of vouchers and verify that all supporting documents are present and that verifications are noted on supporting documents.* Obtain a sample of general disbursement checks, and verify that all supporting documents are present and that verifications are noted on supporting documents. Verify that the proper reconciliations are performed on a timely basis and excep- tions fully investigated, including (1) bank reconciliations with the check register, (2) voucher journal with payable postings, (3) perpetual records with physical counts and general ledger activity, and (4) standard cost calculations and over- head allocations with actual results. Physical Controls Observe facilities and client personnel for proper physical controls over assets, documents, and records. Segregation of Duties Verify that proper segregation of duties exists for purchasing, production, and accounting activities. Discuss work responsibilities with employees assigned to transaction processing, and evaluate effectiveness and consistency of individual responsibilities. Examine procedures manuals, personnel policies, organization charts, the chart of accounts and other documents, and records used in the system. Identify and evaluate significant changes within the process occurring during the year. Observe personnel in the performance of their duties related to the approval and verification of transactions, including Review and follow-up on open orders Preparation of receiving reports and verification of incoming shipments Movement of goods out of receiving to storage or other departments Check preparation and approval Cancellation of supporting documents upon payment to vendor Check distribution