Introduction to Business Processes and Internal Controls

Presentasi Untuk Mahasiswa PPAk UITheodorus Djoko Sutrisno

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Objectives• Describe a business process. • Explain the importance of a business process

in managing a company. • Describe the flow of transactions and

processes within the revenue business cycle. • List the typical business cycles of a

manufacturing company. • Describe the relationship of specific accounts

to particular business cycles.

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Objectives (cont’d.)

• Describe the components of a business cycle.

• Explain the control environment and its importance in relation to the business cycles and the audit engagement.

• Explain internal controls and their relationship to the revenue cycle.

• Describe basic internal control concepts and tests of controls.

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Business Processes

A refreshment standA refreshment stand•Business Objective:Business Objective: To fulfill a customer To fulfill a customer order for hot food.order for hot food.

•Business Process:Business Process: The process would The process would involve four main steps, as follows:involve four main steps, as follows:

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Fulfilling an Order for Hot Food

Cook food

Take customer’s

order

Receive payment from

customer

Give food to customer

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Selling a CarGreet Customer

Salesperson Locates CarRequested

Sales Contract And Credit

Application Prepared

Identify and Respond to

Customer Needs

Credit Application And Terms of Sale

Approved

VehicleTitle, Financing

Contract, Insurance

Deliver Carto Customer

Sales Summary Generated

Sale is Posted as “Final” into General Ledger

Sale Recorded & Inventory

Reduced

Bill Revenue

Customer File Created& Sales Order

Number Assigned

Credit Dept. Verifies File PriorTo Releasing Car

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Processes and Subprocesses–Process – Fulfilling an order for hot food

–Subprocess – Receive payment from customer

Cook food

Take customer’s

order

Receive payment from

customer

Give food to

customer

Receive payment from

customer

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Subprocess – Receive Payment from Customer•Tasks:–Enter customer’s order into cash register

–Tell total price to customer

–Receive money and place in cash register

–Give appropriate change to customer

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Business Process Objectives•Operational –The customer order is taken correctly

•Compliance–The order is cooked in compliance with food health and safety regulations

•Financial–The money received from customers is recorded accurately

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Receive Payment from Customer

•Business objectives:–The customer is charged the correct amount

–The correct payment is received

–The transaction is recorded accurately

–All such transactions are recorded

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Identifying Risks•Customer is charged correct amount

–Risk: order price is calculated incorrectly•Correct payment is received

–Risk: incorrect change is given to customer•Transaction is recorded accurately

–Risk: Orders are entered incorrectly into register•All transactions are recorded

–Risk: employees keep money instead of placing in cash register

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Control Activities•Risk: price is calculated incorrectly–Control activity: each product sold is assigned a button on the cash register. The total price is calculated automatically.

•Risk: incorrect payment is received–Control activity: at the end of the day, the amount of cash in the register is reconciled to recorded receipts.

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Subprocess – Receive Payment from Customer•Subprocess with tasks and control activities:–Enter customer’s order into cash register–CA: each product sold is assigned a button on the cash register. The total price is calculated automatically.

–Tell total price to customer–Receive money and place in cash register–Give appropriate change to customer–CA: at the end of the day, the amount of cash in the register is reconciled to recorded receipts.

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Subprocess – Receive Payment from Customer•Subprocess with tasks and control activities:–Enter customer’s order into cash register–CA: each product sold is assigned a button on the cash register. The total price is calculated automatically.

–Tell total price to customer–Receive money and place in cash register–Give appropriate change to customer–CA: at the end of the day, the amount of cash in the register is reconciled to recorded receipts.

Automated,

Preventive

Manual,

Detective

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Selling a CarGreet Customer

Salesperson Locates CarRequested

Sales Contract And Credit

Application Prepared

Identify and Respond to

Customer Needs

Credit Application And Terms of Sale

Approved

VehicleTitle, Financing

Contract, Insurance

Deliver Carto Customer

Sales Summary Generated

Sale is Posted as “Final” into General Ledger

Sale Recorded & Inventory

Reduced

Bill Revenue

Customer File Created& Sales Order

Number Assigned

Credit Dept. Verifies File PriorTo Releasing Car

C A

CA

CA

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Link Control Activities to Control ObjectivesControl Activities Control Objectives•Customer credit reviewed and approved.

•Deliveries of cars are confirmed and checked for accuracy before release.

•Term of sale approved. •Orders are approved by management as to price and terms of sale.

•Customer file created and sales order number assigned.

•Orders are recorded in the system and assigned a unique identifier for tracking.

•Finance department verifies file prior to releasing car.

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Link Control Activities to Control ObjectivesCustomer credit reviewed and approved.

Orders are approved by management as to price and terms of sale.

Term of sale approved.Customer file created and sales order number assigned.

Orders are recorded in the system and assigned a unique identifier for tracking.

Finance department verifies file prior to releasing car.

Deliveries of cars are confirmed and checked for accuracy before release.

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Business Cycles …

Are a sequence of activities performed by an entity to process related classes of transactions.

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Typical Business Cycles

1. Revenue

2. Expenditure

3. Treasury

4. Fixed Assets

5. Financial Accounting

6. Inventory Management

7. Payroll and Personnel

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Flow of a Business Cycle

Business Cycle

Principal BusinessActivity

Principal BusinessActivity

Principal BusinessActivity

Control Objective

Control Objective

Control Objective

Control Activity

Control Activity

Control Activity

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Steps in Creating a Business Process•1. Identify your overall B_____ O_______•2. Determine your sequence of T______•3. Identify your C______ O_______.•4. Consider the ______ that these _____ _____ be met.

•5. Design _______ _______ to mitigate these _______.

•6. Insert these _______ _______ into the process.

usiness bjectiveasks

ontrol bjectivesrisk will

notControl activities

risksControl activities

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Control Concepts•What are the different ways you can classify control activities?–Preventive vs. Detective–Manual vs. Automated

•What are the three different types of control objectives?–Financial, compliance, and operational

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Tests of Controls

• Observation• Examination of Documentation• Re-performance• Corroborative Inquiry

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