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Audit Tools and Documentation

Learning Objectives

1. Demonstrate theoretical knowledge of various Internal audit frameworks and reporting tools.

2. Know how to distinguish and to prepare the audit reporting tools.

3. Describe the advantages and disadvantage of using the audit reporting tools.

4. Present Internal audit issues/findings using two to three tools discussed.

5. Enumerate the eight areas of waste.

6. Document effectively the audit findings using the CCCER/5C model.

7. Write, present, and discuss persuasive audit findings.

8. Engage stakeholders on the discussion of audit findings and recommendations through well-written audit reports.

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The Eight Tools

Cause &
Control Pareto
Histograms Effect
Charts Charts
Diagram

Force Field 5S
Flowcharts Check Sheet
Analysis Techniques

Histograms
These are charts that show the frequency distribution of
numerical data using rectangles, each of which represents
Intervals.

They display the probability distribution of a continuous variable.

When are Histograms Used?

Ø Summarize large data sets graphically.
Ø Compare measurements to specifications.
Ø Communicate information to the team.
Ø Assist in decision making.

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How to create histogram

1. Calculate the range of values (i.e., maximum and
minimum)

2. Divide the range into evenly spaced intervals

3. Count the number of observations in each interval

4. Create the bars where the height represents the

count in each interval

5. The Y-axis represents the number of items fitting

into each category

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Control Charts

It is a graph used to plot and study how a process changes over time. Data are plotted in
time order, in a similar fashion as run charts.

A control chart has a central line for the average or target value for the process being
plotted, an upper line for the upper control limit i.e., maximum allowable value given the
established performance specifications) and a lower line for the lower control limit.

Two Types:
Ø Variable charts - involve the measurement of the job dimensions
Ø Attribute chart - only differentiates between a defective item and a non- defective item

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1. It detects variations in the processing and warns if there Is any departure

from the specified tolerance limits.

2. It is primarily a diagnostic technique.

3. It depicts whether there Is any change on the characteristics of items since

the start of the production run.

4. A control chart Indicates whether a process Is in control or out of control.

What this
5. It determines processes variability and detects unusual variations taking
place In a process.

chart does? 6. It ensures product quality level.

7. It warns In time and if the process is rectified in time scrap percentage can be
reduced.

8. It provides Information about the selection of process and setting of

tolerance limits.

9. Control charts build up the reputation of the organization through customer's

satisfaction.

Notes about Control Charts!

They are modified run charts and show the placement of data points so that patterns and deviations can be promptly
identified. Their sophistication level can vary, but in general, they typically consist of the following:

1. Points representing the mean (i.e., average) ranges or expected value of measurements of a characteristic in samples taken
from the process at different times. These data points are similar and related to the sample units, internal auditors select for
testing during audits.

2. The mean using all the samples is calculated (e.g., the mean of the means, mean of the ranges) and a center line is drawn at
the value of the mean.

3. The standard deviation for the mean of the values is calculated using all the samples.

4. Upper and lower control limits, typically set at three standard deviations of the center line, are drawn to indicate the
thresholds at which the output is considered statistically "unlikely” and out of bounds.

5. Additional lines may be drawn at one and two standard deviations above and below of the center line, creating bands
around the mean to assess the frequency of observations or transactions in each zone. This division into zones provides a
mechanism to formulate rules that can be translated into risk triggers or concern points.

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Pareto Chart
ØThe Pareto principle, also known as the 80/20 rule, posits that for many events
approximately 80% of the effects are caused by 20% of the causes.

ØThis principle essentially means that there is a concentration of sources that internal
auditors should identify for best results. Pareto analysis is a formal technique useful where
many possible courses of action are competing for attention.

ØIt is a creative way of looking at causes of problems because It helps stimulate thinking and
organize thoughts.

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How to Use Pareto Chart

1 2 3 4 5 6
Identify and List Identify the Root Score Problems. Group Problems Add up the Take Action.
Problems. Cause of Each Together by Scores for Each
Problem. Root Cause. Group.

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Cause and Effect Diagram

(Fishbone Diagram)
§One of the best tools that help to Identify contributing causes of an issue, and hone into the
root cause most accurately.

§This approach is useful for compliance reviews where operators should do what the
contract, law, regulation, or procedures documentation requires.

§This approach is also useful for financial reviews, where accountants and others involved In
record keeping and preparing financial statements must adhere to applicable accounting
standards.

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Cause and Effect Analysis Is a valuable tool for:

• Focusing on causes not symptoms capturing the collective

knowledge and experience of a group.
• Providing a picture of why an effect is happening.
• Establishing a sound basis for further data gathering and
action.
Cause and Effect • Cause and Effect Analysis can also be used to identify all of
the areas that need to be tackled to generate a positive effect.
Diagram
(Analysis)
Cause-and-effect diagrams are designed to:

• Stimulating thinking during a brainstorm of potential causes.

• Providing a structure to understand the relationships between
many possible causes of a problem.
• Giving people a framework for planning what data to collect.
• Serving as a visual display of causes that have been studied.
• Helping team members communicate within the team and
with the rest of the organization.

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Categories of Root Cause

Sources
People
Methods
Machines
Materials
Measurements
Environment

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Draw Align outputs

Identify the
Brainstorm fishbone with cause
problem/Issue
diagram. categories.

Allocate Analyze for

Test for reality
causes root causes.

How to do Cause and Effect analysis and diagram?

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Fishbone Diagram

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Force Field Analysis

A management technique developed by Kurt Lewin, a pioneer in the field of social sciences, for diagnosing
situations.
A great decision-making tool to identify the forces for and against a course of action.

A technique to list, discuss, and evaluate the forces that support or hinder a decision.

It can also help to strategize the best way to present the information by understanding the big picture and the
pros and cons of the recommendation.
Lastly, it forces the proposal advocate to "walk a mile in the auditees' shoes.”

By understanding the auditees' perspective, the auditor is more aware of the challenges that the client faces
and shows empathy during the process.

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1. W rite a T at the top of a piece of paper, flipchart paper or w hiteboard. The plan or proposal can be w ritten above the T,
then follow the steps below . An alternate approach is to w rite the plan or proposal In the m iddle, and place the item s to
the left and right of ft.

2. W rite driving forces/forces for/enabling forces that support the change initiative on one side of the diagram . For business
initiates, exam ples m ay include:

a. Low er costs

b. Faster speed

c. Increased custom er satisfaction

Necessary
d. Few er errors

e. Increased sales

steps to 3. On the other side, w rite factors and forces that prevent the achievem ent of the ideal state. These are called restraining
forces/forces against/hindering forces. W hen considering business initiatives, exam ples m ay include:

create Force
a. Im plem entation costs

b. Com plexity

Field Analysis
c. Tim e to roll out

d. Lack of know ledge/skill

e. Conflicting priorities

f. Past failure w ith sim ilar initiative

4. Score each factor based on the Influence it exerts on the recom m ended course of action and add up the scores for and
against change. The scoring can be done using a five-point Likert scale, w here 1 exerts the low est Influence and 5
represents the highest Im pact. The item s can be prioritized through discussion, ranking, and m ulti-voting techniques, and
the result w ill show w hich side scores the highest.

5. Determ ine w hat strategy to em ploy. You can then decide w hether or hot to m ove forw ard w ith the change. If the decision
Is to proceed, the strategy could consist of strengthening the forces that support the change initiative or
m anaging/diffusing the forces against change.

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Flowchart/Process Flow Map (1/2)

Two commonly used methods for documenting processes are process maps and process
narratives.

Process maps are pictorial representations of inputs, steps, workflows, and outputs. They
can be prepared at a high level, providing an overview of the process, or at the detailed
activity level. Process maps also may include some accompanying narrative.

A flowchart is a type of diagram that represents a workflow or process. It can be classified

as high- level flowchart and detailed flowchart.

The purpose of a high-level flowchart is to depict broad inputs, tasks, workflows, and
outputs. A high-level flowchart helps reviewers understand the overall activities, systems,
reports, and interfaces with other processes or subprocesses.

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Flowchart/Process Flow Map (2/2)

A detailed flowchart documents the more specific inputs, tasks, actions, systems, decisions,
and outputs. In addition to providing a more detailed depiction of the process flow, detailed
flowcharts provide additional information that enhances the understanding of the process.

There may be situations in which the internal auditor believes it is more appropriate to
document the understanding of the process using narrative memoranda instead of
flowcharts.

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Are the tasks necessary?

What can be reduced or eliminated?

Are activities in conflict with others?

Can anything be simplified?

Flowcharting
Value-Adding Are all handoffs necessary?

Checklist Can the sequence be changed?

Are all checks, approvals] and decisions necessary?

Are there loops or Incompatible duties In the process?

Are there dead ends anywhere?

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Eight (8) Areas of Waste (1/2)

1. Transporting - while it is essential in many processes so it will get to where the item needs to be, we must
remember that every time an item is moved there is a risk that it will be damaged, delayed, or lost.

2. Unnecessary Inventory - maintain as little inventory as possible because inventory ties up the
organization's capital, it raises the risk of theft, damage, and obsolescence, and it requires the expenditure
of resources on storage space and preservation.

3. Excess Motion - refers to the unnecessary movement of people, parts, or machines within a process, as it
can damage or cause extra costs on the unit or person that creates the product or delivers the service over
time.

4. Waiting - a large part of an item's life is spent waiting to be worked on or to be sold. Products and services,
in addition to their suppliers and operators, often wait for parts, information, instructions, and equipment.

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Eight (8) Areas of Waste (2/2)

5. Unnecessary processing or paperwork - overprocessing occurs any time, more work is done
on an item other than what is required by the customer

6. Defects - in manufacturing environments, defects are often viewed as produced parts not
manufactured as required or that do not work as intended. In service–provider, defects are
often a little more difficult to define because what service workers do doesn't fit easily into the
description provided above.

7. Overproduction - occurs when more goods are produced than is required by customers and
can be caused by various reasons, including poor forecasting.

8. Underutilized employees - organizations employ their staff for specific skills that these workers
have. These employees have other skills too, so it is wasteful to not take advantage of these
skills as well.

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5S TECHNIQUES
(SEITON, SEIRI,
SEISO, SEIKETSU,
SHITSUKE)

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This is a common tool widely used by internal auditors, but

seldom called by that name.

It is a structured form or document used to collect and analyze

data.

It is often done real time where the data are generated or

collected.

The information collected can be either qualitative or quantitative

Check Sheet and the form is sometimes called a tally sheet because the data
are often used to track and count the number of instances of
various phenomena associated with the review being performed.
It provide a tool to consistently capture information about
transactions examined.

It can be used when the data are observed and collected

repeatedly and the intent is to document the frequency or
pattern of problems, defects, defect causes, or events.

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1. Identify and document the operational definitions and criteria

that will be used when evaluating the selected transactions.

2. Decide what event or problem will be observed and

A check sheet documented.

3. Decide when the data will be collected, and for how long.

could be 4. Design the form so that data can be recorded simply and

constructed
clearly by making check marks (e.g., tick marks or symbols) or
entering numbers. It is best to select check marks or numbers
than can be analyzed (e.g., added, multiplied) easily. Make

following these sure the check sheet collects the appropriate data and Is easy
to use.

steps 5. Label all rows and columns.

6. Select the transactions, Items, or events that will be reviewed.

7. Record on the check sheet every time the event or problem

occurs.

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Documenting Issues
One of the outcomes of operational reviews is the identification and communication of
findings. If conditions and practices meet expectations, the internal auditor can notify the
relevant stakeholders that performance was satisfactory.

When there is a discrepancy between the criteria and existing conditions, the CCCER/5C
model provides a structured, reliable, simple, yet effective framework to document these
conditions.

By following the model, internal auditors will organize their facts and be better prepared to
deliver a compelling argument for management to adopt their recommendations.

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CCCER Model (1/2)

1. Criteria – these are the performance standards or expectations
set by relevant stakeholders and used in making the
evaluation or verification and consist of the expected
performance. The criteria consist of what should exist—the
correct state.

2. Condition - refers to what the auditor discovered as a result of

applying auditing procedures. It is the factual evidence that
the internal auditor found during the review. The condition is
the current state.

3. Cause - is the reason the condition exists. The cause explains

why there is a difference between expected and actual
conditions.

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CCCER Model (2/2)

4. Effect – constitutes the consequence of the condition
identified or is the impact resulting from the problem
itself.

5. Recommendation - the action, or collection of actions, that

if successfully implemented, will neutralize the cause, stop
the effect, and restore the condition to the desirable state
(i.e., criteria).

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Making Findings and

Recommendations Persuasive
Findings and recommendations will be persuasive to
the extent that they convince the reader that there is a
real problem that requires correction. This can be
achieved through a few actions:

1. Quantify as much as possible.

2. Make sure findings are significant

3. Consider the cost/benefit

4. Use appropriate language

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Auditors should know about some of the techniques

used to persuade, distract, and divert their attention by
the audit client. For example:

1. Repetition – by doing this, the perpetrator hopes that

the frequent repetition creates legitimacy.

2. Will of the majority - another approach is by

representing one's argument as if it were the will of
Persuasion and the majority. This gives the person's argument the
aura of legitimacy.

Diversion 3. Generalization - making unwarranted generalizations

that represents one's behavior as that of the whole is
another way to distort the truth.

4. Creating information - some Individuals attempt to

present a different version of the truth. This can be
done by choosing to exclude some information that if
known would have resulted in a different opinion.

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Criteria for Evidence

Verifiable - All results should be based on reliable facts, figures, and documents that others can inspect
independently, and by applying the care and judgment of a reasonable person, arrive at the same conclusion.

Transparency - When there is a legitimate need and authority to do of the facts, figures, and documents should be
available for review by others.

Sufficiency - The facts, figures, and documents used during the review should be enough to convince an equally
qualified, prudent, and unbiased person.

Reliability - The facts, figures, and document used should be free from tampering, or significant and unexplainable
quality variances, prepared by a suitably qualified individual or system and provided timely for review and analysis.

Relevancy - The facts, figures, and documents used during the review should be applicable based on the scope of the
review and the objectives of the organization, program, or process.

Usefulness - The facts, figures, and documents used should help the organization, program, or process improve its
operations, and enhance its ability to achieve its objectives.

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Thank you!

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