Auditing Special Purpose Frameworks: Flowchart Prep Tips
While documentation of an entity's financial reporting system and internal control system may take many forms, electronically prepared flowcharts are quickly becoming the most efficient and effective means of documentation. With specialized flowcharting software such as Visio or Smartdraw, or even various Excel functions, the preparation process is simplified and the flowcharts can be easily replicated, reviewed, and updated for use in subsequent years.
An Overview of Flowchart Preparation
Information for preparing flowcharts is usually obtained by interviewing persons responsible for procedures, making inquiries of each person responsible for document preparation and tracing all documents through the processing procedures.
The objective of flowchart preparation is to produce a complete and understandable flowchart. Below are some tips that apply to flowchart preparation.
- Leave two to three inches on the left of the page open for comments.
- Begin at the upper-left corner and draw down and/or to the right.
- Show the source and use of every document.
- Use "keys" within symbols, or drop-down lists, for footnotes to describe documents.
- Use a separate memo, space on the flowchart or drop-down list to explain any information that is not self-explanatory.
- The flowchart should be divided into columns to separate people or departments with specific areas of responsibility.
- Use directional arrows only if the information flow contradicts a normal pattern.
- Avoid cross lines of dataflow.
Below are steps to facilitate flowchart preparation.
- Define the transaction cycle, system or process to be flowcharted (cash receipts or disbursements, sales, payroll, etc.).
- Lay out the columns of the flowchart to show the flow of information through the system or process. Consider roughing out the flow of documents and information known to you.
- Interview client personnel using an internal control questionnaire or other reference material to gather information.
- Draw or complete the flowchart, (while interviewing client personnel if possible.
- Perform a systems walk-through procedure to verify the accuracy of the flowchart and make a preliminary identification of potential risks of material misstatements.
- Transfer potential risks to a control deficiencies worksheet for consideration of offsetting key controls and a determination of risks of material misstatement that will be used in developing the audit strategy and audit plan (program).
An Illustrative Flowchart
We've provided an illustrative flowchart for a payments and acquisitions cycle prepared following the tips outlined above.
For smaller entities' reporting frameworks, flowcharts are normally prepared for the sales and collection, payments and acquisitions, and payroll cycles. Control deficiencies are then related to applicable financial statement classifications for consideration in the risk assessment process. In my next article, I'll discuss illustrative documentation for synthesizing control deficiencies for major financial statement classifications.
An illustrative Flowcharting Guide containing questions and preparation tips for each major financial statement classification is available upon request. To obtain a copy of this Guide and copies of illustrative flowcharts for the other basic transactions cycles, use the "Contact Us" tab on my website, www.cpafirmsupport.com, to make a request.