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UWCISA Symposium 2005. Due diligence on fast-fashion inventory through data querying A. Faye Borthick Georgia State University, [email protected] Mary B. Curtis University of North Texas, [email protected]. J. Mack Robinson College of Business / Georgia State University. - PowerPoint PPT Presentation
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UWCISA Symposium 2005
J. Mack Robinson College of Business / Georgia State University
Due diligence on fast-fashion inventory through data querying
A. Faye BorthickGeorgia State University, [email protected]
Mary B. CurtisUniversity of North Texas, [email protected]
Simulation in response to learning needs
J. Mack Robinson College of Business / Georgia State University
1. From three decades’ of audit judgment research, auditors have difficulty:
• Finding unusual conditions, including those associated with fraud
• Generating explanations of conditions to test
2. Demands are increasing on auditors to:
• Audit more effectively
• Be more productive with software tools
The challenge
J. Mack Robinson College of Business / Georgia State University
Design and implement learning experiences for novices to develop IS audit expertise
• Create authentic tasks (tasks that IS auditors would perform on the job) to simulate learning on-the-job
• Analyze performance and learning by audit sub-task
The approach
The task: Threadchic inventory audit
J. Mack Robinson College of Business / Georgia State University
• Theadchic: Fast-fashion retailer
• Objective: Perform due diligence audit on inventory account with database querying
• Approach: Audit the account through analysis of the provided data in the context of the situation
Threadchic: An authentic task in a simulation
J. Mack Robinson College of Business / Georgia State University
1. Situation narrative: Context in conversation
2. Transaction data: For analysis with database or audit software querying
3. Prior audit program/existing results
4. Reporting template
5. Questions for Saving Sergeant Pabletti epiphany
Situation narrative: Context in conversation 1
J. Mack Robinson College of Business / Georgia State University
Bradlei (engagement partner): “As usual for due diligence work, we didn’t have advance notice. Because of the short time frame, the site team observed the company’s year-end inventory count, which is why we have count results before we developed the rest of the audit procedures. The team also downloaded copies of the full client data files for us. In addition to the data, here are data attribute definitions (Figure 1), results to date on the engagement (Figure 2), and the audit program for a due diligence engagement similar to this one (Figure 3)...”
Sumit (audit senior): “This is my first due diligence assignment. How does it differ from a financial statement audit?”
Shantor (audit manager): “About two months.”
Sumit: [looking puzzled]
Shantor: “Instead of 75 days after year end to sign off on the audit, there might be two weeks from offer to closing, hence two months’ difference.”
Situation narrative: Context in conversation 2
J. Mack Robinson College of Business / Georgia State University
Sumit: “Why so short?”
Shantor: “It’s the nature of the M&A [mergers and acquisitions] business—urgency to do the deal before anybody gets cold feet or other suitors spoil the duet.”
Bradlei: “To be specific, closing is ten days away, giving us a week for our work. Another difference is that our client is the acquiring company, not the company being audited...”
Roseyrl (first-year audit staff member): “So that’s why we keyboard jockeys are on this job—to analyze the data electronically in just a few days.”
Jantor (second-year audit staff member): “I’m ready! We didn’t do inventory in last month’s query course, but I’ve got some ideas to get us started.”
Bradlei: “Good! We need your query expertise and the analysis it affords for jobs like this where there’s only enough time for doing the most crucial analyses with software. As companies have to accelerate their financial statement filings over the next few years, I believe we’ll be increasing the proportion of audit hours devoted to analysis of whole data files with query tools. More of our training will soon be oriented this way.”
Transaction data: Tables
J. Mack Robinson College of Business / Georgia State University
1. inventoryCount (268 rows)
2. invoices (19 rows)
3. markdowns (268 rows)
4. payments (12 rows)
5. purchases (633 rows)
6. trialBalance (72 rows)
Audit results to date
J. Mack Robinson College of Business / Georgia State University
Objective Results
Existence
Count inventory Counts taken with sufficient accuracy; counting errors random
Perform cutoff test on inventory transactions
All sampled receipts recorded in proper period; all sales transactions recorded in proper period.
Completeness
Count inventory Counts taken with sufficient accuracy
Rights and obligations
Determine whether inventory is pledged
No pledges of inventory found
Four-column reporting template
J. Mack Robinson College of Business / Georgia State University
1. Assertion and audit objective
2. Audit procedure
3. Results from execution of queries
4. Matters warranting follow up: Unresolved conditions and explanations of how to investigate them
J. Mack Robinson College of Business / Georgia State University
Threadchic inventory account reportAssertion
and audit
objectiveAudit procedure
Results from execution of queries
Matters warranting follow up
1. Manage-ment assertion
2. State-ment of the audit objective
Explanation of the audit procedure for implementing the audit objective in terms of the data attributes
1. Names of queries
2. Statement of query results
3. Explana-tion of results
1. Unresolved conditions
2. How to investigate them
Prerequisite skills and knowledge
J. Mack Robinson College of Business / Georgia State University
1. Querying proficiency
2. Data analysis
3. Knowledge of management assertions in financial statements
4. Business process modeling
Analysis tool choices
J. Mack Robinson College of Business / Georgia State University
• Microsoft Access QBE
• ACL
• SQL
Readiness questions: Sergeant Pabletti epiphany
J. Mack Robinson College of Business / Georgia State University
Saving Sergeant Pabletti: Video game played by 80,000 Army recruits each year
1. Recruits inept in first play of game
2. With learning, recruits save the sergeant
3. Vicarious experience for the twitch generation on the value of learning and thinking
4. Objective: Afford learners in IS audit a Saving Sergeant Pabletti epiphany about the value of thinking deeply about the situation
Threadchic readiness question
J. Mack Robinson College of Business / Georgia State University
SKUs appearing in the purchases table but not in the inventoryCount table is most likely attributable to:
1. Threadchic having sold all the inventory for those SKUs
2. Inventory not being accounted for or counted properly
3. Inventory being lost before being placed on store shelves
4. Inventory records being lost sometime during the year
5. Inventory being stolen before or after reaching store shelves
Learning objectives
J. Mack Robinson College of Business / Georgia State University
1. Model business process
2. Perform audit steps
1. Develop audit objectives
2. Design audit procedures
3. Execute audit procedures with querying
4. Interpret results
5. Identify matters warranting follow up and how to investigate them
J. Mack Robinson College of Business / Georgia State University
Ve
nd
or
Th
rea
dch
ic
Purchase garments (SKUs)
FIGURE 1Threadchic Inventory-Related Processes
YesSelect styles & vendor
Make SKUs
Prepare & send
payment
Last sale > 21 days
ago?
Daily for all SKUs:
Empty cartons to shelves
Send SKUs
Record responseS
tore
cu
sto
me
r
Select SKUs
Receive purchase
order
Update inventory and G/L, files at corporate
Sto
res
Co
rpo
rate
Pay for SKUs
Receive payment
Record sale
Alert store staff
Mark down SKU
Update selling price
Record SKUs purchased
Record invoice
Receive payment
Record payment
Leave with
SKUs
Receive invoice
Send SKUs & invoice
Why should process modeling be helpful?
J. Mack Robinson College of Business / Georgia State University
Modeling a process graphically:
• Makes explicit how all of it works, bringing to consciousness more aspects of the process
• Distinguishes a process from similar ones, decreasing the likelihood of making false assumptions about the process
• Creates a situation model in memory from the inferences required to construct the graphical representation
Why should process modeling be helpful? (cont.)
J. Mack Robinson College of Business / Georgia State University
Without explicitly modeling the whole situation, one is more likely to:
• Have only a partial understanding of the process but not realize that
• Make inferences based on incomplete or erroneous understanding of the situation
• Fail to consider important aspects
References for business process modeling
J. Mack Robinson College of Business / Georgia State University
• BPMI, Business Process Management Initiative. 2004. Business Process Modeling Notation (BPMN) Version 1.0. Aurora, CO: BPMI. http://www.bpmi.org/downloads/BPMN-V1.0.pdf
• White, S. A. 2004. Introduction to BPMN. Aurora, CO: BPMI. http://www.bpmi.org/downloads/Introduction_to_BPMN89.pdf
References for situation model building
J. Mack Robinson College of Business / Georgia State University
• 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
The task: Threadchic inventory audit
J. Mack Robinson College of Business / Georgia State University
Conditions to find:
1. Paid-for merchandise supporting only 71% of claimed sales
2. Inability to vouch for purchases of all inventory
Outcomes
J. Mack Robinson College of Business / Georgia State University
1. Paid-for merchandise supporting only 71% of claimed sales:
A few participants find this condition.
2. Inability to vouch for purchases of all inventory:
A few more participants find this condition.
Why are these conditions hard to find?
J. Mack Robinson College of Business / Georgia State University
1. They are unexpected.
2. The default join on the invoices and payments tables does not show invoices for which there is no payment.
J. Mack Robinson College of Business / Georgia State University
J. Mack Robinson College of Business / Georgia State University
Analyzing performance
J. Mack Robinson College of Business / Georgia State University
• Visually from tables
• One for each audit sub-task
• One by performance lapse
• Analysis of covariance as a function of prior performance
J. Mack Robinson College of Business / Georgia State University
Development of audit objectives ● = reasonable statement; = marginal statement; blank = none
Participant 1 2 3 4 5 6 7 8 9
Existence
Verify payment for purchases ● Verify paid-for inventory covering sales
Completeness
Verify adjustments per year-end count ● ● ● ● Verify inclusion of purchases in inventory ● ● ●
Rights/obligations
Verify that all inventory was purchased ● ●
Valuation
Verify lower-of-cost or market value ● ● ● ● ● Verify cost agreement: inventory & invoice ● ●
J. Mack Robinson College of Business / Georgia State University
Performance lapses by participant ● = reasonable statement; = marginal statement; blank = none
Participant 1 2 3 4 5 6 7 8 9
Audit objective
1. Not phrased as an assertion
2. Insufficient to develop audit procedure
3. Incomplete or unconvincing 1 4 2 4 1 2
4. Irrelevant to the application 1 5 4
4. Missing 3 3 3 4 4 4 6 5 4
Identifying condition (6 possible)and how to investigate (4 possible)
1. Condition not identified 6 5 6 4 6 5 5 6 6
2. Investigation approach not specified 4 4 4 2 3 4 4 4 4
Analysis of covariance (ANCOVA)
J. Mack Robinson College of Business / Georgia State University
• Performance: Proportion attained on the four audit sub-tasks
• Contrast: With and without business process modeling
• Covariate: Students’ course average before the simulation
J. Mack Robinson College of Business / Georgia State University
ANCOVA on business process modeling (BPM)
Task
Mean (out of 1.0)
F value p valueNo BPM With BPM
Develop audit objective
0.33 0.45 5.49 0.018
Design audit procedure
0.39 0.42 0.64 0.215
Execute audit procedure
0.36 0.40 0.58 0.226
Interpret results 0.27 0.33 2.13 0.078
Learner reaction to Threadchic
J. Mack Robinson College of Business / Georgia State University
1. Exasperated at the messiness and ambiguities in the situation but engaged by its authenticity—really engaged!
2. Crestfallen when they were unable to:
• Detect all the unusual conditions
• Imagine potential explanations for them
• Explain how to investigate potential explanations
3. Wanted a complete, detailed report including a database with queries so they could debug their analysis
4. Insisted on readiness questions for subsequent simulations
Reactions to Threadchic
J. Mack Robinson College of Business / Georgia State University
IS auditors:Delighted at students having this kind of experience
Auditing faculty:Believed this kind of learning experience is overdue but that they (faculty) need more technical skill
AIS faculty:Convinced the learning experience is excellent but cautious about the simulation’s difficulty
Authors:Intrigued at performance range, which creates opportunities to detect effects of different learning strategies
What is Threadchic’s contribution?
J. Mack Robinson College of Business / Georgia State University
1. Help develop students’ querying and analysis skills in an authentic, engaging situation
2. Help bridge the understanding gap between IS auditors and general auditors by enabling novice auditors to:
1. Apply IS audit tools to verify internal consistency of data and detect unusual conditions
2. Perform an audit of financial statement assertions based on data analysis
Access
J. Mack Robinson College of Business / Georgia State University
Web staging of the simulation including a link to the database:
http://www.gsu.edu/~wwwsys/pro/project/Threadchic/site/Threadchic.htm
Use name = ac863 and password = Qd0319