Deck 13: Auditing Resource Management Processes

Question 1

Describe examples of indirect process risks relevant to the property management process.

Answer 1

a. Technology risk: The design of facilities will depend on current construction and manufacturing technology. Tracking of costs is affected by the reliability of technology used in information systems. Technology risks related to construction affect the rate of deterioration of the facility and the potential for cost overruns.
b. Planning risk: Property management is dependent on financial, budgeting, and contingency planning decisions. Insufficient resources or poor planning may result in insufficient capacity, poor maintenance, loss of use of significant physical facilities due to natural disaster or terrorism, and a lack of resources to fund acquisitions.
c. Regulatory risk: The location, design, construction, and maintenance of facilities are all subject to extensive regulation. In the case of constructed assets, regulations can be as detailed as dictating the number and width of doorways and the accessibility of the premises to disabled employees and patrons. Regulatory risk could lead to noncompliance with zoning or safety hazards.

Question 2

What activities are necessary to manage resources like physical assets in a multi-location manufacturing/merchandising firm?

Answer 2

a. Assessing needs: First, the asset needs of the organization must be identified. These needs might include new factories, retail locations, vehicles, and computers. Asset needs are usually based on forecasts, future plans, and overall strategy. Effective strategic planning is critical!
b. Evaluating available resources: Once a resource need is identified, the various alternatives must be evaluated. The best factory location, for example, may depend on many factors. Retail locations depend on customer traffic, accessibility, and land costs. Effective property management requires a full analysis of the various alternatives for acquiring assets including the decision to lease, make, or buy assets.
c. Authorization of procurement: Once options have been specified and evaluated, senior management decides which options to pursue. These decisions will be based on preliminary information and tentative negotiations with potential suppliers.
d. Planning: Formal negotiations with suppliers determine contract prices and terms, delivery schedules or milestones, and service or warranty arrangements. Final selection of suppliers and specific models/versions/designs/floor plans occurs at this point in the process.
e. Authorization of acquisition: Given the extensive details required for most asset acquisitions, a separate review and approval of final plans for an acquisition is necessary. Significant asset acquisitions may need approval by the board of directors. This results in a signed contract with a chosen supplier and commitment to a delivery or construction schedule.
f. Acquisition or construction/remodeling: For most assets, this step of the process involves taking delivery of the asset, physical set-up, and testing. For land or buildings, the acquisition process may be quite complex and time consuming, especially if the asset is to be constructed.
g. Operations and maintenance: All assets require continuous maintenance and upkeep, and occasional repairs. This is an ongoing activity.

Question 3

What activities are necessary for the financial management process?

Answer 3

a. Planning and budgeting: Projecting cash flows from operations is the starting point for financial planning. How much free cash flow the organization needs at any point in time is determined by strategic goals and long-term plans. If cash flow is inadequate, plans must change or alternate financing must be arranged. Accurate forecasting is important for financial management.
b. Evaluating financing options: An organization can raise funds externally by borrowing or issuing equity. Borrowed funds may come from bank loans, publicly issued bonds, commercial paper, leases, or vendors. Equity financing involves issuing stock.
c. Borrowing funds: Sources of credit must be identified and acceptable terms arranged, resulting in inflow of financial resources.
d. Debt service: Debt service includes the routine handling of periodic interest and principle payments.
e. Issuing equity: Equity financing involves underwriters and other financial professionals. Public stock offerings are subject to examination and regulation by securities market regulators. New securities may also be issued as part of stock option or employee stock purchase plans.
f. Returns to shareholders: Dividends constitute the primary return to shareholders from the company. Sometimes, the company repurchases its own shares. Both cases involve disbursements to shareholders.
g. Evaluating investment options: When the company has excess financial resources not immediately needed, those funds are invested in the short term. This involves specifying the investments that are appropriate to maximize investment returns while controlling risk. Recent developments have triggered an increase in investments in complex derivatives, which may create significant, and often misunderstood, risks to the company.
h. Managing investments: The daily buying and selling of investments and moving of financial resources is relatively routine. These activities can create both cash inflows and outflows.
i. Investment earnings: Investments produce returns through interest, dividends or capital gains. This activity focuses on realizing and recording investment earnings, which generally will produce a cash inflow for the company.
j. Manage cash flow: The combined effect of operations, financing transactions, and investment activities determines net cash flow to the company at any point in time. The purpose of cash flow management is to minimizing idle financial resources while satisfying all obligations.

Question 4

You are the auditor for a client with self-constructed cranes for use in the construction business. What evidence do you need to examine?

Question 5

What are the objectives of the property management process?

Question 6

What plans and needs must management actively monitor in order to properly assess needs and long-term planning in the property management process?

Question 7

Describe examples of people risks relevant to the financial management process.

Question 8

What is the financial management process? Briefly describe the process.

Question 9

What is the property management process? What assets are involved in this process?

Question 10

What are the objectives of the financial management process?

Question 11

In auditing a particular client, you are concerned about the risk of ineffective planning and budgeting including inappropriate incentives to financial resource management. What controls will you look for?

Question 12

Describe examples of direct process risks relevant to the financial management process.

Question 13

What determines the complexity of financial management?

Question 14

You are the auditor for a large manufacturing and merchandising client that has discontinued some product lines and relocated its distribution center in the current year. What do you need to address with regard to the possible impairment of assets?

Question 15

Describe examples of direct process risks relevant to the property management process.

Question 16

Describe examples of people risks relevant to the property management process.

Question 17

Describe accounts related to property management for which substantive analytical procedures are quite useful?

Question 18

What are the primary substantive audit tests that are appropriate for testing borrowed funds?

Question 19

What are the primary substantive audit tests that are appropriate for testing investment balances?

Question 20

Describe examples of indirect process risks relevant to the financial management process.

Question 21

You are auditing a client with infrequent but large equity transactions. What substantive audit tests might you choose?

Question 22

In auditing a particular client, you are concerned about the risk of ineffective planning and budgeting including inappropriate incentives to financial resource management. What performance measures will help determine whether this risk is a problem?

Question 23

You are the auditor for a large manufacturing and merchandising client. What processing controls do you expect in place to mitigate the financial management risks?