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Auditing in the ERP Environments

Auditing in the ERP Environments. 10-June’2006. AGENDA. GENERAL OVERVIEW - ERP - Any Business,ERP solutions,SAP R/3 –Architecture & Application components MODULES IN ERP- Logistics,Accounting – Navigation of Screen,Core Business Cycle in Manufacturing unit

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Auditing in the ERP Environments

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  1. Auditing in theERP Environments 10-June’2006

  2. AGENDA • GENERAL OVERVIEW - ERP - Any Business,ERP solutions,SAP R/3 –Architecture & Application components • MODULES IN ERP-Logistics,Accounting – Navigation of Screen,Core Business Cycle in Manufacturing unit • RISK ASSESMENT IN ERP -Methology – Quantification Model , Impact-Severity X Detection,exposure,Statements – SD/MM/FI/ Common-Examples,Registers and Heat Maps – Module wise, Revenue, expenditure & Inventory cycles-Summing up • 4. TECHANICAL RISK IN ERP - Basis application infrastructure,Risks-in Installation management,ABAP/4 work bench & transport (se38/sa38) computing center management systems,Profile Generator ( PGFC). • 5. AUDIT IMPLEMENTATION IN ERP - Learning for auditors, Excellence Model/ Global best practices (COBIT /COSO) and New Directions in ERP Auditing

  3. General Overview -Any Business Purchase Qty. Value Sales Order Bill Vendor Payable Customer Receivable Other Business Associates HR Wages Salary FA Share Holders Statut. Bodies Production/Service Enterprise

  4. ERP solutions–What do they enable 1-Managing & Supporting the resources of organisation efficiently • Employees • Customers • Vendors • Share Holders • Production Process • Material & Services

  5. ERP solutions-what do they enable 2-.Increasing Competitiveness 3-.Reducing Costs 4.-Improving operational reporting 5.-Improving Quality decision making 6-.Enhancing customer service 7-. Improving profitability 8- Providing integrity of data 9-Enhancing productivity of value chain 10-Speed

  6. ERP solutions-what do they enable • -ERP solutions are integrated ,Configurable,Real time and often available as Cross Industry solutions • -Today’s presentation is primarily based on SAP Although many ERP solutions are in use :e.g.- Oracle , J.D edward,Baan,Mfg Pro etc with similar concepts. • SAP = Systems ,Applications,Products in Data processing • – ERP cost/user-Licence - Info-users – Rs. 60K + • ‘ (Approximate) Operational-users – Rs. 90K+ • Developers – Rs. 350K+ • AMC - Rs. 17 ~ 20% • ERP at Eicher = SAP 4.7c (375 users)

  7. SAP R/3 –Architecture -3 Layers Presentation Layer - SAP R/3-S/W-GUI ( Enterprises 4.7c/ECC5) with which users interact - Application Servers-with SAP R/3 Kernel that run ABAP/4 programms(WIN 2003/Server Pack 1) Application Layer • RDBMS (eg Oracle 9i with (Patch level 4)-ABAP/4 Dictionary,source &executable program. • TCodes-se16/tstct=120314 nos • - Tables(DB02) =35650 nos Data Base Layer

  8. SAP -R/3 Enterprises - Application components SD MM PP CO FI ERP AM QM PS PM WF HR IS

  9. Modules in Logistics – Navigation of Screen • Logistic General (LO) • Product Life cycle Management (PLM) • Sales & Distribution (SD) • Material Management (MM) • Logistics Execution (LE) • Production Planning & Control ( PP) • Plant Maintenance (PM) • Customer Service (CS) • Quality Management (QM) • Project System (PS) • Environment Health & Safety ( EH&S) • Retail • Agency Business (LO-AB) • Global Trade • Country Versions

  10. Modules in Accounting - Navigation of Screen • Accounting General (AC) • Financial Accounting (FI) • My SAP Banking • Corporate Finance Management(CFM) • Treasury (TR) • Controlling (CO) • Investment Management(IM) • Project System (PS) • Incentive & Commission Management • Enterprises Controlling • Rural Estate Management • Public Sector Management • Flexible real Estate Management (RE-FX) • Production sharing accounting systems • Country version

  11. Core Business Cycle in Manufacturing Create Customer Relationship Create Vendor Relationship Create Production Order MRP Producing Inventory Sales Qty. Purchase requisition Production Sales Order Purchase Order/ Scheduling Agreement Goods issue Raw Material Management Handling FGS Inventory Manage-ment Delivery Note Goods Receipt Our Invoice Vendor Invoice Verification A.R. Collection AP Payment Reporting

  12. RISK ASSESMENT METHODOLOGY – BY A QUANTIFICATION MODEL Key business processes in Sales and Distribution (SD), Materials Management (MM) and Financial Accounting (FI) need to be studied in detail to identify their vulnerability to threats from within and outside. Based on this and experience of internal audit team, risk statements relevant to businesses are to be captured. For each risk statement, risk impact and risk exposure is to be assessed as under

  13. R I SK IMPACT HIGH 100 Y1 R2 R1 MEDIUM 40 G1 Y2 R3 LOW 20 G3 G2 Y3 0 2 4 10 LOW MEDIUM HIGH RISK EXPOSURE → Risk Registers and Heat Maps – Module wise Using the risk impact and risk exposure scores as worked out above,all possible risk statements ( like 3 examples given for each SD/MM/FI ) need to be prepared in the form of a RISK REGISTER of many pages and ultimately ,all risk statement Sr nos to be plotted on 1 page HEAT MAP.

  14. Risk impact-Severity X Detection Risk impact ( Severity x Detectability) to be assessed on a scale of 1 – 100 (100 being the highest adverse impact. A-Risk Severity ( on a scale of 1- 10 ) is determined based on weighted average affect on 5 parameters ie i- PBT, ii- Statutory / regulatory compliance iii- Strategic value iv- Financial statement accuracy , v- Reliability/ operational effectiveness . B- Risk Detectability ( on a scale of 1 – 10 ) is determined based on the stage of detectability of adverse event ie with in the co.or from outside customers.

  15. Risk exposure Risk exposure(likelihood of occurrence) to be assessed on a scale of 1-10 (10 being most likely). Risk exposure is determind based on weighted average effect of 10 parameters,responsible for the exposure ie I-Incorrect source data/ data entry ii Incorrect incomplete execution iii-Incorrect/ non verification of output iv-Skill/ resource constraint v-Inadequate segregation of duties vi-Lack of system documentation vii-Authority norms not defined/ followed viii- Inappropriate configuration/ process logic ix-Weak internal/ compensating controls x-Others (i.e.: process complexity, frequency of changes, software limitation, unassignable causes etc.)  

  16. S. No Risk statement Risk Risk exposure Heat zone Severity DetectabIlity Impact 1 Invoice may be raised without effecting physical delivery of the goods from depot/ plant (bill and hold) 7 8 56 5 R1 2 Sales order may not be executed in time and in full 4 6 24 3 Y2 3 Debit / credit notes sent to customers may not contain adequate supporting details 2 4 8 4 G2 RISK STATEMENTS – SD-Examples

  17. S. No Risk statement Risk Risk exposure Heat zone Severity DetectabIlity Impact 1 Financial authority norms for release of PO may not be mapped into SAP 4 8 32 6 R3 2 GR may be prepared for a quantity lower/ higher than vendor delivery challan 4 6 24 4 Y2 3 CENVAT credit availed may be lower than CENVATABLE excise duty credited to vendor through invoice verification 3 6 18 4 G2 RISK STATEMENTS – MM-Examples

  18. S. No Risk statement Risk Risk exposure Heat zone Severity DetectabIlity Impact 1 Depreciation rates may have been incorrectly set up 5 6 30 5 R3 2 Vendors account may not have been reconciled/ confirmed as per laid down frequency 5 6 30 4 Y2 3 Line items (individual entries) clearing may not have been carried out in vendor accounts 3 6 18 4 G2 RISK STATEMENTS – FI-Examples

  19. S. No Risk statement Risk Risk exposure Heat zone Severity DetectabIlity Impact 1 SAP transaction authorizations granted to users may not relate to their assigned role/responsibility 8 8 64 8 R1 2 SAP transactions may be carried out using group IDs resulting in non traceability of transactions to any specific individual (employee) 8 8 64 8 R1 3 Audit trails (chronological log of changes) may not be reviewed/ analyzed by process owners 5 8 40 7 R3 RISK STATEMENTS – Common to all functionsExamples

  20. Imp-table mappings &Concepts • SD-Sales orders=vbak/vbap/vbpa-different types • SD-Shipping=vblk/likp/lips-different types • SD-Billing=konv/vbrk/vbrp/vbuk—different types,PRICING procedures • SD-Cust mast used in AR=knvp/knvv/kna1/knb1,sales organisation • MM-Purc requisition=eban/ebkn • MM-PO/SA=ekko/ekpo • MM-Deliv sch=eket/ekkn • MM-GR=mkpf/mseg/ekbe • MM-Mat Mast=marc/mlan/makt/mara/mbew • MM-PO inf record=konh/konp/eina/eine • MM-BOM-STKO/STOP • MM-Mat-types ,Material Movements,Material groups,Material types,purchase groups • FI-Paym=payr, Acctg=bkpf/bseg,-open/closed items-Cust=bsid/bsad,Vend=bsik/bsas,G/L=bsik/bsas • FI-Mast-G/L=skb1/ska1/skat,CC=csks/cskt,profit c=cepc/cskt • FI-Vend mast-used in AP=pur-lfm1/lfm2/gen-lfa1/lfb1/lfbk • FI-Document types-30 types- AB-acctg, BR-bank recp,KR-vend inv, RV-sale inv • FI-Acct types-5-A-Assets,D-Cust, K-Vend,M-Material, S-G/L , • FI-COA-Chart of accts

  21. Risks in –Revenue, expend,inventory cycles-overview -400+ Configuration :- SAP System land scope ,R/3 customizing ,organ objects,currencies, Tax procedures,charges in customer /vendor master.Document types ,depreciation keys, overhead cost allocation,PO release,Payment terms ,Pricing procedures in SD, credit controls,outgoing invoice posting/Free goods ,Automatic account determination. Authorisation :- Authorization objects ,user management,Tolerance groups,Work flows,Conflicting combinations,owned developed transactions,super user ,change management. Masters :- GL Masters-,Customer Masters,Vendor Masters, Material masters, Selling price,Tax codes,Quota arrangement,BOM. Procedure manuals:- Risk based queries (SD,MM,FI) Using SAP +MS access /AIS/Critical tools/tables/LDB-SAP—eg At Eicher— SAP-Querries=106+133+25, MSAcc-Querries=103+135+39 Audit Trails :- Configuration control,Authorization ( change management,Master & Application ( PO/Sales order credits /FI documents)

  22. Technical - Basis application infrastructure in SAP R/3. • 4 Key Basis Tools + Utilities • Installation Management guide-IMG- SPRO • ABAP/4 Work Bench &Transportation System ( Development + Test + Production.) • Computing center management system (CCMS) • - Utililities to monitor ,Control & Config. R/3 • …. Start up ,shut down,NW monitoring,security ,back ups,alerts trouble shooting,system Config.& system profile management,DBA, Profile security.) • D. Profile generator & security Adm.(PG&SA) • ( SUIM-Authorisation ,Information System,SU03-.Maintainence& Authorisation.

  23. Risks-in Installation management 1-The organisation Models :- SPRO & SCC4 –control production client settings.---Risks are: - Incorrect consolidation /Inadequate reporting /Incorrect MIS/Manual work around. Assigned to individual DB record – Internal No by SAP & external no by users (snro+suim+spro). 2-Critical no . Range:- 3-Modif of critical tables SAP –Tables –Other than X* Y* -Tables fields (SE16/SE11/DD03M)

  24. Risks in ABAP/4 work bench & transport(se38/sa38). • Change Control Procedure(Programme,Queries). • Development & Testing Servers. • Transport system testing. • Logs. • Emergency change procedures.

  25. Risks in - computing center management systems Batch processing control :- Batch input (SM35) ,Administration SM(64) Processing (SM36) Application server parameters:- a) Login IPW expiration 180 day b) Min pw length 6-8 (C) Login /fails to session end (incorrect pw-3 times) Locking transaction codes :- SM 01 (Users who have access to lock /unlock T.code) Restricted Password. :- Default PW , Name Permission table authorization with valid IP address (port 3200) SAP Router :- On Line Support systems :- (SAP Market place ,Web) Remote Access to SAP vendor Remote function call :- Programme inter faces (SM59) Use of E-SCORE , /EPIC /DMS/ITS/ etc

  26. Risks in -Profile Generator ( PGFC) :- • Security Admin probel ( Create /change/display) • Super user SAP* ,SAP all • Authorisation documentation (Biggest risks ) • Log + Trace file

  27. ERP implementation- Learnings for auditors Managing Incharge:- • Higher no of IS auditors than traditional profile auditors. • ERP trained –Auditors ( Functionally /Query) Audit Methodology:- • Risk assessment of audit universe (H/M/L) • Audit Manuals ( Query ) Excel ,M.S.Access • Segregation of duties. • User authorisation ( object level security) • Customized to fit each organisations’ unique needs. Role of Auditor :- • Integrated approach ( involvement in project early stage for design + Controls of systems ) • Pre implementation review – Before go live ( Business case , project risks,Application security design). • Post implement review – (Application) • Quality assurance – BPR Programme. Audit involvement in project :- • During selection & implementation ( Contribute towards establishing control environment ). Audit respons :- • Environment evaluation from risk prospective, • Subject specials ( SD,MM,Tax) & ERP competent team • Efficient audit • Audit universe ( Business application + Basis appl.infrastructure) • Use HELP

  28. Audit Excellence Model/Global best practices (COSO) • Mapping in COSO (Committee of sponsoring Organisation of tread way commission) • A :- 3 Objectives Identifications : 1 Operation • 2 Financial Reporting • 3 Compliances. • B :- 5 Components of Internal Controls :- • Control Environments :- Ethics,Values,Standards, • Risk Assessment :- Technology,Operation,Finance,Heat Maps( Risk Impact vs ‘ Exposure). • Control Activities :- KPI, Polices,Procedures,TQM,Physical,Safe guards. • Information & Communication :- Up & down , Adequacy ,Q,Timeliness • Monitoring & controls :- Internal controls, Physical verification, Overheads, MIS, . , Feed backs,Forums etc

  29. Audit Excellence Model/Global best practics (COBIT) • Mapping to COBIT (Control Objective for Information and related Technology ). • MAIN PROCESSESS No of Key Processes • Planning and orgainsation 11 • Acquisition & Implementation 6 • Delivery & Support 13 • Monitoring 4 LEVEL OF CONTROLS -ASSESMENT 0. Non Existance 1.Initial /Adhoc 2.Repeatable but person dependent 3.Defined –Standardized & documented. 4. Managed – Monitoring OK & Feed back system. 5. Optimized Control- Industry Best Practices

  30. New Directions in ERP Auditing :- • Risk Based Auditing linked to COSO& Cobit • Professional ethics& standards • AIS (Materiality )+ Queries development(Table down load+MS access) • Auditing tools- ACL/IDEA etc and many more • On –line continuous audit(Remote-desk top auditing) • E enabled applications (vendors/Dlrs, P2P, B2C) • Outsourcing – Competence/costs – benefit based • 100 % transaction Audit/AUDIT thr computers • Continuous enhancing ERP competencies • Qualified Auditiors-CIA/CISA….

  31. References www.theiia.org Internal auditing :- Guidance for the profession :- Code of Ethics :- International Standards for the professional practices of internal auditing :- Practice Advisories :- Development & Practice Aids. www.isaca.org IS Auditing standards IS Auditing guidelines IS Auditing Procedures Standards for Professional information system control http://www.sapgenie.com/ (google search based) http:/www.sap.com services / education http://www.sap.com/ Community Help ..sap.com

  32. Thank you Arvind Dang 98711 41333 Adang@eicher.co.in

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