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Auditing in the

ERP
Environments


AGENDA
1. GENERAL OVERVIEW - ERP - Any Business,ERP solutions,SAP
R/3 Architecture & Application components
2. MODULES IN ERP-Logistics,Accounting Navigation of
Screen,Core Business Cycle in Manufacturing unit
3. 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

General Overview -Any Business
Purchase
Qty. Value
Vendor
Payable
FA

Sales
Order
Bill
Customer
Receivable

HR
Wages
Salary
Statut.
Bodies
Share
Holders
Other
Business
Associate
s
Production/Service Enterprise

ERP solutionsWhat do they enable
1-Managing & Supporting the resources of organisation
efficiently
-Employees
-Customers
-Vendors
-Share Holders
-Production Process
-Material & Services


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
ERP solutions-what do they enable

-ERP solutions are integrated ,Configurable,Real time
and often available as Cross Industry solutions
-Todays 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)
ERP solutions-what do they enable

SAP R/3 Architecture -3 Layers
Presentation
Layer
Application
Layer
Data Base
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)
-RDBMS (eg Oracle 9i with (Patch
level 4)-ABAP/4 Dictionary,source
&executable program.
-TCodes-se16/tstct=120314 nos
- Tables(DB02) =35650 nos

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

Modules in Logistics Navigation of Screen
1. Logistic General (LO)
2. Product Life cycle Management (PLM)
3. Sales & Distribution (SD)
4. Material Management (MM)
5. Logistics Execution (LE)
6. Production Planning & Control ( PP)
7. Plant Maintenance (PM)
8. Customer Service (CS)
9. Quality Management (QM)
10. Project System (PS)
11. Environment Health & Safety ( EH&S)
12. Retail
13. Agency Business (LO-AB)
14. Global Trade
15. Country Versions

Modules in Accounting - Navigation of Screen
1. Accounting General (AC)
2. Financial Accounting (FI)
3. My SAP Banking
4. Corporate Finance Management(CFM)
5. Treasury (TR)
6. Controlling (CO)
7. Investment Management(IM)
8. Project System (PS)
9. Incentive & Commission Management
10. Enterprises Controlling
11. Rural Estate Management
12. Public Sector Management
13. Flexible real Estate Management (RE-FX)
14. Production sharing accounting systems
15. Country version

Core Business Cycle in Manufacturing
Create
Customer
Relationship
Sales Qty.
Sales Order
Goods issue
Delivery Note
Our Invoice
A.R.
Collection
MRP Producing
Inventory
Create
Production
Order
Create
Vendor
Relationship
Production
Inventory

Manage-
ment
Handling
FGS
Raw Material
Management
Purchase
requisition
Purchase Order/
Scheduling
Agreement
Goods Receipt
Vendor Invoice
Verification
AP
Payment
Reporting

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
RISK ASSESMENT METHODOLOGY BY A QUANTIFICATION MODEL


R
I
S
K


I
M
P
A
C
T

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.

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.


Risk impact-Severity X Detection

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.)

Risk exposure

S.
N
o

Risk statement

Risk

Risk
exposur
e

Heat
zone

Severit
y


DetectabIlity

Impa
ct

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

S.
N
o

Risk statement

Risk

Risk
exposur
e

Heat
zone

Severit
y

DetectabIlity

Impa
ct

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

RISK STATEMENTS FI-Examples
S.
N
o

Risk statement

Risk

Risk
exposur
e

Heat
zone

Severit
y

DetectabIlity

Impa
ct

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 Common to all functions Examples
S
.
N
o

Risk statement

Risk

Risk
exposu
re

Heat
zone

Severi
ty

DetectabIlit
y

Impa
ct

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

Imp-table mappings &Concepts
SD-Sales orders=vbak/vbap/vbpa-different types
SD-Shipping=vblk/likp/lips-different types
SD-Billing=konv/vbrk/vbrp/vbukdifferent 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

Risks in Revenue, expend,inventory cycles-overview -400+
Configuration :-
Authorisation :-
Masters :-
Procedure
manuals:-
Audit Trails :-
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.
Authorization objects ,user management,Tolerance groups,Work
flows,Conflicting combinations,owned developed
transactions,super user ,change management.
GL Masters-,Customer Masters,Vendor Masters, Material masters,
Selling price,Tax codes,Quota arrangement,BOM.
Risk based queries (SD,MM,FI) Using SAP +MS access
/AIS/Critical tools/tables/LDB-SAPeg At Eicher
SAP-Querries=106+133+25, MSAcc-Querries=103+135+39
Configuration control,Authorization ( change management,Master &
Application ( PO/Sales order credits /FI documents)

Technical - Basis application infrastructure in SAP R/3.
4 Key Basis Tools + Utilities
A. Installation Management guide-IMG- SPRO
B. ABAP/4 Work Bench &Transportation System ( Development
+ Test + Production.)
C. 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.

Risks-in Installation management
1-The organisation
Models :-
2-Critical no
. Range:-
3-Modif of
critical tables
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).
SAP Tables Other than X* Y*
-Tables fields (SE16/SE11/DD03M)

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

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

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

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

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 :-
1. Control Environments :- Ethics,Values,Standards,
2. Risk Assessment :- Technology,Operation,Finance,Heat Maps( Risk Impact vs
Exposure).
3. Control Activities :- KPI, Polices,Procedures,TQM,Physical,Safe guards.
4. Information & Communication :- Up & down , Adequacy ,Q,Timeliness
5. Monitoring & controls :- Internal controls, Physical verification, Overheads, MIS, . ,
Feed backs,Forums etc

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

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.

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

Thank you