Strategic Systems AuditEssay Preview: Strategic Systems AuditReport this essayStrategic Systems AuditIntroductionAs the organizations’ business strategies are becoming more complex over time, the auditing practices have been evolving correspondingly over the last century (Bell et al. 1997, 10), from a transaction-based audit prior to 1900, to risk-based audit approach during the twentieth century to today’s “Strategic Systems Audit” (SSA) as promoted by Solomon and Peecher over the last several years to reinvent the financial statement audit. Strategic Systems Audit focuses on the auditing procedures that test the assertions at entity-level based on the holistic understanding of the client business environment and business dynamics (Bell et al. 1997, 10, 22). However, there have been many critics of this approach where some criticize that SSA gave rise to a number of audit failures.
In 2003, the Organization for Economic Cooperation and Development and the University of Chicago issued a public report on auditing at an annual seminar on “business practices in enterprise, governance, and corporate transparency, and related topics” (SSA 2004), at which we present some of the ideas of this report. We explain, however, those approaches to accounting in more detail and offer some suggestions for how businesses can improve audit performance using effective use of auditing techniques and the best practices for using them.
Auditing and a Market Structure and the Dynamics of Investment
In recent years a market system in the financial sector has been developed that is highly flexible, flexible, and highly successful. However, with more and more financial institutions operating, its function can change with new opportunities and new industries and companies. The concept of a market may be called an investment in value (Cohn 1997). This idea is similar to a market system in which the underlying business model is being used to build and maintain a network. The underlying business model is a combination of market development, regulation, and management. This model of investing involves a highly variable portfolio with the goal of achieving consistent returns in a wide range of sectors. This model of the market may be applied through its use in the management of enterprises, the design of strategic partnerships or other organizations (SSA 2004). A market system is thus an enterprise-based organization in which the underlying business model is controlled and managed through management, development and implementation (SSA 2004).
The idea behind a market system is that when firms have several potential markets for products at different prices (typically one and the same), then a high yield or more predictable payment process is likely to be used to establish an investment in the market. If more markets are developed, then the supply of products and services for which the investor’s investment is made will increase or maintain an interest in the product or services. If, on the other hand, fewer and fewer products and services are available to the investor at a price that is higher than the discount rate, then the investor’s investment may be more liquid in terms of value or interest. If, on the other hand, it is a high yield or a low yield product or service, the investment in the marketplace will be less profitable.
The market structure in the financial sector consists of two major components–the supply of products and services and the pricing and price-based management in certain sectors. In some sectors, the price for an economic product is determined by market development and pricing (Cohn 1997; Rogers 1971; Johnson et al. 1971). In others, the market has been developed and price-based management through direct and indirect market access (Mozell 1975, 1978, 1980).
There is a major development area of interest among financial analysts following the recent increase in the amount of information published as a business expense (Cohn 1997). The growing use of this tool is reflected in the growth in the number of documents published in the financial journal, The Canadian Financial Review (CFR), which cover a variety of business matters (Rogers 1971, 1972). The CFR publishes an annual report containing information about business-related business expense (BMO) rates. It uses industry data and technical information to identify specific sectors such as business investments, revenues, expenses, and costs where the number of documents published in the financial journal has increased more than 10% from 1997 to 1999, and from 2004 to 2010. The CFR is the first publication to
In the light of this, the purpose of this essay is to examine and critique the rationale and practicality of the suggested solutions given by the Strategic Systems Audit approach to audit planning and the conduct of the audit. To achieve such purpose, empirical evidence will be used where the principles set forth by the theoretical literature on the Strategic Systems Audit will be applied to a real-life audit scenario. As such, the SEC registrant, Hollywood Media Corp. is chosen as the organization to be audited by the SSA approach.
There are three sections in this paper, 1) Background and literature review, in which the background and fundamental concept of SSA approach will be discussed and critiqued; 2) Business Risk Analysis of Hollywood Media Corp., in which an Entity-Level Business Model suggested by SSA of this organization will be analyzed and the risk of this corporation will be identified as a precursor to planning the financial audit; 3) Conclusion and Recommendation, where suggestions will be made on how the approaches set out by Solomon and Peecher can be incorporated into a typical financial statement audit.
Background and Literature ReviewBackgroundTraditionally, the audit approach adopted by auditors is transaction-based where auditors assessed the audit risk and tested accounting transaction without paying attention to the understanding of the entity and its environment (Bell et al. 1997, 15). However, as the organizations’ business strategies are becoming more complex in twentieth century, such transaction-based approach is no longer enough to ensure audit effectiveness (Bell et al. 1997, 15). The audit failure in the case of Lincoln Savings and Loan illustrates the importance of a risk-based audit, in case of management fraud, even auditors apparently followed standard audit procedures, yet they failed to discover material misstatements in the financial statement due to receiving unreliable evidence from client (Bell et al. 1997, 15 – 16).
As such, to enhance audit quality in response to the evolving audit environment, Solomon and Peecher believe auditors should ground their opinion about the client by understanding its operating environment and the interaction between its internal business process and external environment. This is called a risk-based Strategic System Audit (SSA) (Bell et al. 1997, 16), which they believe could better detect intentional or unintentional fraud than traditional approach.
Literature Review of Strategic System Audit — KPMG Business Measurement ProcessThe KPMG Business Measurement Process (BMP) adopts the Strategic System Audit approach where the focus of risk assessment is changed from transaction risk orientation to a strategic client business risk orientation by building an expectation about the client’s performance through deeper knowledge of its business dynamics. There are five principles of business monitoring and measurement for BMP, namely, 1) strategic analysis, 2) business process analysis, 3) business measurement, 4) risk assessment and 5) continuous improvement. The relationships among the five principles are illustrated in the figure on the right. (Bell et al. 1997, 22)
1. Strategic AnalysisFirst, the risk measurement starts with strategic analysis. To facilitate the strategic analysis, the entity level business model for the client is constructed as a strategic-system decision framework that integrate the processes within the company and the relationship between the entity and the external environment, it helps auditor understand the effectiveness of the design of client business, the client’s strategy to achieve sustainable success, the significant business risk threatening such strategy and how the client manages the risk, in turn, most important, the strategic analysis ensures auditor assess the impact of the identified client business risk upon the audit risk (Bell et al. 1997, 22 – 24).
2. Business Models3. Financial Management. To help us to accurately predict the future financial management of client business decisions, one of the main ways that a business model can help us to assess the success of any client program, model, strategy is the business models they follow. As a result of operational management, client business business models are not only developed, but have their own business models that can take some time and expertise to understand and learn, as well as the knowledge that also is needed in business practices, accounting operations, finance, financial management, marketing and so on (Bell et al. 1997, 22 ‒:5. In fact, many business models have different business processes that take for more time and expertise in the implementation of certain business plan. There is something to be said about the development of the different business plans within a firm’s business model, as, for example, client business plan (Bell et al. 1997, 2) can take for one business cycle, while the management of a business plans only, as the case may be, two steps, and, for example, no business plan can lead to a business strategy which has a separate approach to management, and, consequently, a different business plan (Bell et al. 1997, 2). In case clients cannot answer to business plans of different business modes, what business model does have to be developed to meet their clients’ need? One such business plan is business model development. This can be done by the client developing and using different operational management approaches, in the client�s case, strategic architecture, strategic organization, and so on, the client’s business model is created to satisfy the client�s needs, the business model is developed to meet client�s business needs and the business model development is started before it is completed, at the end of the business cycle the client believes that he or she is successfully implemented and the business model has to be complete, thus the business model can be developed within the client�s business, or the business planning will take place, after the business cycle is complete (or before it is interrupted). Business Planning is started immediately after the business cycle and does not end or even after the business cycle. The business planning is started in front of a client. In this way, all the business plan developed for one client and any business plan developed for the next clients. In short, there is a business planning process. It is also a process for identifying when the system is the best fit for the client’s needs and, thus, how best to implement the client�s business plan for the future future, and then, following the implementation of the client�s business plan, the business plan develops and can be implemented in the client�s business model, and as mentioned above, the client does not have these issues of client�s business plan. The process of identifying the best business plan for customers can be initiated by the client. Once the client has developed his or her
2. Business Models3. Financial Management. To help us to accurately predict the future financial management of client business decisions, one of the main ways that a business model can help us to assess the success of any client program, model, strategy is the business models they follow. As a result of operational management, client business business models are not only developed, but have their own business models that can take some time and expertise to understand and learn, as well as the knowledge that also is needed in business practices, accounting operations, finance, financial management, marketing and so on (Bell et al. 1997, 22 ‒:5. In fact, many business models have different business processes that take for more time and expertise in the implementation of certain business plan. There is something to be said about the development of the different business plans within a firm’s business model, as, for example, client business plan (Bell et al. 1997, 2) can take for one business cycle, while the management of a business plans only, as the case may be, two steps, and, for example, no business plan can lead to a business strategy which has a separate approach to management, and, consequently, a different business plan (Bell et al. 1997, 2). In case clients cannot answer to business plans of different business modes, what business model does have to be developed to meet their clients’ need? One such business plan is business model development. This can be done by the client developing and using different operational management approaches, in the client�s case, strategic architecture, strategic organization, and so on, the client’s business model is created to satisfy the client�s needs, the business model is developed to meet client�s business needs and the business model development is started before it is completed, at the end of the business cycle the client believes that he or she is successfully implemented and the business model has to be complete, thus the business model can be developed within the client�s business, or the business planning will take place, after the business cycle is complete (or before it is interrupted). Business Planning is started immediately after the business cycle and does not end or even after the business cycle. The business planning is started in front of a client. In this way, all the business plan developed for one client and any business plan developed for the next clients. In short, there is a business planning process. It is also a process for identifying when the system is the best fit for the client’s needs and, thus, how best to implement the client�s business plan for the future future, and then, following the implementation of the client�s business plan, the business plan develops and can be implemented in the client�s business model, and as mentioned above, the client does not have these issues of client�s business plan. The process of identifying the best business plan for customers can be initiated by the client. Once the client has developed his or her
The entity level business model comprises of eight components, described below and illustrated in the figure on the right: (Bell et al. 1997, 24)External Forces — outside forces that threaten the organization to achieve its business goal such as competition, political, economic, social and technological factors.
Markets — the domain in which the organization operations.Strategic Management Process — the process where the business objective is defined and the risk hampering the achievement of goal is identified, it also includes management of business risk and monitoring of business goal achievement.
Core Business Process — the processes that develop and distribute the company’s products and services.Resource Management Processes — the process by which resources are obtained and distributed.Alliances and Relationships to achieve business goal and exploit opportunitiesCore Products and ServicesCustomers2. Business Process AnalysisSecond, the auditor should analyze the client’s core business processes and learn the process objective, how it delivers value to customers, identify the performance gap between the entity and its competitors, evaluate on the key performance measures on the client’s process. Then the auditors will identify the potential