How to Cook a Fresh Audit Program

January 2005

I was hanging out with an eight-year-old recently and she and I decided we needed a snack—some popcorn. So we went into the kitchen and she watched as I got a big pot out from under the stove and added oil and kernels. She gave me a funny look and said “What are you doing?” When I told her I was popping popcorn, she gasped, “IN A POT!!??!!”

After she tasted the results—I use real butter and Orville Redenbacher popcorn—she was a convert. Come to find out she was had only ever eaten quickie popcorn from a microwave. She didn’t even know that it would work on the stove top.

So, my question to you is “What are you doing?” Are you standing by the microwave screaming for it to finish and then eating the mediocre results or are you creating a fresh, risk-based audit program? The difference is palatable.

Last month we talked about how a fresh audit program is preferable to a canned audit program. Canned audit programs can lead you down the wrong path and waste your time. Canned audit programs don’t focus on risk—only customized, fresh programs do.

So How Do You Create a Fresh Audit Program?

1. Start Out with a Good Question

First, you start out by having a very clear audit objective (for more on that see past newsletters). Ideally, this audit objective is phrased as a question. For instance, “Is the food stamp program in compliance with federal grant regulations?” “Is the hospital guarding its medical equipment from theft?” “Is that Orville Redenbacher popcorn?”

2. Brainstorm How to Answer the Question

Your next step is to sit down and think about a variety of ways that you could get to the answer to that question. I suggest that you do this with others. Fellow auditors and the client may come up with some excellent ideas on steps that you can take to answer that question. For instance, if you are checking to see that the hospital is guarding the medical equipment from theft, you might ask the staff what they do to protect the equipment, review inventory and security procedures, see if the inventory records are accurate by physically tracking down several pieces of inventory, etc.

3. Consider Bang

After coming up with a list of possible audit steps—assess each step to determine two things:

• What kind of evidence is it going to yield?
• How many resources is it going to consume?

You want to perform the steps that give you the most bang for your buck. Bang comes from gathering strong evidence at the lowest possible cost.

The four types of evidence are, in order of their strength:

• physical
• documentary
• analytical
• testimonial

The stronger the evidence, the better—especially if you are supporting an audit issue or finding.

Physical evidence is actually seeing an item in inventory—say a box of toner. Documentary evidence is when you examine the invoice related to the box of toner. Analytical evidence is where you take data regarding the quantity of boxes of toner and trend it over time. And testimonial evidence is where you ask the accounting clerk to tell you now many boxes of toner are on hand. More about evidence in future e-zines.

Also, you want to perform steps that are efficient and economical. Ask yourself how much time each step is going to take and choose the steps that yield strong evidence with the lowest time investment. For some possible steps, it might not be about time; instead, it might be about money. Ask yourself how many resources that step is going to consume.

4. Add Reminders

And one last word (for this month anyway) about audit programs. Make sure that your audit programs remind you to gather evidence to support every element of your findings.

Most audit programs get us plenty of condition and criteria evidence, but fail to gather any juicy effects or even to dig in to find the cause. Add steps to your program—yes, literally add steps to your program—that say “For any audit issues/findings, gather evidence to support the effect.” “For any audit issues/findings, find out and gather evidence on the cause of the issue.”

I’ve seen auditors unable to complete their report when they get back to the office because they had failed to gather the cause and effect during fieldwork. That leads me to believe that the topic for next month’s newsletter should be the elements of a finding.