Match the audit plan to the operating cycle

The operating cycle, a financial issue

The operating cycle represents an essential stake in the financing of an organization, being a circuit which begins when the company buys what it needs to produce and ends once the receipts are received. This time lag forces the organization to hold financial resources to live on credit, in a way, between the moments it spends on supplies, and the moment it receives the proceeds of its sales, and therefore cash. The operating cycle thus induces a need for financing, better known under the name of working capital requirement, given that it is the surpluses of long-term resources over long-term jobs which cover it. An organization can therefore find itself in financial difficulty when its financial means are insufficient compared to the sums committed to have the human and material means necessary to carry out the activities. The ability to collect debts, as well as the ability to negotiate long deadlines for paying invoices, matters more than the level of revenue level.

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As proof, this can increase sharply and quickly, which commercially is a good sign, and the company find itself… in default of payment by being unable to finance a sudden increase in its operating cycle. just like the ability to negotiate long deadlines for paying invoices, matters more than the level of turnover. As proof, this can increase sharply and quickly, which commercially is a good sign, and the company find itself… in default of payment by being unable to finance a sudden increase in its operating cycle. just like the ability to negotiate long deadlines for paying invoices, matters more than the level of turnover. As proof, this can increase sharply and quickly, which commercially is a good sign, and the company find itself… in default of payment by being unable to finance a sudden increase in its operating cycle.

 Components of the operating cycle

The operating cycle obviously interests the financial partners of the organization, as well as the owners, being decisive for the continuation and development of activities. The internal auditor will find there a most relevant source of information for drawing up his multi-year audit plan, given its cross-functional nature and composition. The operating cycle in fact associates several sub-cycles which are all phases concentrating the processes necessary for their realization. These steps are basically the following:

• supply , which includes all activities intended for the acquisition of materials, goods and services;
• production , which consists of transforming supplies into finished products, or providing services, by combining the factors of capital and labor;
• the sale of finished products and services;
• Recovery for the collection of receivables owed by customers.

Matching the multi-year audit plan to the operating cycle

By listing the processes already audited according to the components of the operating cycle (supply, production, sales, and collection), internal audit has an overview of its work according to the financial and commercial requirements specific to its organization. Without supplanting the relationship between audit missions and risk management, this breakdown sheds additional light on the auditor for planning his interventions to contribute added value. Indeed, the company is all the more able to minimize its need for working capital, and therefore to reduce its financial costs, if it uses optimized processes during the operating cycle. Internal Audit and control system reviews in UAE, by ensuring the effectiveness and efficiency of the resources committed, can participate in this optimization. For this, it must audit all the processes directly attached to the components of the operating cycle. Given the budgetary constraints, the exercise can only be carried out over several years, hence the need for a multi-year audit plan which, in addition to being backed by risk management, is also supported by the cycle. operating.

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Created on Apr 6th 2022 06:57. Viewed 142 times.

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