Paper Solution 2008: Major Advantages Having An Internal Audit Department

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Paper Solution 2008

Q1) (a) Internal Audit is one of the techniques of control available to the top continuous i prove ent for better perfor ance"# $o hi!hli!htin! benefits accruin! to the top Answer: Internal audit is a tool of managerial control which is aimed at measuring, reviewing and evaluating the effectiveness of other controls. It is define as an appraisal activity for the review of operations at all levels of management. The basic objective of internal audit is to ensure the optimum use of all resources in order to achieve the organi ational objectives. Internal audit facilities'( A continuous review of internal accounting controls. !roper scrutiny of all the report for managerial purpose. Ascertainment of the e"tent to which the assets of the organi ation are accounted for any safeguard from losses to damages. #erifying the authenticity of the transactions. $tudying the operational efficiencies to promote efficiency and economy. %etermining whether the operating objectives, targets and related control procedures are promptly instituted and the degree to which the desired results are achieved. &"amining and ascertaining the e"tent to which established policies, plans and procedures are compiled with. Assessing the budgetary standard setting. ana!e ent# ana!e ent for ensurin! ent upon this state ent anal%&in! it

Major advantages Having An Internal Audit Department

It dispenses the need to employ e"ternal consultants to act as internal auditors hence saving large sum of money. This is even especially true when an internal audit department is properly run with well trained and e"perienced internal auditors'

The internal auditors are intimately ac(uainted with the business as they are continuously employed in the same concern and have access to much confidential information and to all levels of management. )ence, they really are special personnel who have very in depth inner *nowledge which can then contribute to the company'

The Internal Audit maintains a group of highly s*illed people available to cope with non+recurring and e"ceptional jobs which no many employee could deal with efficiently and effectively'

It ensures that the organi ation detailed standard policy and procedures are running smoothly. This compared to the e"ternal auditors, primary role of the ability to e"press the true and fair view of the clients, financial statements audit'

Internal auditors are invaluable in areas li*e operational audits, constant e"amination of internal chec* controls, the detailed application of normal auditing method and detailed review of the various type of management reporting'

-ast but not least, it provides an e"cellent training ground for future e"ecutives. Trainee personnel obtain intimate *nowledge of the business which they can study problems of all *inds at different levels.

Q1) (b) )hat are the consideration involved in hi!hli!htin! involved in re!ulatin! *+, function b% the top ana!e ent especiall% in vie- of challen!es faced on account of !lobali&ation.

Answer: .lobali ation means no barriers of trade between the countries across the globe. Anyone can freely trade the goods and services among the countries in the globe. This results into stiff competition in the global mar*et, in this competitive mar*et if the firm has to survive then it must be updated and the products of the firms must have the latest technology in it. In the situation li*e this if the /0% department is functioned by top management then this will be useful for the future of the organi ation because, top management can ma*e decisions very (uic*ly due to powers in their hand and the e"perience that they earn. If /0% decisions made (uic*ly and effectively then one can e"pect always updated and latest (uality product of the firm in the mar*et. %ue to the influence of trips 1trade related intellectual property rights2 the competition in global scenario became very tough before the top management there are various patents, copyrights acts available in these provisions to protect the /0% findings of one company that,s why there is heavy e"penditure is re(uired in /0% activities by the corporate. Also due to intense competition it is indeed to corporate to update their products and services with their rivals products and services. $ocio cultural differences among the mar*et territories influence the direction of /0% activities for e.g. incase of Annapurna iodi ed salt invented by )-- made an intensive research on preserving the iodine content in food coo*ed by indian receipies for that they have introduced stable iodine salt which has been patented in 34 countries which encapsulates iodine in aluminum and magnesium hydroid.

Thus, these are the considerations involved in regulating /0% function by the top management especilly in view of challenges faced on account of globali ation.

Q2) (a) /0plain subtle difference a on! the 1ana!e ent audit2 Qualit% audit and 3echnical audit. Answer: 1ana!e ent Audit 4 A management audit may be described as a systematic and objective appraisal of the (uality of management, aimed both at individual managers and toward the management team as an interloc*ing system of decision ma*ers. 5anagement audit concerned with the ways and means to perform specific tas*. 6or e.g. it involves the decision ta*en by the management, reporting and follow up procedures, direction given by the management to the company, leadership etc are e"amined in the management audit. Qualit% Audit 4 A systematic and independent e"amination to determine whether (uality activities and related results comply with planned arrangements and whether these arrangements are implemented effectively and are suitable to achieve the stated objectives. A (uality audit is concerned with the (uality of results of specific tas*s which involves various products and services. 6or e.g. it involves the (uality testing of the final output of the plant whether it is goods or services.

3echnical Audit 4 Technical audit can be described as systematic and independent e"amination of technical facilities of the company. It is concerned with the e"amining the technical specifications of the various entities of the company 6or e.g. factory layout, production or manufacturing facilities, locations, machineries, processes etc. comes under technical audit. Q2) (b) )hat are the challen!es faced in pricin! corporate services provided to business units operatin! as Profit $entre.

Q50 (a) )hat is 6t-o step transfer pricin! and profit sharin!7 approach. 8arrate thereof# Answer: (I) 3-o step transfer pricin!'

erits and de erits

The two step transfer pricing was introduced to overcome the problems caused by marginal cost, such as low morale in the selling division and lac* of motivation by the buying division, to ma"imi e the organi ational profits.

7nder the %ual !ricing: The selling division is credited with a price based on the total cost plus mar*up and The buying division is debited with marginal cost.

This means that the selling division is allowed to ma*e profit and the buying division has the correct information that enables it to ma*e the correct selling decision that will ma"imi e the organi ational profits. Advantages: 1i2 The company will increase production by eliminating inefficiencies leading to increased sales 0 profit. 1ii2 The 8T!, is simple to calculate and easy to understand

1iii2 1iv2 1v2

This method is ideal for pricing e"ports since the price have to be competitive. %ue to increased production, the variable cost per unit may also decrease. This method is clear for buying profit centre 0 there is no confusion over the T!

%isadvantages:+ 1i2 1ii2 1iii2 1iv2 It is difficult to brea* up semi variable e"penses into variable 0 fi"ed cost. It is difficult to understand if it is too comple". The selling profit centre has a distinct advantage since they recover their fi"ed costs and profit. The T! per month will change depending on the number of units transferred 0 profit is difficult to calculate. 1v2 1vi2 1vii2 There could be doubts on the accuracy of the cost 0 investment allocation. The selling profit centre is not affected by the company,s performance. There could be a conflict between 9usiness 7nits if the production or selling capacity is limited. ethod'

(II) Profit sharin!

This is another method of Transfer !ricing where upstream fi"ed costs and profits are involved. 7nder this method, 7nder this method, the product is transferred to the profit centre at standard variable cost. :nce the product is sold, the contribution earned is shared by the business units.

Advantages: 1i2 The profit of the company which is shared is real. 1ii2 It is easy to understand and calculate. 1iii2 It is fair to all business units.

1iv2 It follows marginal costing analysis which is scientific accounting system. 1v2 There is no competition between business unit. %isadvantages:

1i2 Argument over profit sharing of the business units will re(uire top management to resolve disputes. 1ii2 It is costly and time consuming 1iii2 It is against %e+;entralisation.

1iv2It may affect autonomy of 9usiness 7nit 5anager. 1v2 Allocation of profit does not give valid information on business unit profits. 1vi25anufacturing units profit depends upon the mar*eting units ability to sell and to sell at a proper price.

Q9) )hat is :alance Score $ard. ,escribed steps involved in i ple entation thereof2 difficulties and reasons for failure thereof2 if an%# Answer: (A) :alance Score $ard' %avid ;haudron defines 9$; as: A way of measuring organi ational, business unit or departmental viewpoints. A way of 9alancing long term and short term actions. A way of 9alancing different measures of success such as: 6inancial, ;ustomer, Internal operations and )uman /esources systems 0 %evelopment. A way of tying strategy to measures to action.

In short, 9$; is a business management concept that transforms both financial and non+financial data into a detailed roadmap, that help an enterprise measure performance and meet both short and long term objectives. (:) Steps in i ple entin! thereof'( (1) ,efinition of Strate!%:+ This is the initial step in the implementation of a 9$;. $ince the 9$; establishes a lin*age between strategy and operational action, the definition of an organi ation,s strategy should necessary be the starting point in defining the 9$;. The goals of the organi ation should be in writing at this stage and target should have been prepared.

<hile steps should be ta*en to develop the scorecard at the corporate level for single industry firms, in respect of multibusiness firms, the development should start at the business unit stage. )owever, in respect of the single industry firm, and each business unit scorecards should thereafter be prepared for functional levels and below. (2) ,efinition of easures of strate!%' This is the second stage involved in the implementation of a balance

score card. <hile developing measures for supporting the define strategy, it is important to focuse attention on a few measures which are considered critical for the organi ation. The reason underlying this is to ensure that management is not burdened with a large number of measures which could prove dysfunctional. There must be an efforts to establish cause and effect lin*age between the individual measures Perspective Innovation and learning perspective 1easures 5anufacturing s*ills

Internal business perspective

6irst > pass yield order cycle time

;ustomer perspective

;ustomer satisfaction survey.

6inancial perspective

$ales revenue growth

(5) Inte!ration of

easures into the

ana!e ent s%ste ' This is the =rd step in the implementation of the

9$;. At this stage, efforts must be made to integrate the 9$; with the culture, )/ !ractices in formal and formal structures of the organi ation. )owever, other system in the organi ation can create imbalance among the measures. (9) ;requent *evie- of easures and results' This is the last stage in the implementation of 9$;. The

senior management of the firm must review the 9$; constant basis. These review show the seriousness of management regarding the utility of these measures, indicates whether the strategy is being implemented in a

correct manner and the degree of success with which it is functioning, serve to align measures to changing strategies, and help in improving measurement.

($) *easons fro failure'( (1) 3rade off is difficult' <hile some firms prepare a single report by suitably combining financial and non+ financial measures and giving weights to each of the measures, no weights are assigned e"plicitly to the measures in most of the 9$;. ;onse(uently, ma*ing trade offs between non+financial and financial measures is difficult owing to the lac* of weights. (2) $orrelation bet-een non(financial easures and result is poor'( The underlying assumption in the

9$; is that the achievement of measures is the score card leads to future profitability. This is far from true. There is no certainly that accomplishing targets in any non+financial area would give rise to profitability in the future. Although it is theoretically possible to establish cause and effect relationship among the different measures, there is a poor understanding of the lin*age between the non+financial measures and financial performance. ;onse(uently, firms which adopt a 9$; should understand this problem. (5) ;ailure to update easures'( <hile changes and adoption of different strategies necessitates updation of

measures to bring about alignment, it is suprising that many firms lac* formal mechanism to update the measures. ;onse(uently, measures based on past strategy are being still developed by firms. Also, as employees become familiar with the use of measures they tend to build up inertia. (9) :ias to-ards financial results'( $enior management are highly trained conversant with measures used for judging financial performance of a firm. Apart from this, because of the pressure applied by the 9:% on behalf of the shareholders, the financial performance of a given priority. The 9$; is of+ten lin*ed up in a poor manner to an incentive scheme. As a result, the compensation of senior management is based on financial performance. 5oreover, there is a good deal of bias towards financial performance by senior manager who have made an effort to lin* rewards to measures in 9$;. This could lead to managers being more concerned about financial measures resulting in loss of goal congruence.

(<) 1ana!erial overload'( )ow many critical measures can one manager trac* at one time without losing? 7nfortunately there is no right answer to this (uestion e"cept it is more than @ and less than A4. It too few then the manager is ignoring measures that are critical to creating success. If it too many then the manager may ris* losing focus and trying to do too many things at once.

Q<) /cono ic =alue Added (/=A) is a technique of 1ana!e ent $ontrol2 considered b% so e as superior to that of *>I"# Anal%&e the state ent2 and !ive %our co ents2 quotin! illustrations?situations prevailin! in the :usiness )orld2 in support of %our ar!u ent#

Q@) /0plain *esponsibilit% $entre and

ap the process of evaluation thereof fro

one sta!e to another

-ith the help of illustration(cu (e0periences of the corporate# Answer: (A) *esponsibilit% $entre An organi ation is composed of a number of financial responsibility centres. These responsibility centres are created by management based on the needs of the business enterprise. A responsibility centres may be define as an organi ational unit which is headed by a responsible person namely a manager. )e is responsible for the activities of the unit. The responsibility centres is responsible for performing some function which is its output. In performing these functions, it uses resources or 8inputs,. The costs assigned to a responsibility centre are intended to measure the input that it consumes in a specific period of time, such as a wee* or a month. (:) 3%pes of *esponsibilit% $entres' 1i2 &"penses ;entre 1ii2 /evenue ;entre 1iii2 !rofit ;entre 1iv2 Investment ;entre (i) /0penses $entre'( &"pense centers are responsibility centers whose inputs are measured in monetary terms, but whose outputs are not. There are two types of e"pense centers. A. /n!ineered /0pense centers > It has following characteristics

a. Their inputs can be measured in monetary terms. b. Their output can be measured in physical terms. c. The optimum rupee value of input re(uired to produce one unit of output can be determined. 9. ,iscretionar% /0pense center'( <here the output centres cannot be measured in terms of money, they are *nown as 8%iscretionary &"pense ;entre,. The word 8%iscretionary must be properly understood. &"ample of such e"penses centres are human resource department, accounting department, legal department, industrial relations department etc. in other words all administrative and support functions fall within the ambit of discretionary e"pense centres. In case of discretionary e"pense centre an optimal relationship cannot be established between inputs 0 output

(ii) *evenue $entres' /evenue is a monetary measure of output. <here the output of responsibility centre is measured in terms of money, we have what is *nown as revenue centres. According to Anthony, in a revenue centre, outputs are measured in monetary terms, but no formal attempt is made to relate inputs 1i.e. e"pense or cost2 to outputs. &"amples of revenue centres are mar*eting organi ation where no responsibility for profit e"ists. :rders boo*ed and sales are compared with the budget to measures their performance. The primary yard stic* for judging the efficency of revenue centres is revenue earned vis a vis the budget. )owever, the head of the revenue centre is held responsible for e"penses incurred by his responsibility centre. .enerally, revenue centre managers do not have responsibility for estabilishing selling prices. Thus, in a revenue centre, there is no relationship between inputs and outputs. (iii) Profit $entres' In the language of Anthony when financial performance in a responsibility centre is measured in terms of profit, which is the difference between the revenue and e"penses, the responsibility centre is called a profit centre. Thus if the performance in a responsibility centre is measure in terms of both the revenue it earn and and the cost it incure, it is called as profit centre. !rofit as measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that points to different directions. The profit centre concept is powerful one. (iv) Invest ent $entre' An investment centre is a responsibility centre in which the manager is held responsible for the use of assets as well as for revenue 0 e"penses. It is therefore the ultimate e"tension of the responsibility idea. The manager is e"pected to earn a satisfactory return on capital employed in the responsibility centre.

5easurement of the investment base or capital employed gives rise to many difficult problems and the idea of the investment centre being new, there is considerable disagreement as to best solution of these problems.

($) ;lo- fro

one sta!e to another sta!e' 1A8A;A$3A*I8B ;A8$3I>8 /n!ineered /0pense $enters :ptimal relationship can be established

Inputs

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/upees

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!hysical

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Inputs

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/upees only for cost directly incurred

P*>$/SS

/upee for revenue

:ASI8/SS A8I3 Profit $enters Input are /elated to :utput

Inputs

:utputs

/upees ;ost

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:ASI8/SS A8I3 Invest ent $enters Input are /elated to ;apital &mployed

Inputs

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