Management control is a process of assuming that resources are obtained and used effectively and efficiently in the accomplishment of the organizations objectives. It is a fundamental necessity for the success of a business and hence from time to time the current performance of the various operations is compared to a predetermined standard or ideal performance and in case of variance remedial measures are adopted to confirm operations to set plan or policy.Features of management control systemTotal System: MANAGEMENT CONTROL SYSTEM is an overall process of the enterprise which aims tofit together the separate plans for various segments as to assure that each harmonizes with the others and thatthe aggregate effect of all of them on the whole enterprise is satisfactory. Monetary Standard:MANAGEMENT CONTROL SYSTEM is built around a financial structure and allthe resources and outputs are expressed in terms of money. The results of each responsibility centre inrespect to production and resources are expressed in terms of a common denominator of money. Definite pattern:It follows a definite pattern and time table. The whole operational activity is regular andrhythmic. It is a continuous process even if the plans are changed in the light of experience or technology.Coordinated System:It is a fully coordinated and integrated system. Emphasis: Management control requires emphasis both on the search for planning as well as control. Bothshould go hand in hand to achieve the best results.Function of every manager : Manager at every level as to focus towards future operational and accountingdata, taking into consideration past performance, present trends and anticipated economic and technologicalchanges. The nature, scope and level of control will be governed by the level of manager exercising it.Existence of goals and plans: MANAGEMENT CONTROL SYSTEM is not possible without predetermined goals and plans. These two provide a link between such future anticipations and actual performance.Forward looking : MANAGEMENT CONTROL SYSTEM is on the basis of evaluation of past performancethat the future plans or guidelines can be laid down. Management Control involves managing the overallactivity of the enterprise for the future. It prevents deviations in operational goals.Continuous process:It is a continuous process over the human and material resources. It demands vigilanceat every step. Deciding, planning and regulating the activities of people associated in the common task of attaining the objectives of the organization is a the primary aim of MANAGEMENT CONTROL SYSTEM. People oriented : It is the managers, engineers and operators which implement the ideas and objectives of the management. The coordination of the main division of an organization helps in smoother operations andless friction which results in the achievement of the predetermined objectives.Scope of controlMANAGEMENT CONTROL SYSTEM is an important process in which accounting information is used toaccomplish the organizations objectives. Therefore the scope of control is very wide which covers a very widerange of management activities. Policies control : Success if a business depends on formulation of sound policies and their proper implementation.Control over organization:It involves designing and organizing the various departments for the smoothrunning of the business. It attempts to remove the causes of such friction and rationalizes the organizationalstructure as and when the need arises.Control over personnel:Anything that the business accomplishes is the result of the action of those peoplewho work in the organization. It is the people, and not the figures, that get things done.Control over costs:The cost accountant is responsible tocontrol cost sets, coststandards, labour materialand over heads. He makes comparisons of actual cost data with standard cost. Costcontrol is a delicate taskand is supplemented bybudgetary control systems.Control overtechniques:It involves the use of bestmethods and techniques so as to eliminate all wastages in time, energy and material. The taskis accomplished by periodic analysis andchecking of activities ofeach department with a viewto avoid aneliminate all non-essential motions, functions and methods.Control over capital Expenditure: Capital budget is prepared for the whole concern. Every project is evaluated in terms if theadvantage it accrues to thefirm. For thispurpose capital budgeting, projectanalysis, study of cost of capital etc are carried out.Overall control: A master plan isprepared for overall control and all the departments of the concern areinvolved in this procedure.What is concept of free cash flow as applied to the organization?explain the process of computation?We define net cash flow asnet income plus non cash adjustment which typically means net income plusdepreciation though thatcash flows cannot bemaintained over time unless depreciated fixed assets are replaced.So management is not completely free to use its cash flows however itchooses. Therefore we define the termfree cash flows.Free cash flowis the cash flow actually available for distribution to investor after the company has made all the investment in fixed assets andworking capital necessary to sustain ongoingoperation. When we studied incomestatement in accounting the emphasis was probably onthe firms netincome, which is accounting profit.However the value of companys operation is determined by the stream of cash flows that theoperations willgenerate now and in the future. To be more specific, the value ofoperation depends on allthe future expectedfree cash flows, defined as after- tax operating profit minus the amount of newinvestment in working capital andfixed assets necessary to sustain the business. Therefore the way for managers to make their companies morevaluable is to increase their free cash flowUses of FCF:1.Pay interest to debt holders, keeping in mind that the net costto the company is the after tax interestexpense.2.Repay debt holders, that is, pay off some ofdebt.3.Pay dividends to shareholders.4.Repurchase stock from shareholders.5.Buy marketable securities or other nonoperating assets.In practice, most companies combine these five uses in such a way that thenet total is equal to FCF. Forexample, a company might pay interest and dividends, issue new debts, also sell some of its marketablesecurities. Some of these activities are cashoutflows (paying interest and dividends) andsome are cash inflows(issuing debt and selling marketable securities), but the net cash flowfrom these five activities is equal to freecash flows.Computation of free cash flows:Eg:Suppose the company had a 2001 NOPAT of$170.3million and depreciation is only the non cashcharge whichis $100million then its operating cash flow in 2001 would beNOPAT plus any non cashadjustment on thestatement of cash flows.Operating cash flow =NOPAT+depreciation (noncash adjustment)= $17.03 + $100= $270.3Company has $1,455million operating assets, at the end of2000, but $1,800 at the end of2001.it made a netinvestment in operating assets ofNet investment in operating assets = $18, 00 -$1,455 = $345millionIf netfixed assets rosefrom $870millionto $1000millionhowever company reported$100millionofdepreciation. So itsgross investment in fixed assets would beGross investment = netinvestment + depreciation= $130 + $100= $230millionCompany free cash flows in 2001 wasFCF = operating cash flow gross investment in operating assets= $270.3 - $445= -$174.7millionAn algebraically equivalent equation isFCF = NOPAT -Net investment in operating assets= $170.3- $345= -$174.7millionEven though company had a positive NOPAT, its very high investment in operating assets resulted in anegative free cash flow. Because free cash flow is what isavailable for distribution to investor, not only wasthere nothing for investors, but investor actually had to provide additional money to keep the business ongoing.A negative current FCF not necessarily bad provided it is dueto the high growth or tosupport the growth. Thereis nothing wrong with profitable growth; even it causes negative free cash flow inthe short termWhat is balance scorecard? what is the process of implementation and difficulties of implementation?TheBalanced Scorecard(BSC) is a performance management tool which began as a concept formeasuring whether the smaller-scale operational activities of acompany are aligned with itslarger-scaleobjectives in terms of visionand strategy.By focusing notonly on financial outcomes butalso on theoperational, marketing and developmentalinputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turnhelps organizations act in their bestlong-term interests.Organizations wereencouragedto measurein addition tofinancial outputswhat influencedsuchfinancial outputs. For example, process performance, market share / penetration, long term learning andskillsdevelopment, and soon.The underlying rationale is that organizations cannotDirectly influence financial outcomes, asthese are"lag" measures, and that the use of financial measures alone to inform the strategic control of the firm isunwise.Organizations shouldinstead also measure those areas wheredirect management intervention is possible. Insodoing, the early versions ofthe Balanced Scorecard helped organizations achieve a degree of "balance" inselection of performance measures. In practice, early Scorecards achieved this balance by encouraging managersto select measures from threeadditional categories orperspectives: "Customer," "Internal Business Processes"and "Learning and Growth."The balance scorecard suggests that weview the organization from four perspectives, and todevelopmetrics, collect data and analyze it relative toeach of these perspectivesThe learning andgrowth perspective:To achieve our vision, how will we sustain ourability to change and improve?The business process perspective :To satisfy our shareholders andcustomers what businessprocesses must we excel at?The customer perspective :To achieve our vision, how should we appear to ourcustomer?The financial perspective :To succeed financially, how should weappear to ourshareholders?

Wecansummarizetheimplantation ofa balanced scorecard in fourgeneral steps;1.Definestrategy.2.Definemeasureofstrategy.3.Integratemeasures intothe managementsystem.4.Review measures and result frequently.Each of these stepsis iterative, requiring the participation of senior executive and employees throughout theorganizationDefine StrategyThe balance scorecard builds a link between strategy and operational action. As aresult it is necessary to beginthe process ofdefining a balanced scorecard by defining theorganization goals areexplicit and what that targetshave been developed.Define Measures of StrategyThe next step is to develop measures in supportof the articulate strategy. It is imperative that the organizationfocuses on a few critical measures at this point; otherwise management will be overloaded with measures. Also, itis important that the individual measures be linked with each other in a cause effect mannerIntegrated Measures into the management systemThe balanced scorecard must be integrated with theorganization formal andinformal structure, its culture, and itshuman resources practice. While the balanced Scorecard gives some means forbalancing measures, the measurescan still become unbalanced by otherssystem in the organization such ascompensation policies that compensatethe manager strictly basedon financial performance.Review Measures and resultFrequentlyOnce the balance scorecard is up and running it must beconsistently reviewed by senior management. Theorganization shouldbe looking for thefollowingHow do the outcome measures say the organization is doing?How do the driver measures say theorganization is doing?How has theorganizations strategy changed sincethe last review?How has thescorecard measures changed?The most important aspects of these reviews are as follows;They tell management whether the strategy isbeing implemented correctly andhowsuccessfully the strategy is working.They show thatmanagement isserious about the importance ofthese measures.They maintain alignment of measure to everchanging strategies

Difficulties in implementing BalancedScorecardThe following problems unless suitably dealt with, couldlimit the usefulness ofthe balanced scorecard approach:Poor correlation between nonfinancial measures andresult.Fixation on financial result. Nomechanism for improvement.No mechanism forimprovement.Measures overloadPoor Correlation between Nonfinancial measures and resultSimply put there isno guarantee that future profitably willallow targets achievement in any nonfinancial area.This is probably thebiggest problem with the balanced scorecard because thereis an inherent assumption thatfuture profitability does follow from achieving the scorecard measures, identifying the causeeffect relationshipsamong the different measures iseasier said than done.This will be a problem with anysystem that is trying to develop proxy measures for future performance. Whilethis does not mean that the balanced Scorecard should be abandoned it is impthat comp adopting such a systemunderstand that the links between nonfinancial measures and financial performance are stillpoorly understood.Fixation on Financial ResultsAs previously discussed not only are most senior managers well trained and veryadept with financial measuresbut they also mostkeenly feel pressure regarding the financial performance of theircomp. Shareholder are vocaland the board of directors often appliespressure on the stakeholders behalf .this pressure often overwhelms thelong term uncertain payback of the nonfinancial measures.Non mechanism for ImprovementOne of the most overlooked pitfalls of the balanced scorecard is that acompany cannot achieve Stretch goals ifthe Company has nomechanism for improvement .Unfortunately achieving many ofthese goals require completeshifts in the way that business isdone yet the company often does not have mechanism to make those shifts .Themechanism available takes additional resource and requiresa changed in thecompany culture. These changes donot happen overnight nor do they respond automatically to a new stretch targets. Inertia often works against thecompany employees are accustomed to a selflimited cycle of setting targets, missing thosetargets and readjustingthe targets to reflect whatwas actually achieved. Without a method for makingimprovement, improvements areunlikely to consistently happen no matter how good the stretch goal sound.Measurement overloadHow many critical measures can one manager track at one time without losing? Unfortunately there is no rightanswer to this question except it is more than 1and less than 50. Ittoo few then the manager is ignoring measuresthat are critical to creating success. If it too many then the manager may risklosing focus and trying to do too many things at once.

What are different methods to measure profits of a profit center in organization? what are different measure each measure to convey to managers?

When financial performance in a responsibility center is measured interms of profit, whichis the differencebetween the revenues and expenses, theresponsibility center is called a profitcenter.Profit as a measure of performance is especially useful since it enables senior management to use onecomprehensive measure instead ofseveral measures that often point todifferent directions.There are two types of profitability measurements in a profit center, just as there are for theorganization as awhole. There is, first, a measure ofmanagement performance,in which the focus is onhow well the manageris doing. This measureis used forplanning, coordinating andcontrolling the day-to-day activities of the profit center. Second, there is a measure ofeconomic performance, in which the focus ison how well the profit centeris doing as an economic entity. The message given by these twomeasures may be quite different.

Types of Profitability measures:In order toevaluate the economic performance of a profitcenter, one must use netincome after allocating allcosts. However, in evaluating the performance of manager, anyof five different measures ofprofitability can beused.1)Contribution Margin:The logic behind using contribution margin as a measure is that fixed expenses arenot controllable by the manager, andtherefore he should focus onmaximizing the spread between revenueand expenses. But the problem with this is that somefixed costs are controllable and all fixed costs arepartially controllable. A focuson the contribution margin tends todirect attention away from this responsibility2)Direct Profit:This measure shows the amount that the profit center contributes to the general overhead andprofit of thecorporation. It incorporates all expenses incurred in ordirectly traced to the profitcenter,regardless of whether these items are entirely controllable by the profit center manager. A weakness ofthismeasure is that itdoes not recognize the motivational benefit of charging headquarters costs.3)Controllable Profit:Headquarters expensesare divided into twocategories: controllable and non-controllable. The controllable expenses are controlled bybusiness unit manager. Consequently, if these costsare included in the management system, the profit will be after the deduction of all expenses that areinfluenced by profitcenter manager.4)Income before Taxes:In this measure, all corporate overhead is allocated to profit centers. The basis ofallocation reflects therelative amount of expense that isincurred for each profit center. Ifcorporateoverheads are allocated to profit centers, budgeted costs,not actual costs, should beallocated. Then theperformance report will show anidentical amount in the budget and actual columns forsuch overheads.5)Net Income:Here, companies measure performance of domestic profit centers at thebottom line, theamount of net income afterincome tax. There are twoarguments 1) Income after taxis constant percentageof the pretax income, so there is noadvantage in incorporating income taxes 2) many decisions that haveimpact on income taxes are made at headquarters, and it is believed that profit center manager should not bejudged by theconsequences ofthese decisions.What is Interactive Control?Interactive controlalerts management of strategic uncertainties either troubleor opportunities that becomethebasis for manager toadapt to arapidly changing environments by thinking about new strategies.1.A subset of themanagement control information thathas a bearing on the strategic uncertainties facing the buss becomes the focal point.2.Seniorexecutive takesuch information seriously.3.Managers at alllevels of the orgfocus attentionon theinformation produced by the system.Explain some of the factors which influence top management style and implication style on top management control?The management control function in an organization is influenced by the styleof senior management. The style of the chiefexecutive officer affects the management control process in the entire organization. Similarly, the style ofthe business unit manager affects the unit'smanagement controlprocess, and thestyle of functional department managers affects the management control process in their functional areas.Differences in Management StylesManagers manage differently. Some rely heavily on reports and certain formal documents; othersprefer conversations and informal contacts. Some are analytical; others usetrial and error. Some are risk takers; others are riskaverse. Some are process oriented; others are resultsoriented. Some are long-term oriented; others are short-term oriented. Someemphasize monetary rewards; others emphasize a broader set of rewards.Management styleis influenced bythe manager's background andpersonality. Background includes things like age, formal education, and experience in a given function, suchas manufacturing ,technology, marketing, or finance. Personality characteristics include such variables asthe manager's willingness to take risks and hisor her tolerance for ambiguity.Implications for Management ControlThe various dimensions of management style significantly influence the operation of the controlsystems. Even if the same reports with the same set of data go with the same frequency to the CEO,two CEOs with different styles woulduse these reports very differently to manage thebusiness units.Style affects the management control process how theCEO prefers to usethe information, conductsperformance review meetings, and so on which in turnaffects how the control system actually operates, even if the formal structure does notchange under a new CEO.In fact, when CEOs change,subordinates typically infer what the new CEO really wantsbased on how heor she interacts during the management control process.Personal versus Impersonal ControlsPresence of personal versus impersonal controls inorganizations is an aspect of managerial style. Managers differ on how much importance they attach toformal budgets and reports as wellas informal conversations and other personal contacts. Some managers are "numbers oriented"; they want a largeflow of quantitative information, and they spend much time analyzing this information and derivingtentative conclusions from it. Other managers are "people oriented"; they look at afew numbers, butthey usually arrive at their conclusions by talkingwith people, judging the relevance and importanceof what they learn partly ontheir appraisal of the other person.They visit various locations and spend time talking with both supervisors and staff to get a sense ofhow well things are going.Managers' attitudes toward formal reports affect the amount of detail they want, thefrequency of thesereports, and even their preference for graphs ratherthan tables of numbers, and whether theywantnumerical reports supplemented with written comments. Designers ofmanagement control systemsneed to identify thesepreferences and accommodate themTight versus Loose ControlsA manager's style affects the degree of tight versus loose control inany situation. The manager of a routine production responsibility center can be controlled relatively tightly or loosely, and the actual control reflects the style of the manager's superior. Thus, the degree of tightness orlooseness often is not revealed by the content ofthe forms or aspects ofthe formal control documents, rules, orprocedures. It isa factor of howthese formal devices are used. The degree of looseness tends toincrease at successively higher levels in the organization hierarchy :higher-level managers typically tend to payless attention to details and more tooverall results. The style of the CEOhas a profound impact onmanagement control. If a new senior manager with a different style takes over, the system tendsto change correspondingly. It might happen that the manager's style is not agood fit with theorganization's management control requirements. If the manager recognizes this incongruity and adapts his orher style accordingly, the problem disappears. If, however, the manager is unwilling orunable to change, the organization will experienceperformance problems. The solution in thiscase might be to change themanagerWhat are the objectives of Transfer Pricing?Transfer price if designed appropriately has thefollowing objectives:It should provideeach segment with the relevant information required to determine theoptimum trade-offbetween company costs and revenues.It should induce goal congruent decisions-i.e. the system should be so designed that decisions that improve business unit profits willalso improve company profits.It should help measure the economic performance of the individual profit centers.The system should be simple to understand and easy toadminister.What is ideal transfer price in thesituations ofa.LimitedMarketb.Shortage of Capacity intheindustryThe ideal transfer price in the situations of :a.LimitedMarketBy limited market it means that the markets for buying and selling profit centers may be limited.Even in case of limited market the transfer price that is ideal or satisfies the requirement of a profit centersystem is the competitive price. In case if a company isnot buying or selling its product in anoutside marketthere are some ways to find the competitive price. They are as follows:1. If published market prices are available, they can be usedto establish transfer prices. However, these should be prices actually paid in the market-place and the conditions that exist in the outside market should be consistent withthose existing within the company .For example, market prices that areapplicable torelatively small purchases are not valid inthis case.2. Market prices are set by bids. This generally can be done only ifthe low bidder has a reasonable chance ofobtaining the business.One company accomplishes thisby buying about one-halfof a particular group of products outside the company and one-half inside thecompany.The company then puts all of theproducts out to bid, but selects one-half to stay inside. The companyobtains valid bids, because low bidders can expect to get some ofthe business. By contrast, if a companyrequests bids solely to obtain a competitive price and does not award thecontracts to the low bidder, itwill soon find that either no onebids or that the bidsare of questionable value.1.If the production profit centersells similar products in outside markets, it is often possible to replicate acompetitive price on the basis of the outside price.2.If the buying profit center purchases similar products from the outside market, it may be possible to replicate competitive prices for its proprietary products. This can be done bycalculating the cost ofthe difference in design and otherconditions of sale between thecompetitive products andthe proprietaryproducts.a.ShortageofCapacityintheindustryIn this case, the output of thebuying profit center is constrained and again company profits may not beoptimum. Some companies allow either buying profit center to appeal a sourcing decision to acentral person orcommittee. Inthis scenario a buying profitcenter could appeal a selling profitcenters decision to sell outside.The person/group would then make a sourcing decision on the basis ofthe companys best interests. In everycase the transfer price would be thecompetitive price . In other words, the profitcenter is appealing only thesourcing decision.Even if there are constraints on sourcing, the market price is the best transferprice. If the market price can be approximated, it isideal transfer price.When do you useCost Based Transfer Pricing?We use cost-based transfer pricingif there isno way ofapproximating valid competitive price.Transfer prices may be set up onthe basis of cost plusa profit, even though such transfer prices may be complexto calculate and the resultsless satisfactory than amarket-based price.Two aspects need to be considered for cost-based transfer pricing:1.The cost basis:The usual basis is the standard cost. Actual costs should not be used because productioninefficiencies will then be passed onto the buying profit center. If the standard costs areused, there is a needto provide an incentive to set tight standards and to improve standards.2.The profit markup:In calculating the profit markup, there alsoare two decisions:What is the profit markup to be based?The simplest and most widely used base ispercentage of costs. Ifthis base is used, however, noaccount is taken of capital required. Aconceptually better baseis a percentage ofinvestment.But there may be a majorpractical problem incalculating the investment applicable to agiven product. If thehistorical cost of the fixed assets is used, new facilities designed to reduce prices could actually increase costs because old assets are undervalued.What is the level of profit allowed?The second problem with the profit allowance is the amount of the profit. The conceptual solution is to base the profit allowance on the investment required to meet the volume needed by the buying profit centers. The investment would be calculated at a standard level, withfixed assets and inventories atcurrent replacement costs. This solution iscomplicated and, therefore, rarely usedin practice.Transfer Pricing is not an accounting tool comment with anillustration?If a grouphas subsidiaries that operate indifferent countries with different tax rates, manipulating the transferprices between the subsidiaries can scale down the overall tax bill of the group. Forexample the tax rate inCountry A is 20% andis 50% in Country B.In the larger interest of the group, it wouldbe advisable to showlower profits in Country B and higher profits inCountry A. For this, the group canadjust the transfer price insuch a way that the profits inCountry A increase and that in Country Bget reduced. For this the group should fixa very high transfer price if the Division inCountry A provides goods to the Division inCountry B. This willmaximize the profits in Country A and minimize the profits in Country B. The reverse will betrue if the Divisionin Country A acquires goods from the Division inCountry B.There is also a temptation to set upmarketing subsidiaries in countries with low taxrates and transfer products to them at a relatively low transfer price.Transfer price is viewed as a major international tax issue. While companies indulge in all types of activities tolower their tax liability, the taxauthorities monitor transfer prices closely in anattempt to collect the full amount of tax due. For thisthey enter into agreements whereby tax is paid on specific transactions in one country only.But if companies set unrealistic transfer price to minimize their tax liabilities and the same isspotted by the tax authority, then the company is forced to pay tax in both countries leading to double taxation. There have been instances where companies havefixed unrealistic transfer prices. The first caserelates toHoffman La Roche that imported two drugs Librium and Valium into UK at pricesof 437 pounds and 979pounds per kilo respectively. While the taxauthorities in UK accepted the price,the Monopolies Commission did not accept the company's argument, since the same drugs were available from an Italian firm for 9 pounds and 28 pounds per kilo.The company's lawyers argued the case before the Commission on two grounds viz.1. The price was not seton cost but on whatthe market would bear and2. The company had incurred an R&D cost that wasincluded in the price.These arguments did not go well with the Commission and the company wasfined 1.85 million poundsfor the manipulative practices adopted while fixing the transferprice.The second case is of Nissan. The company had falsely inflated freight charges by 40-60% toreduce the profits.The manipulation helped the company to hide tax tothe tune of 237 million dollars. The next year Nissan was made to pay 106 million dollars in unpaid tax inthe USA because the authorities felt that part of their US marketing profits were being transferred to Japan, astransfer prices on import of cars and truckswere too high. Interestingly the Japanese tax authorities took adifferent view and returned the doubletax. With a view toavoid such cases fromrecurring, Organisation forEconomic Cooperation and Development issued some guidelines in 1995. These guidelines aim at encouraging world trade. They evolved what came to be known as the arm's length price. The principle states that the transfer price would be arrived aton the basis as ifthe two .companies are independent and unrelated. The price isdetermined through:Comparable Price Method where the price is fixed on the basis ofprices of similar products or anapproximation to one.Gross Margin Method where a gross margin isestablished and applied to the seller's manufacturing cost. In spite of all these efforts, ithas to be admitted that setting a fair transfer price isnot easy. So the onus of proving the price has been puton the taxpayer who is required to produce supporting documents. If the taxpayer fails to do this he isrequired to pay heavy penalty. For example, in USA, failure to provide documentary evidence results in a 40%penalty on the arm's length price. In UK thepenalty is to the tune of100% of any tax adjustment. Other countries are also in the processof evolving tight norms for the same. Countries across the globe also allow the taxpayer to enter into an Advance Pricing Agreement whereby dispute can be avoided and so alsothe costly penalty of double taxation and penalty.Concept of profit centre in NPO?By law NPO areallowed to make profit but are restrained from distributing it to owners andmanagement This way they arenon profit making organizations (from the owner's point of view). Suchorganizations include religious, charitable and educational trusts. Prime goalof management control systems insuch organization is enhancing the service spread first and if possible then cost control rather and than operatingefficiency. Onthe financial front, they enjoy manyconcessions from the government such astaxes, subsidies,grants etc soalso they attract special control fromthese assisting institutes.Characteristics:1. Absent of profit performance measure leads to problems in assessing the efficiency of the organization. If theorganization shows large net income itmay be because that NPO may not beproviding the services to theextent possible/ expected. If the organization shows net losses itmay show the NPO facing riskof bankruptcy.Hence non availability of clear-cut performance yardstick makes the problem ofcontrol worst.2. NPO's have contributed capital Plant: NPOs do not have shareholder as itsstakeholder. The capitalcontribution to the business comes by way of contributions to assets such asbuilding and equipments. Secondkind of contribution could be in the form ofmonetary assistance, which entitles the organization to reap theinterest on it keeping theprincipal amount intact.3. Operating Assets represents the resources used for running day today activities. And the contributed assetsare not allowed to mix up withthe operating assets.4. Fund accounting: NPO need to keep twotypes of financial statements one set for contributed capital andanother for operating capital. The nature ofthe contributed capital is beyond control ofthe management andtherefore management concentrates oncontrolling the operatingassets/investments.5. Governance: Usually NPO aremanaged by trusts, whoexercise less control on operational matters. Henceperformance control is lessdemanding from owners' point of view and difficult from the point of viewofmanagement.These characteristics posedifficulty in pricing of theproduct/services -what could beappropriate price? Usuallyit is set attotal/full cost. The more stress expected on allocation of scare resources. Though not stricter control,but a sense of control canbe built among the managers by way ofusing budgets for various activities andexpenses. Non profit basismakes performance evaluation quite impossible. Butone can make thethings easierby concentrating on adherence to costsbudgets, and enhancing the service base.Management control in matrix structures?

Matrix organizational structureassigns multiple responsibilities to thefunctional heads. Evaluation ofperformance ofsuch organizational entities is very difficult. Though they offereconomies of using scaresfunctional staff, it poses problems ofcasting the individual responsibility. This form of organization isverycomplex, from the point ofview of management control system.At the end we mustnot forget that the management control system is for the organization and not theorganization exists formanagement control system. Onehas to moldand remold the management control systemto suit thegiven organization structure A citation by Anthony is worth noting inthis regard.Usually in anadvertisement agency, account supervisors are shiftedfrom oneaccount to another on periodic basis,this practice allows the agency tolook at theaccount from the perspectives of different executives. However taking in toconsideration the time lag of resultrealization insuch services is quite large. And this may pose problem of performance assessment of a particular executive. This does not meana control system designer shouldinsist on abandoning therotation system of the executives .Matrix structure offers advantages such asfaster decision making process, efficiency and effectiveness but simultaneously itmay pose problems suchas added complexity in control function, assignment ofresponsibility and authority etc.What do you understand byGoal Congruence? What are the informal factors that influence goalcongruence?This term is used when thesame goals are shared by top managers and their subordinates. This isone ofthe many criteria used to judge the performance of an accounting system. The system can achieve its goal moreeffectively andperform better when organizational goals can be wellaligned with the personal andgroup goalsof subordinates and superiors. The goals of the company should be thesame as the goals ofthe individualbusiness segments. Corporate goals can becommunicated by budgets, organization charts, and jobdescriptions.Goal Congruence- MeaningIndividuals work in different hierarchies and handle different responsibilities & mayhave different goals. Butthey must come together as far as Companys Goal isconcerned (there action must speak Cos language.)Goal CongruenceExample 1 The HR manager has devised aHR training program to enhance the skills of itssales personnel,with an objective to enhance their productivity But if company is in strategic need of attaining a certain salesvolume in a given quarter, it can not doso on account of nonavailability of personnel.Example 2The marketing department has planned an impressive advertising campaign, which promises goodreturns, But say due to cash crunch Companys current financial position may not let to losethe stringsExample 3 Production Manager may get a good applause for reducing cycle time; But at what cost? Buildingup the high inventory i.e. higher investment in current assets. While doing so he just overlooked the financialinterest of the company. After completing the given activity in moreefficient manner the concerned managerscores the point/s on his score card. Whether his actions are leading to scoring of points on the organizationsscore card too? if it isso then only one cansay the organization is marching towards a common goal.Every individual working in an organization has got his own motive to dothe work. Individuals act in their owninterest, based on their own motivations. And it is always not necessarily consistent with the Cos goal. Ina goalcongruence process, the actions the people areled to takein accordance with their perceived self interest arealsoin the best interest of the organization i.e. Goal congruence ensures that the action of manager taken in their best interest is also in the best interest ofthe organization.Informal factors that influence goalcongruence:External factors set of attitudes of the society, work ethics ofthe societyInternal factors (Factors withinthe organization)Culture-Common beliefs, shared values, normsof behavior & assumptionsImplicitly accepted andexplicitly built into.What is a responsibility centre? List andexplain different types of Responsibility Centers?Responsibility centers:A responsibility center is an organization unit that is headed by a manager who isresponsible for its activities. Ina sense, a company is acollection of responsibility centers. Each of which isrepresented by boxon the on theorganization are responsibility centers forsection work shifts orother small organization units. At ahigher levelare departments or business units that consist of several of these smaller units plusstaff and management peoplethese larger units are also responsibility center. And from the stand point of senior management and the board ofdirectors, the whole company is responsibility center although the term is usually usedto refer to unit within the company.

Types of Responsibility Centersa)CostCenterCost centers are divisions that add to the cost ofthe organization, but only indirectly add to theprofit of the company. Typical examples include Research andDevelopment, Marketing andCustomer service. Companies may choose to classify business units as costcenters, profit centers, or investment centers. There are some significant advantages toclassifying simple, straightforward divisions ascost centers, since cost iseasy tomeasure. However, cost centers create incentives for managers tounderfund their units inorder to benefit themselves, and this underfunding may result inadverse consequences for the company asa whole (reduced sales because of badcustomer service experiences, forexample). Because the cost centre has anegative impact on profit (at least on the surface) itis a likely target for rollbacks and layoffs whenbudgets are cut. Operational decisions in acontact centre, for example, are typically driven by costconsiderations. Financial investments in new equipment, technology and staff are oftendifficult to justify tomanagement because indirect profitability is hard to translate tobottom-line figures. Business metrics are sometimes employed to quantify the benefits ofa cost centre and relate costs and benefits to those of theorganization as awhole. In a contact centre, for example, metrics such as average handle time, service level and cost per call are used in conjunction with othercalculations tojustify current or improved fundingb)Profit CenterA responsibility centre is called a profit centre when the manager is held responsible for both costs(inputs)and revenues (outputs) and thus for profit. Despite the name, a profit centre can exist innonprofits organizations(though it might not be referred to assuch) when a responsibility centre receives revenues for its services. Aprofit centre is a big segment of activity for which bothrevenues and costs are accumulated: A centre, whose performance is measured in termsof both - the expense itincurs and revenue it earns, is termed as aprofit centre.The output of a responsibility centre may either be meant for internal consumption or for outside customers. Inthe latter case, the revenue is realized when the sales are made. That is, when theoutput is meant for outsiders,then the revenue will be measured from the price charged from customers. If the output ismeant for otherresponsibility centre, then management takes adecision whether to treat thecentre as profit centre ornot. In fact,any responsibility centre can be turned into a profit centre by determining a selling price for its outputs. Forinstance, in case of a process industry, the output of oneprocess may be transferred to another process at a profitby taking into account themarket price. Such transfers will givesome profit tothat responsibility centre.Although such transfers donot increase the Companys assets, theyhelp in management control process.c)InvestmentCentreAn investment centre goes a step further than a profit centre does. Itssuccess is measured not only by itsincome but also by relating that income to its invested capital, as in aratio of income to the value of the capitalemployed. In practice, theterm investment centre is not widely used. Instead, the term profit centre is used indiscriminately to describe centers thatare always assigned responsibility for revenues andexpenses, but mayor may not be assigned responsibility for the capital investment. It is defined as aresponsibility centre in whichinputs are measured in terms of cost /expenses and outputs are measured in terms of revenues and inwhichassets employed are also measured. Aresponsibility centre is called an investment centre, when itsmanager is responsible for costs and revenues as well asfor the investment in assets used by hiscentre. He is responsible formaintaining a satisfactory return on investment i.e. asset employed inhis responsibility centre. The investmentcentre manager has control over revenues, expenses andthe amounts invested in thecentres assets. Themanager of an investment centre is required to earn a satisfactory return. Thus, return on investment (ROI) isused as theperformance evaluation criterion in aninvestment centre. He also formulates the credit policy, which has a directinfluence on debt collection, and the inventory policy, which determines theinvestment in inventory.The Vice President (Investments) of a mutual funds company may be in charge of anInvestment Centre. In theInvestment Centre, the manager in charge isheld responsible for the properutilization of assets. He isexpectedto earn asatisfactory return onthe assets employed inhis responsibility centre. Measurement ofassets employedposes many problems. It becomesdifficult to determine the amount of assetsemployed in a particularresponsibility centre. Some of the assetsare in the physical possession of the responsibility centre while for someassets it may depend upon other responsibility centers or the Head Office ofthe company. This is particularlytrue of cash or heavy plant andequipment. Whether such assets should beincluded in the figure of assetsemployed of the responsibility centre and if included, at how much value, is a difficult question. On account ofthese difficulties, investment centers aregenerally used only forrelatively large units, which have independent divisions, both manufacturing and marketing, fortheir individual products.Internal control

Internal control is defined as a process affected by anorganization's structure, work and authority flows, people and managementinformation systems,designed to help theorganization accomplish specific goals or objectives.[1]It isa means by whichan organization's resources are directed, monitored, and measured .It plays animportant role in preventing and detecting fraud and protecting the organization's resources, bothphysical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, andcompliance with lawsand regulations. At the specific transaction level, internal control refers tothe actions taken toachieve a specificobjective (e.g., how to ensurethe organization's payments to third parties arefor valid services rendered.)Internal control procedures reduce processvariation, leading to morepredictable outcomesDescribing Internal Controls:Internal controls may be described in terms of: a) the objective they pertain to; and b)the nature of the controlactivity itself.Objective categorizationInternal control activities are designed to provide reasonable assurance that particular objectives are achieved, orrelated progress understood. The specific target used todetermine whether a control is operating effectively iscalled the control objective. Control objectives fall under several detailed categories; in financial auditing, theyrelate to particular financial statement assertions, but broader frameworks are helpful toalso capture operational and compliance aspects:1.Existence(Validity):Only valid orauthorizedtransactions areprocessed (i.e., noinvalidtransactions)2.Occurrence (Cutoff): Transactions occurred during the correct period or were processed timely.3.Completeness: All transactions are processed that should be (i.e., no omissions)4.Valuation: Transactions are calculated using an appropriate methodology or are computationallyaccurate.5.Rights & Obligations: Assets represent the rights of the company, and liabilities its obligations, as of agiven date.6.Presentation& Disclosure (Classification): Components offinancialstatements(or other reporting) areproperly classified (by type oraccount) and described.7.Reasonableness-transactions or results appear reasonable relative to other data or trends.Activity categorizationControl activities may also bedescribed by the type or nature of activity. These include (but are not limited to):Segregation of duties- separating authorization, custody, and record keeping roles tolimit risk offraudor error by one person.Authorization of transactions - review ofparticular transactions byan appropriate person.Retention of records- maintaining documentation to substantiate transactions.Supervision or monitoring of operations -observation or review of ongoingoperational activity.Physical safeguards - usageof cameras, locks, physical barriers, etc. toprotect property.Analysis of results, periodic andregular operational reviews, metrics, and otherkey performanceindicators(KPIs).IT Security - usage of passwords, accesslogs, etc. to ensure access restricted to authorized personnelWhat is a Non- Profit Organization? How is the performance of this organization evaluated?A nonprofit organization, as defined by law, is an organization that cannot distribute assets or incometo, or for the benefit of, itsmembers, officers, or directors. The organization can, of course, compensate itsemployees, including officers andmembers, for services rendered and forgoods supplied. This definition doesnot prohibit an organization from earning a profit; it prohibits only the distribution of profits. A nonprofitorganization needs to earn amodest profit, on average, to provide funds for working capital and for possiblerainy days.Performance evaluationof nonprofitorganizationFor any organization, the mostimportant reasons to measure performance are to improve effectiveness andtoacquire information that will allow the organization to driveits agenda forward. Ifthe motivation for doingevaluation remains outside an organization, the evaluation will have limited impact. To doperformanceassessment effectively, an organization must commit toadopting a cultureof measurement, because acceptancemust come from senior management, staff, funders, andboard members alike.Board self-evaluationMembers of the Board of Directors should regularly evaluate the quality of their activities on a regular basis.Activities might include staffing the Board with newmembers, developing the members into well-trained andresourced members, discussing and debating topics to makewise decisions, and supervising the CEO.Probablythe biggest problem with Board self-evaluation is that itdoes not occur frequently enough. As a result, Boardmembers have no clear impression of how they are performing as members of agoverning Board. Poor Boardoperations, when undetected, can adversely affectthe entire organization.Staff and volunteer(individual) performance evaluationMost of usare familiar with employee performance appraisals, which evaluate the quality of anindividualsperformance intheir position in theorganization. Ideally, those appraisals reference the individuals written jobdescription and performance goals to assessthe quality of theindividuals progress toward achieving the desiredresults described in those documents. Continued problems inindividual performance often arethe results of poorstrategic planning, program planning and staff development. If overall planning isnot done effectively,individuals can experience continued frustration, stressand low morale, resulting intheir poor overallperformance. Experienced leaders have learned that continued problems inperformance are not always the resultof a poor workethic the recurring problems may be the result of larger, more systemic problems in theorganizations.Program evaluationProgram evaluations have become much more common, particularly because donors demand them toensure thattheir investments are making a difference intheir communities. Program evaluations aretypically focused on thequality of the programs process,goals or outcomes. Anineffective program evaluation process oftenis theresult of poor program planning programs should be designed sothey can be evaluated. It can also be theresultof improper training about evaluation. Sometimes, leaders do not realize thatthey have the responsibility toverify to the public that the nonprofit is indeed making a positive impact in the community. When programevaluations arenot performed well, orat all, there islittle feedback to the strategic andprogram planningactivities. When strategic and program planning are done poorly, theentire organization isadversely effected.Evaluation of cross-functional processesCross-functional processes arethose that spanseveral systems, such as programs,functions and projects.Common examples of major processes include information technology systems and quality management ofservices. Because these cross-functional processes span so manyareas of theorganization, problems intheseprocesses can be theresult of anytype of ineffective planning, development and operating activities.Organizational evaluationOngoing evaluation of the entire organization is amajor responsibility of all leaders inthe organization. Leaderssometimes do notrecognize the ongoing activities ofmanagement toactually include organizational evaluations but theydo. The activities oforganizational evaluation occur every day. However, thoseevaluations usuallyare not donesystematically. As aresult, useful evaluation information is not provided tothe strategic andprogram planning processes. Consequently, both processes can beineffective because they donot focus on improving the quality of operations inthe workplace.Why Balance Score Card is considered superior to other methodsof Performance Appraisal?Prepare Balance Score Card for any organization you are familiar with.What is theBalanced Scorecard?The rationale for the development ofthe Balanced Scorecard was agrowing dissatisfaction with traditional, financial measures ofperformance. These measures sufferfrom a numberof serious drawbacks in that they take ashort-term, lagged (i.e., historic) view of performance. The shifttowards flexible, leanproduction/service systems inmany firms hasstrengthenedthe requirement forperformance measurementsystems to become more broadlybased, incorporating both non-financial andexternal measures of performance.According to Kaplan and Norton,the Balanced Scorecard provides a better assessment ofperformance as it"enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring theintangible assets they need forfuture growth".The original scorecard designed by Kaplan andNorton contained four key groupingsof performance measures.These four groupings, called perspectives by Kaplan andNorton, were considered sufficient to track thekeydrivers of both current and future financial performance of the firm. The perspectives focused on theachievements ofthe firm infour areas: namely the financial, customer, internal business process andinnovation/learning perspectives. The four perspectives can be represented asan interlinked hierarchy. Thefirms strategy underlies the whole scorecard, as the measures for each of the four perspectives are drawn from this strategyTo obtain asatisfactory overview ofperformance, thescorecard will require a mixof lagging and leading(forward looking) measures. Financial measures tend to belagged and consequently, the measures chosen fortheother perspectives will need to includeleading measures. In general, outcome measures tend to belagged, forexample, current market share is theresult of past decisions and consequently is a lagging measure. Thus thechallenge in designing a Balanced Scorecard isto choose driver measures whichlead changes in theoutcomemeasures in the non-financial perspectives and which ultimately drive thefinancial measures.Once the firms objectives have been agreed and the appropriate outcome and driver measures chosen for each ofthe perspectives, firm and managerial performance is assessed bycomparing actual attainment on eachmeasurewith the target set for that measure.Explain different organizational goals. Comment ongoal of shareholder valuemaximization inparticular.GoalsAlthough we often refer to the goals of a corporation, a corporation does not have goals; it is an artificial beingwith no mind or decision-making ability of its own. Corporate goals are determined by the chief executiveofficer (CEO) of the corporation, with the advice of other members of senior management, and they are usuallyratified bythe board ofdirectors.Inmany corporations, the goals originally set by the founder persist forgenerations. Examples are Henry Ford, Ford Motor Company; Alfred P. Sloan, General Motors Corporation;Walt Disney, Walt Disney Company; George Eastman, Eastman Kodak; and Sam Walton, Wal-Mart.Economic GoalsShareholder's value, Earning per share and Market value, all relate to maximizing shareholder's value, which isnot a desirable goal,because what is 'maximum' isdifficult to determine. Although optimizing shareholder valuemay be one goal, but there are other stakeholders in the business also such as customers, employees, creditors,community and so on. Again, shareholder value isusually equated with the market value ofthe company's stock.But market value is not an accurate measure of the worth of shareholders' investments. Besides, such value canbe obtained only when the share is traded inthe stock exchange.It is interesting to note that Henry Ford's operating philosophy was 'satisfactory profit', not 'maximumprofit'. He said, "A reasonable profit is right, but not too much. So, it hasbeen my policy to force the price of thecar down as fast as production would permit and give the benefit to the user and laborers, with resulting surprisingly enormous benefit ourselves "Othergoalssuchasaddingnewproducts,orproduct lineornewbusinessactuallyindicatenormal organizationalgrowth.Social GoalsHowever, everyorganization hasitsshareofresponsibilitytowardsthe localcommunitywhereitissituated, and the public at large. Itis very difficult to incorporate in Management Control System such goals astaking pride in an organization which cares for the society and renders service to the public. Of course, anyconcrete structural programme indicating its operational expenses, methods of providing service, personnelinvolved in rendering service and the nature of the service in details can, however, be mentioned through anappropriate system.ProfitabilityIn a business,profitability is usually the mostimportant goal.Return on investment can be foundby simply dividing profit (i.e., revenues minus expenses) byinvestment,but this method doesnot drawattentionto thetwo principal components: profit margin andinvestmentturnover.In the basic form of this equation, "investment" refers to the shareholders' investment, which consists ofproceeds from the issuance ofstock, plus retained earnings.One ofmanagement's responsibilities istoarriveat therightbalance betweenthe twomain sourcesoffinancing: debt and equity. The shareholders' investment (i.e., equity) is the amount of financing that was notobtainedbydebt,thatis,byborrowing.Formanypurposes,thesourceoffinancingisnotrelevant;"investment" thus means the total ofdebt capital and equity capital."Profitability" refers to profits in the long run, rather than in the current quarter or year. Many currentexpenditure (e.g., amounts spent on advertising or research and development) reduce current profits but increaseprofits over time.Some CEOs stress only part of the profitability equation. Jack Welch, former CEO of General ElectricCompany, explicitly focused on revenue; he stated that General Electric should not be in any business in whichits sales revenues were not thelargest or the second largest ofany company in that business. This doesnot implythat Welch neglected the other componentsof the equation; rather, it suggests that in his mind there was a close correlation between market share andreturn oninvestment.Other CEOs, however, emphasize revenues for a different reason: For them, company size is agoal. Such apriority can lead to problems. If expenses are too high, the profit margin will not give shareholders a goodreturn on their investment. Even if the profit margin is satisfactory, the organization may still not earn a goodreturn if the investment is too large.Some CEOs focus onprofit either as a monetary amount or asa percentage of revenue. This focus does notrecognizethe simple fact thatif additional profits areobtained byagreaterthan proportionalincrease ininvestment, each dollar of investment has earned less.Maximizing Shareholder ValueIn the 1980sand 1990s theterm shareholder value appeared frequently in the business literature. This concept isthat the appropriate goal of a for-profit corporation is to maximize shareholder value. Although the meaning ofthis term was not always clear, it probably refers to the market price of the corporation's stock. We believe,however, that achieving satisfactory profit is a better wayof stating a corporation's goal, for two reasons.First, "maximizing" implies that there is away of finding the maximum amount that a company can earn. Thisis not the case. In deciding between two courses of action, management usually selects the one it believes will increase profitability the most. But management rarely, if ever, identifies all the possible alternatives and theirrespective effects on profitability. Furthermore, profit maximization requires that marginal costs and a demandcurve be calculated, and managers usually do not knowwhat these are. If maximization were the goal, managerswould spend every working hour (and many sleepless nights) thinking about endless alternatives for increasingprofitability; life is generally considered to be too shortto warrant such an effort.Second, although optimizing shareholder value may be amajor goal, it is byno means the only goal formostorganizations. Certainly a business that does not earn a profit at least equal to its cost of capital is not doing itsjob; unless it does so, it cannot discharge any other responsibilities. But economic performance is not the soleresponsibility of a business, nor is shareholder value. Most managers want to behave ethically, and most feel anobligation to other stakeholders in the organization inaddition to shareholders.Example: Henry Ford's operating philosophy was satisfactory profit, not maximum profit. He wrote let mesay right here that I do not believe that we should make such an awful profit on our cars. A reasonableprofit is right, but not too much. So it has been my policy to force the price of the car down as fast asproductionwould permit,and givethe benefitstothe usersandlaborers-withresulting surprisinglyenormous benefits to ourselves.By rejecting the maximization concept, we do not mean to question the validity of certain obvious principles.A course ofaction that decreases expenses without affecting another element, such asmarket share, is sound. Sois a course of action that increases expenses with a greater than proportional increase in revenues, such asexpanding the advertising budget. So, too, are actions that increase profit with a less than proportional increasein shareholder investment (or, of course, with no such increase at all), such as purchasing a cost-saving machine.These principles assume, in all cases, that the course of action is ethical and consistent with the corporation'sother goals.An organization's pursuit of profitability is affected by management's willingness to take risks. The degree ofrisk-taking varies with the personalities of individual managers. Nevertheless there is always an upper limit;some organizations explicitly state that management's primary responsibility is topreserve the company's assets,with profitability considered a secondary goal. TheAsian .financial crisis during 1996-1998 istraceable, inlargepart, to the fact that banksin Asia's emerging markets made what appeared to be highly profitable loans withoutpaying adequate attention to the level ofrisk involvedMultiple Stakeholder ApproachOrganizations participate in three markets: the capital market, the product market, andthe factor market. A firmraises funds in the capital market, and the public stockholders are therefore an important constituency. The firmsellsits goodsand servicesinthe product market,and customersform akey constituency. Itcompetes forresourcessuch ashumancapital andraw materials inthefactormarketand theprimeconstituencies arethecompany's employees and suppliers and the various communities in which the resources and the company'soperations are located.The firm hasa responsibility to allthese multiple stakeholders-shareholders, customers, employees, suppliers,and communities. Ideally, its management control system should identify the goalsfor each ofthese groups anddevelop scorecards totrack performance.Example: In 2005, theAcer Group, headquartered in Taiwan, was one ofthe largest computer companiesThe Company subscribed to the multiple stakeholder approach and managed its internal operations tosatisfy the needs of several constituencies. To quote Stan 'Shih,-the founder, "The customer is number 1,the employee is number 2, the shareholder is number 3. I keep this message consistent with all mycolleagues. I even consider the company's banks, suppliers, and others we do business with are ourstakeholders; even society is stakeholder. I domy best to run thecompany that way."Lincoln Electric Company is well known for its philosophy that employee satisfaction was more importantthan shareholder value. James Lincoln wrote: "The last group to be considered is the stockholders who ownstockbecausetheythinkitwillbemoreprofitablethaninvestingmoreinanyotherway.The absenteestockholder is not' of any value to the customer or tothe worker, since he has no knowledge of nor interest inthecompany other than greater dividends and advance in the price of his stock." Donald F. Hastings, chairman andchief executive officer, emphasized that thiswas still the company's philosophy in1996.Explain and illustrate with one example differences between 3 forms ofinternal audit Financial, Operational & Management. Financial AuditFinancial Audit is ahistorically oriented, independent evaluation performed by internal auditor orexternalauditor for the purposeof attesting to thefairness, accuracy and reliability of the financial data, providingprotection for the entity's assets; evaluating the adequacy andaccomplishment of thesystem (internal control)designed, provide for the aforementioned Fairness and Protection, Financial data, while notbeing the onlysource of evidence, are the primary evidential source. The evaluation isperformed on a planned basis ratherthan a request".Institute of Internal Auditor:-Financial audit takes care of the protective aspect of the business and it does notnormally carry outconstructive appraisal function ofthe business operations. It helpsin detection and prevention offraud. It alsoverifies whether documentation andflow of activities arc inconformity with the internal control system introduced and developed within the organization. It helps coordinating with statutory auditor tohelp them inproper discharge of their function. Besides, financial audit alsoensures compliance with statutory laws especially in financial andaccounting matters.

Objectives of Financial Audit:To see thatestablished accounting systems andprocedures have been complied withTo see that proper records have been maintained for the fixed assets ofthe Concern to look into correctnessof the financial data andrecords along with correctness ofthe accounting procedure followed.To see whether scrap,salvage and surplus materials have beenproperly accounted for etc.To see thatinternal control system has been workingproperly.To see that any abrupt variation in sales, purchases etc.; with respect to immediate previous year are notdue to anyirregularityTo see that the credit control has been strictly followed.To see that all payments have been made with proper authorization and approval. .To see that preparation of salary and wage pay roll hasbeen properly done.The opinion expressed by the auditors shall be based onverified data, reference to ich shall alsobe made here and, if practicable, included after the company hasbeenforded on opportunity to comment on them.Management AuditIt is a complex task closely related with the processof management. It is highly result oriented. It requiresinter/multi-disciplinary approach asit involves examination, review and appraisal of variouspolicies and actionsof management on the basisof certain norms/standards.It undertakes comprehensive andcritical review of allorganizational activities withwider perspective.It goes beyondconventional audit andaudits the efficacy of themanagement itself.Definition:It's a comprehensive and constructive examination of anorganization, the structure ofa company, institutionor branch of government or of anycomponents thereof, such asdivision or department and its plans, objectives,its means of operations and its use ofhuman and physical facilities. objectivesTo ascertain the provision ofproper control at different levels, their effectiveness Iin accomplishing managementgoals.Ascertain objectives of the organization are properly communicated and understood at alllevels.To reveal defects orirregularities inany of theelements examined andto indicate what improvements arepossible to obtain the best results of theoperations of the company.To assist themanagement toachieve the most efficient administration of its operations.To suggest to the management the ways and means toachieve the objectives if the management of the organization itselflacks the knowledgeof efficient management.It aims toachieve the efficiency of management and assess thestrength and weaknesses of theorganization structure, its management team and its corporate culture.To ascertain the provision ofproper control at different levels, their effectiveness in accomplishing managementgoals.Ascertain objectives of the organization are properly communicated and understoodat all levels.To reveal defects orirregularities inany of theelements examined andto indicate what improvements arepossible to obtain the best results of theoperations of the company.To assist themanagement toachieve the most efficient administration of its operations.To suggest to the management the ways and means toachieve the objectives if themanagement of the organization itself lacks the knowledge of efficient management.It aims toachieve the efficiency of management and assess thestrength and weaknesses of theorganizationstructure, its management team and its corporate culture.To help the management at all levels in the effective and efficient discharge of their duties andresponsibilities.The auditor must apprise managerial performance at all levels ofthe organization. The audit starts right atthe top level ofthe management. It studies the managerial performance at all thelevels of management. Theaudit has to study the decision-making system of the organization and also the level of autonomy granted to themanagers at different levels of theorganization. The authority andresponsibility given at the different levels ofthe management. One of themost important things that the audit must study is that the mangers at various levelsuse the authority.Conducting Management AuditManagement audit requires aninterdisciplinary approach since itinvolves a review ofall aspects ofmanagement functions. It has tobe conducted by a team of experts because this requires 3varieties of skills,which one individual may not possess.The team may consist ofmanagement experts, accountants, and theoperation research specialists, theindustry experts and even social scientists.The auditors must have analytical mind and ability to look at a management function form the point of viewof the organization as a whole. They therefore have to be properly trained in thisaspect. They need to havethrough knowledge of the management science and theyshould be acquainted with thesalient features of variousfunctional areas.Under financial audit, the entire emphasis ison macro-aspect, the individual transactions being- scrutinizedfor check of the aggregates. It is concerned with examination of transactions recorded in the books of account. Itreviews the procedure and internal checks, andscrutinizes individual transactions forthe purpose of verification,of Profit and Loss Account and Balance Sheet. Financial audit is not concerned with ~ avoidance of profiteeringmotive. It indicates the financial position and over~performance of the business, regardless ofits performance invarious segments. Financial audit is applicable to allclasses of companies and industries irrespective ofsize andDan of operations.Instead of serving theinterest of the management and theGovernment, it serves interest of shareholders.Financial audit is organization - oriented. It isconducted under Sections 224 - 232 of the Companies Act 1956.

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