Professional Documents
Culture Documents
SVKMS
NARSEE MONJEE COLLEGE OF COMMERCE &ECONOMICS
VILE PARLE (W), MUMBAI 400056.
EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project
on HOW INTERNAL AUDIT CAN CONTROL COST submitted by
student of M.Com. Part - I (Semester I) for the academic year 2013-14. This
project is original to the best of our knowledge and has been accepted for
Internal Assessment.
PRINCIPAL
Shri. Sunil B. Mantri
ADVANCED
COST
ACCOUNTING
submitted
by
me
for
Place: MUMBAI.
Date:
(SOUMEET D. SARKAR)
Name & Signature of Student
3
ACKNOWLEDGEMENT
It is indeed a great pleasure and proud privilege to present this project
work.
I thank my project guide and M-COM co-ordinator of SVKMS NARSEE
MONJEE COLLEGE OF COMMERCE AND ECONOMICS, VILE PARLE
(WEST). Their co-operation and guidance have helped me to complete this
project.
I would sincerely like to thank the principal of our college Shri.Sunil
B.Mantri for his support and guidance.
I would also like to thank the college library and its staff for patiently
listening and guiding me and finally. I would like to thank my family and
friends who supported me in this project.
THANK YOU.
CONTENT
Sr. No.
PARTICULARS
Page No.
CHAPTER I INTRODUCTION
1.1
1.2
2.2
2.3
2.4
10
2.5
Areas of Operation
11
2.6
12
2.7
18
3.1
Categories
20
3.2
21
4.1
Cost Control
30
4.2
31
Conclusion
37
5.3
Biblography
38
INTERNAL AUDIT
and
business
to
integrity and
accountability, internal audit provides value to governing bodies and senior management
as an objective source of independent advice. Professionals called internal auditors are
employed by organizations to perform the internal auditing activity.
The scope of internal audit within an organization is broad and may involve topics such
as an organization's governance, risk management and management controls over:efficiency/effectiveness of operations (including safeguarding of assets), the reliability of
financial and management reporting and compliance with laws and regulations. Internal
6
audit may also involve conducting proactive fraud audits to identify potentially fraudulent
acts; participating in fraud investigations under the direction of fraud investigation
professionals,
and
conducting
post
investigation
fraud
audits
to
identify
control
regulations,
policies, procedures and principles have been followed by the company or not.
2. To check whether the existing internal control system is adequate and effective
and according to the size of the organization.
3. To ensure that all the assets of organization are properly safeguarded, if not, he
reports the management about the drawback with suggestions.
4. To highlight the weak areas of the organization and give suggestion to strengthen
them.
5. To check whether working of the organization is smooth, effective, efficient and
economical.
HISTORY OF INTERNAL AUDIT:The Internal Auditing profession evolved steadily with the progress of management
science after World War II. It is conceptually similar in many ways to financial auditing
by public accounting firms, quality assurance and banking compliance activities. While
some of the audit technique underlying internal auditing is derived from management
consulting and public accounting professions, the theory of internal auditing was
conceived primarily by Lawrence Sawyer (1911-2002), often referred to as "the father of
modern internal auditing"; and the current philosophy, theory and practice of modern
internal auditing as defined by the International Professional Practices Framework (IPPF)
of the Institute of Internal Auditors owes much to Sawyer's vision.
With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the
profession's exposure and value was enhanced, as many internal auditors possessed the
skills required to help companies meet the requirements of the law. However, the focus
by internal audit departments of publicly traded companies on SOX related financial
policy and procedures derailed progress made by the profession in the late 20th century
toward Larry Sawyer's vision for internal audit. Beginning in about 2010, the IIA once
again began advocating for the broader role internal auditing should play in the corporate
arena, in keeping with the IPPF's philosophy.
MISSION OF INTERNAL AUDIT:The internal audit supports effective and efficient discharging of the guiding and
monitoring duties of the organizations management by producing assurance services for
its internal customers relating to governance, control and risk management processes. The
internal audit brings added value and promotes achievement of the set goals by giving
improvement recommendations, producing objective and independent information and by
training supervisors and employees in understanding and application of monitoring
processes and self-assessment of business and other activities within the organization. The
internal audit sets its own objectives and performs its duties so that the values of the
8
organization are included in them and that these values also guide the work of the
auditors. The internal auditors function as partners of the other organizational parts and
work as experts in different teams (especially development teams) if they do not
endanger their independence.
PURPOSE OF INTERNAL AUDIT:The internal audit is one of the managements control tools who through its operations
assist the entire organization by examining and evaluating the adequacy and efficiency of
internal control, risk management, quality of operations and governance processes. The
internal audit furnishes the organization with analyses, appraisals, recommendations,
counsel and information. The purpose is to ascertain that the internal control system, by
taking into account also the information produced by the external auditors, functions so
that the management can be reasonably sure that the set objectives and goals will be
achieved, the operations are effective, reporting is reliable and safeguarding of assets and
compliance with the laws and regulations is done.
OBJECTIVES OF INTERNAL AUDIT:1. To determine the reliability and integrity of information; (i.e. evaluating the
internal control systems and the integrity of financial and operating information
produced by those systems).
2. To determine whether compliance exists with policies, procedures, laws and
regulations.
3. To establish that there is a proper authority for every acquisition, retirement and
disposal of assets.
4. To confirm that liabilities have been incurred only for legitimate activities of the
organization.
5. To appraise the economy and efficiency of resource utilization (i.e. physical,
monetary and most importantly staff).
9
their
responsibilities
by
providing
them
with
analyses,
appraisals,
PRINCIPLES OF ESTABLISHING INTERNAL AUDIT:The basic principles of establishing internal audit in a business concern are:1. Independence:- The internal audit department should have an independent
status in the organization. The internal auditor must have sufficiently high
status in the organization. He may be required to report directly to the board
of directors.
2. Objectives:- The objectives of the internal audit function should be made very
clear and unambiguous. The objective should be properly communicated so
that internal audit is not viewed as over the shoulder check by other
departments.
3. Clarity In Scope:- The scope of internal audit department must be specified
in a comprehensive manner. The department must at all times, have authority
10
AREAS in which INTERNAL AUDIT OPERATES:Internal audit covers the following areas1) Review
of
Accounting
System
and
Related Internal
Controls:-
The
11
I.
II.
Staffing and Training:- The internal audit unit should be appropriately staffed in
terms of numbers, grades, qualifications and experience, having regard to its
responsibilities and objectives. The internal auditor should be properly trained to
fulfill
all
his
responsibilities.
The
effectiveness
of
internal
audit
depends
substantially on the quality, training and experience of its staff. The aim should be
to appoint staff with the appropriate background, personal qualities and potential.
Thereafter, steps should be taken to provide the necessary experience, training and
continuing professional education.
STAFFING
The internal audit unit should be managed by a head of internal audit who should
be suitably qualified and should possess wide experience in internal audit and its
management. He should plan, direct, control and motivate the resources available
to ensure that the responsibilities of the internal audit unit are met. The full range
of duties may require internal audit staff to be drawn from a variety of
12
Organizational Relationships
The head of internal audit should prepare the internal audit plan in consultation
with senior management. The internal auditor should arrange the timing of internal
audit assignments in consultation with the management concerned, except on those
rare occasions where an unannounced visit is a necessary part of the audit
approach. Consultation can lead to the identification of areas of concern or of
other interest to management. Matters which arise in the course of the audit are
confidential and discussion should be restricted to management directly responsible
for the area being audited unless they have given express agreement to broaden
the discussion. Discussions with management are necessary when preparing the
audit report. This is an essential feature of the good relationship between the
auditor and the management.
Relationship with External Audit
The relationship between internal and external audit needs to take account of their
differing roles and responsibilities. Internal audit is an independent appraisal
function within the organization and internal auditors are direct employees. The
external auditor usually has a statutory responsibility to express an independent
opinion on the financial statements and stewardship of the organization. The aim
should be to achieve mutual recognition and respect, leading to a joint
improvement in performance and the avoidance of unnecessary over-lapping of
work. It should be possible for the external and internal auditors to rely on each
other's work, subject to limits determined by their different responsibilities,
respective strengths and special abilities. Consultations should be held and
consideration given to whether any work of either auditor is adequate for the
purpose of the other. The internal auditor does not automatically have a right of
access to the records of the external auditor. However, the relationship between
the internal and external auditor will usually be such that the external auditor will
be able to allow access to the necessary records. Since internal audit evaluates an
organization's internal control system the external auditor may need to be satisfied
that the internal audit function is being planned and performed effectively. This
review needs to be seen by both parties as a necessary part of the working
14
information
exchanged.
The
benefits
of
joint
training
Due Care:- The internal auditor should exercise due care in fulfilling his
responsibilities. The internal auditor cannot be expected to give total assurance that
control weaknesses or irregularities do not exist. In order to demonstrate that due
care has been exercised the internal auditor should be able to show that his work has
been performed in a way which is consistent with this guideline. The internal auditor should
possess a thorough knowledge of the aims of the organization and the internal
control system. He should also be aware of the relevant laws and the requirements
of relevant professional and regulatory bodies. The internal auditor must be
impartial in discharging all responsibilities; bias, prejudice or undue influence must
not be allowed to limit or over-ride objectivity. At all times, the integrity and
conduct of the internal auditor must be above reproach. He should not place
himself in a position where responsibilities and private interests conflict and any
personal interests should be declared. The internal auditor should not improperly
disclose any information obtained during the course of his work.
15
V.
Planning, Controlling And Recording:- The internal auditor should adequately plan,
control and record his work. The main purposes of internal audit planning are:a) To determine priorities and to establish the most cost-effective means of
achieving audit objectives;
b) To assist in the direction and control of audit work;
c) To help ensure that attention is devoted to critical aspects of audit work;
and
d) To help ensure that work is completed in accordance with pre-determined
targets.
Control of the internal audit unit and of individual assignments is needed to
ensure that internal audit objectives are achieved and work is performed
effectively. The most important elements of control are the direction and
supervision of the internal audit staff and review of their work. This will be
assisted by an established audit approach and standard documentation. The degree
of control and supervision required depends on the complexity of assignments and
the experience and proficiency of the internal audit staff.
Internal audit work should be properly recorded because:a) The head of internal audit needs to be able to ensure that work delegated
to staff has been properly performed. He can generally do this only by
reference to detailed working papers prepared by the internal audit staff
who performed the work;
b) Working papers provide, for future reference, evidence of work performed,
details of problems encountered and conclusions drawn; and
c) The preparation of working papers encourages each internal auditor to
adopt a methodical approach to his work.
VI.
Evaluation of the Internal Control System:- The internal auditor should identify
and evaluate the organization's internal control system as a basis for reporting upon
its adequacy and effectiveness.
VII.
Evidence:- The internal auditor should obtain sufficient, relevant and reliable
evidence on which to base reasonable conclusions and recommendations. Internal
audit evidence is information obtained by an internal auditor which enables
16
Reporting and Follow-Up:- The internal auditor should ensure that findings,
conclusions and recommendations arising from each internal audit assignment are
communicated promptly to the appropriate level of management and he should
actively seek a response. He should ensure that arrangements are made to follow
up audit recommendations to monitor what action has been taken on them. Internal
audit reports provide a formal means of communicating to management the results
arising from audits undertaken. Such reports should include audit findings,
recommendations and conclusions relating to the adequacy of and compliance with
the system of internal control and the efficiency, effectiveness and economy of
operations in the area covered by the audit. From the point of view of
completeness, management response to the audit findings should preferably also be
included in the report. The aim of every internal audit report should be:a) To prompt management action to implement recommendations for change
leading to improvement in performance and control; and
b) To provide a formal record of points arising from the internal audit
assignment and, where appropriate, of agreements reached with management.
17
DIFFERENT ROLES of INTERNAL AUDIT:1. Role in Internal Control:- Internal auditing activity is primarily directed at
improving internal control. Internal control is broadly defined as a process,
effected by an entity's board of directors, management and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives
in the following internal control categories:a) Effectiveness and efficiency of operations.
b) Reliability of financial reporting.
c) Compliance with laws and regulations.
Management is responsible for internal control. Managers establish policies and
processes to help the organization achieve specific objectives in each of these
categories. Internal auditors perform audits to evaluate whether the policies and
processes are designed and operating effectively and provide recommendations for
improvement.
2. Role in Risk Management:- Internal auditing professional standards require the
function to monitor and evaluate the effectiveness of the organization's risk
management processes. Risk management relates to how an organization sets
objectives,
then
identifies,
analyzes,
potentially impact its ability to realize its objectives. Risks fall under strategic,
operational,
financial
reporting,
and
legal/regulatory
categories.
Management
18
initiatives. This places the CAE in the position to report on many of the major
risks the organization faces to the Audit Committee, or ensure management's
reporting is effective for that purpose. Internal auditors may help companies
establish and maintain Enterprise Risk Management processes.
3. Role in Corporate Governance:- Internal auditing activity as it relates to
corporate
governance
is
generally
informal,
accomplished
primarily
through
19
CATEGORIES of INTERNAL AUDIT:1. System Based Audit:- It refers to an in-depth evaluation of the internal control
system with the objective to assess to extent to which the controls are functioning
effectively. It is designed to assess the accuracy and completeness of financial
statements, the legality and regularity of underlying transactions and the economy,
efficiency and effectiveness of operations. A systems based audit should be
followed-up through substantive testing of a number of transactions, account
balances, etc. to determine whether the financial statements of the auditee are
accurate and complete, the underlying transactions legal and regular and/or the
criteria for economy, efficiency and effectiveness have been achieved.
2. Performance Audit or Operational Audit:- It assesses whether the activity,
programme or body has been managed economically and/or efficiently and/or
effectively. A particular performance audit will not necessarily seek to reach
conclusions about all three aspects above:- it should be clear from the audit
objectives, which need to be examined. When carrying out audits of economy or
efficiency, however, the auditor does need to make a general consideration of the
effectiveness of the audited entity:- it may be better that the entity does the right
thing badly rather than doing the wrong thing well.
3. Financial or Accounting Audit:- It evaluates the accuracy of the accounting and
related procedures and practices. It assesses the accuracy and completeness of the
financial statements of the activity, programme or body being audited; and/or
evaluates whether the transactions underlying the financial statements are legal and
regular. However, according to the definition of internal auditing, internal auditors
are mainly evaluating the system of internal control. Therefore internal auditors
primary interest is not the accounting as such, but rather the controls which
ensures the quality of accounting information and financial reporting.
4. Compliance Audit:- It evaluates the how well the organization conforms and
adherences with
relevant
contracts. Usually all audits include the compliance element, because the auditor
uses the laws, policies and regulations as a yardstick to measure the performance
20
of the organization. Therefore these guidelines do not contain separate section for
compliance audit, but the aspect is included in all audit instructions later in these
guidelines.
STANDARDS RELATED to INTERNAL AUDIT:1. Standard on Internal Audit 1 - Planning an Internal Audit
a) Internal audit plan should cover areas such as obtaining knowledge of legal
and regulatory framework within which the entity operates, obtaining
knowledge of the entitys accounting and internal control systems and
policies, determining the effectiveness of internal control procedures adopted
by the entity, determining the nature, timing and extent of procedures to be
performed,
identifying
activities
warranting
special
focus
based
on
21
should
cover
engagement
all
the
acceptance,
assessment of
internal
important
engagement
controls,
aspects
of
planning,
evidence
an
engagement
viz.,
risk
assessment
and
obtained and
examination /
clearly
expressing
significant
observations,
suggestion /
weaknesses
and
exceptions),
observations,
findings
and
22
determining
internal
auditor
should
consider
being
examined,
adequacy
of
the
system
of
internal
control,
provide
support
for
audit
results.
After
evaluating
the
24
audit.
The
depth
of
coverage
of
internal
audit,
being
to
cover
comments
on
internal
control
25
and
make
recommendations,
if
any,
for
improving
that
26
is
responsible
for
establishing
and
operating
the
risk
management framework.
c) ERM process consists of Risk identification, prioritization and reporting,
Risk mitigation, Risk monitoring and assurance. The corporate risk function
establishes the policies and procedures, and the assurance phase is
accomplished by internal audit. The role of internal auditor is to provide
assurance to management on the effectiveness of risk management.
15. Standard on Internal Audit 15 - Knowledge of the Entity and its Environment
a) To obtain knowledge of the economy, entitys business and its operating
environment, including its regulatory environment and the industry in which
it operates, sufficient to enable him to review the key risks and entity
wide processes, systems, procedures and controls. To identify sufficient,
appropriate, reliable and useful information to achieve the objectives of the
engagement.
b) Prior to accepting an engagement, the internal auditor should obtain a
preliminary knowledge of the industry and of the nature of ownership,
management, regulatory environment and operations of the entity subjected
to internal audit, and should consider whether a level of knowledge of the
entitys business adequate to perform the internal audit can be obtained.
c) Following the acceptance of the engagement, further and more detailed
information should be obtained.
generally
of
recognised
material
to
amounts
have
and
direct
disclosures
effect
in
the
on
the
financial
29
COST CONTROL:Cost control and reduction refers to the efforts business managers make to monitor,
evaluate, and trim expenditures. These efforts might be part of a formal, company-wide
program or might be informal in nature and limited to a single individual or department.
In either case, however, cost control is a particularly important area of focus for small
businesses, which often have limited amounts of time and money. In a small business
the focus is often on selling and servicing the customer. This leaves the task of
purchasing slightly sidetracked. Even seemingly insignificant expenditures - for items like
office supplies, telephone bills, or overnight delivery services - can add up for small
businesses. On the plus side, these minor expenditures can often provide sources of cost
savings.
Cost control refers to management's effort to influence the actions of individuals who are
responsible for performing tasks, incurring costs, and generating revenues. First managers
plan the way they want people to perform, then they implement procedures to determine
whether actual performance complies with these plans. Cost control is a continuous
process that begins with the annual budget. As the fiscal year progresses, management
compares actual results to those projected in the budget and incorporates into the new
plan the lessons learned from its evaluation of current operations. Through the budget
process and accounting controls, management establishes overall company objectives,
defines the centers of responsibility, and determines specific objectives for each
responsibility center, and designs procedures and standards for reporting and evaluation.
Cost control is the practice of managing and/or reducing business expenses. Cost controls
starts by the businesses identifying what their costs are and evaluate whether those costs
are reasonable and affordable. Then, if necessary, they can look for ways to cut costs
through methods such as cutting back, moving to a less expensive plan or changing
service providers. The cost control process seeks to manage expenses ranging from
phone, internet and utility bills to employee payroll and outside professional services. To
be profitable, companies must not only earn revenues, but also control costs. If costs are
too high, profit margins will be too low, making it difficult for a company to succeed
against its competitors. In the case of a public company, if costs are too high, the
30
company's may find that its share price is depressed and that it is difficult to attract
investors. The following are some simple successful cost control methods:1. Review and Modify Business Model:- There is a great, economically and
commercially successful business model, that is used to lay down the foundations
of any company. The business model must be however subject to small and big
changes. It means as a manager, you should subject the business model to
changes according to your competitors actions and markets status. By the term
change, I also mean that you should be upgrading and improving all possible
business operations. You need to come up with new process and procedures to
reduce costs.
2. Daily Updates:- One of the best ways to start controlling costs it to have daily
updates of production, all possible long and short term expenditures. Divide all
these expenditures, even the ones such cost of machinery or insurance, and sales,
by the number of working days. This will give you a concrete figure of the total
amount that has been spent. Similarly after sales of your goods or services, you
may also divide the total amount of sales by the number of working days. This
will give you a micro figure about the daily expenditure and sales. It will
definitely help you to zero down on all possible cost problems that you incur.
3. Uniformity:- Cost control management is all about deriving the best outputs in a
least cost. Hence, set up a highly efficient and specialized stores department which
will oversee all purchases. You may also take a risk and make long term
agreements regarding the quality and quantity of materials that are being supplied
to your manufacturing process. This uniformity will ensure a timely, cheap and
assured supply of raw materials.
4. Time Planning:- Time is money! Well divide the amount of wages that you give
out with the number of work hours per month. Explain to the employees per
hour expenditures that you incur, and hence the necessity for time management.
You may also install good cost control systems, in order to help your employees
to manage their work hours well. A cost control software will also work wonders
in the finance and accounting department.
31
necessary for your own customers. But again, why are you paying them and then
sitting on their inventory. They need to own the inventory until time of sale. This
is commonly referred to as scan based trading or just-in-time trading.
INTERNAL AUDIT and COST CONTROL:Many organizations focus their cost reduction efforts around the numbers. This is the
reason why cost reduction initiatives are regarded as the sole domain of the financial
community. Cost cutting is often no more than a review of the budget, the introduction
of a saving against each line item, and then monitoring actual versus planned spend.
There is no problem with this approach if it is short-term cuts that are wanted. It is
easy to reduce costs by a small amount on each line item by delaying expenditure into
a future period. However, these are not real savings and the organization loses the
opportunity to review underlying business practices during difficult economic periods that
have the potential to create sustainable cost savings. Once the pressure is off, these so
called cost savings quickly come back into the budgets and management are none the
wiser. This is the tactical response to cost cutting. It can be done and it does have
benefits but these are mainly short term in nature. On the other hand, organizations that
approach their cost reduction efforts in a strategic manner have the opportunity to
significantly strengthen their competitive position from a cost perspective rather than just
survive the current economic downturn. Activity-based cost reduction is a strategic
response to cost cutting that provides sustainable benefits. This means the focus shifts
from the individual line items on the income statement or balance sheet toward the
underlying activities that drive the expenditure. Once these underlying activities are
understood, it is relatively easy to identify and prioritize improvements that will have a
larger and longer-term impact on the business.
The biggest risk for any major initiative is the ability of the organization to sustain the
benefits. In a survey of 115 multinationals taken from the Financial Times Stock
Exchanges top 350 companies, it was found that 70% could not sustain the benefits of
their cost reduction efforts beyond two years. Often this is due to the fact that the
33
changes introduced are not continuously re-enforced through regular, visible reporting of
the key measures that determined success in the beginning. The organization loses sight
of those aspects that were considered essential when the program was first introduced.
This is where the internal audit function can play a significant role.
The internal audit function should be an integral part of any strategic cost reduction
program because it can ensure the redesigned business processes, activities and structures
(if any) remain responsive to the risks, and are embedded in the business methods and
practices.
The value that can be achieved by the inclusion of the internal audit function is
immense, as it can support a number of strategic objectives, including the following:
1. Achieving buy-in to the cost reduction program from a broader group of
stakeholders.
2. Improving visibility at management, executive and board levels by ensuring
internal audit reports include commentary on the cost cutting initiatives.
3. Identifying the risks and implications of cost reduction initiatives.
4. Providing valuable input and insight into the key processes and activities that
drive certain costs.
5. Identifying critical improvement drivers to keep the business focused on priority
areas.
6. Bringing a process and control capability to the overall program.
7. Monitoring and evaluating key performance indicators on a continuous basis.
8. Developing regular reviews as part of the annual internal audit plan to support
sustainability.
9. Providing an objective view point on the proposed initiatives prior to, during and
after the introduction of the cost cutting program.
10. Reporting on the benefits realized by the program.
As an example, overtime cost was considered to be excessive in one very large
organization. Certain employees were actually earning more by way of overtime pay than
from their regular salaries. Management decided to cut this cost, especially as difficult
economic circumstances were resulting in lower business activity levels. As a result of
the increased focus on overtime pay together with more regular reporting, the cost began
34
to show a reducing trend. However, as often happens, the moment the emphasis changed
to other significant areas and the level of scrutiny reduced, the cost of overtime began
to increase. This example highlights the need for much more effort in understanding and
changing the underlying reasons for a particular cost rather than simply focusing on the
cost itself. For example, travel expenditure may be under review and the finance
manager might request a saving of 20% in the following years budget. One approach
would simply be to cut the number of trips by an average of 20%, and the target would
be achieved with no difficulty. Except during the following year, when the pressure is
off, the costs will creep back into the system and the benefits of the saving will be
short lived. An alternative approach, in addition to the above action (which is a very
good starting point), would be to review and redesign the underlying activities that drive
travel expenditure in order to change the way the organization operates. This would have
the effect of sustaining the saving over a much longer term and ultimately gain the
organization competitive advantage.
The following questions in relation to travel expenses should also be asked:1. What is the breakdown of the travel expense ? (In order to understand the
makeup of the cost and where to focus improvement efforts.)
2. What activities are performed that result in these costs being incurred ?
3. Why do these activities need to be performed and do they add value to the
business ? And how can the benefit or value of the activity be determined ?
4. What are the interdependencies and risks of changing these activities ?
5. Is there a better way to achieve the same or even a better result, e.g., scenario or
option planning ?
6. What should the targeted cost be, taking into account potential improvements ?
7. What needs to be done to redesign the approach to travel to enhance the process
and reduce the cost ?
8. What controls or performance measures need to be introduced to ensure
sustainable success ?
9. How will the performance of the activities be reported to ensure that the costs
dont creep back into the system ?
10. Who will sponsor the change program ?
35
This simple example demonstrates how cost cutting is much more than just the
elimination of expenses from a budget. It is a strategic adjustment that may well have a
material impact on how an organization does business. Working through this approach in
a meticulous way, organizations are more likely to achieve substantial benefits over the
longer term by identifying significant improvement areas. After an exercise similar to
that described is performed, it is possible to prepare a much more informed budget for
the next period, which will recognize the embedded savings derived. All too often
budgets are simply a derivative of the previous period plus an adjustment for perceived
economic and market changes. In fact, it is recommended that three year rolling budgets
be introduced, showing the expenditure trends and the benefits derived from any cost
saving initiatives over a longer term. Unfortunately, many organizations leave the cost
reduction program in the hands of the financial community which also has many other
priorities. This results in a number of quick wins and short-term benefits but often fails
to achieve the longer-term sustainable impact that could make a strategic difference to
the entity. Organizations that view cost reduction initiatives as a strategic imperative that
could potentially result in a competitive advantage, and that approach the overall effort
in an inclusive and methodical manner, will be much stronger when the economic cycle
turns. No one yet knows who will survive, who will thrive, and who will disappear
during the current downturn - only time will tell. Nonetheless, those organizations that
approach cost reduction with the right mindset have a better chance of success than
those which simply tamper on the periphery.
36
CONCLUSION:The internal auditor should check whether proper operating standards and norms have
been established for cost control and reduction. They should be detailed enough to be
identifiable with specific operating responsibilities and should be capable of being used
by operating personnel for monitoring and evaluating their performance. The internal
auditor should review the methods of establishing the operating standards and norms. He
should carefully examine the assumptions made while setting the standards to ensure that
they are appropriate and necessary. The variances should be examined to evaluate
whether or not the standards and norms are practical. Where there is a wide divergence
between actual performance and the corresponding standards, reasons may be looked into.
The system of identification and analysis of deviations from standards should be
examined. The internal auditor should examine whether analysis of variances is
communicated to those concerned in time. He should also examine whether in
communicating the variances serious matters are highlighted and whether exceptional
variances are communicated more expeditiously than is done in the normal course. As a
part of evaluating resources utilization, identifying the facilities which are under-utilized
is an important function of the internal auditor. Such instances may consist of underutilized machines, unoccupied storage space, huge cash or bank balances, idle man power
etc. The internal auditor may also identify understaffing and overstaffing in various areas
as these prevent optimum use of resources.
While commenting on staffing, the internal auditor should pay special attention to nonproductive work being performed. This would require an enquiry into the job descriptions
of employees combined with an intelligent observation of the work being done. Finally
the internal auditor should review all procedures with reference to their costs and
benefits. One of the factors resulting in inefficiency is that in many cases procedures
become hindrance to operations.
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