Nature of MCS

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According to Anthony & Govindarajan MCS helps managers move an organization toward its strategic objectives 2 views about scope of MCS
1st strategy is developed and then MCS comes into picture Strategies emerge through experimentation and are influenced by the MCS

– –

Above issue actually depends on the environment in which the entity operates –
If the environmental changes are predictable, strategy can be developed 1st If the environmental changes are rapid then experimentation and MCS’s influence is there

• •

As compared to mechanical control systems, MCS are complex and judgmental The central control problem is of GOAL CONGRUENCE


Control Process in General
• Four basic elements –
– Detector (actual measurement) – Assessor (comparison with standard) – Effector (alteration of behavior, if required) – Communication network (transmission of information)


3 levels of controls
Point Strategy formulation Management control Task control 1. Nature of end product Goals, strategies & policies Least systematic Implementation of strategies Somewhat systematic Efficient and effective performance of individual tasks Most systematic

2. Degree of systematization 3. Time frame focus

Focuses on long-run

Focuses on medium-term

Focuses on short-run activities Uses current accurate data Control more important

4. Inputs

Rough estimations of future Planning more important

Mix of accurate data and forecasts Planning & control equally important

5. Importance of planning & control


Formal MCS Goals & strategies Rules Other Information Reward (feedback) Yes Strategic Planning Budgeting Responsibility Center performance Report Actual v/s Plan Was Performance Satisfactory? No Revise Revise Corrective action Measurement Feedback Communication 4 .

Formal & Informal MCS • • • • • Management Style and Culture Infrastructure Rewards Coordination and integration Control Process 5 .MSSM .

Management Control Systems – Cybernetic Paradigm & control Environment Decision maker Goals Value premises Feedback Sensor Perception Factual premises Comparator Behavior choice Effector Behavioral Repertoire 6 .

6. 8. 7. Set goals and performance measures Measure achievement Compare achievement with goals Compute variances Report variances Determine cause(s) of variances Take action to eliminate variances Follow-up to ensure goals are met 7 . 2. 4. 5. 3.Cybernetic Paradigm & Control Process Elements of a control process 1.

Establish acceptable range of variation 10. 2. 6. Confirm severity of a problem. 4.Attributes of good control system (MCS) 1. Use of sampling 9. Developing a discerning view of control 8 . Control by exception 11. results of the corrective action should be monitored 12. Early warning predictors should be tracked 8. cause of the problem should be identified. A positive view of the control process Objectives should be expressed in measurable terms Objectives should have focus and should not be too many in numbers Controls should seek balance among various aspects No dual assignment of responsibility True control is achieved by comparing projected performance against the standard 7. 3. 5.

simultaneous internal analysis revealing strengths and weaknesses. matching core competencies with external opportunities and deciding a strategy 9 .Understanding strategies – Concept of strategy • Strategy describes the general direction in which an organization plans to move to attain its goals • Strategy formulation – Environmental analysis pointing out opportunities and threats.

This is because Corporate HQ. and unrelated diversified firms do not perform well over the long run. on average. related diversified firms perform the best. has the ability to transfer core competencies from one business unit to another. in the related diversified firm. the latter is a matter of unit level strategy • Classification into 3 types for corporate level – Single industry – Related diversification – Unrelated diversification • Research has shown that. 10 . single industry perform next best.Understanding strategies – Corporate and unit-level strategies • Corporate strategy is concerned more with where to compete than how to compete.

Ford Motor P & G.Understanding strategies – Corporate level strategiessummary of 3 generic strategies Type Single industry Related diversified Unrelated diversified Pictorial representation Features Competes in only one industry Sharing core competencies across businesses Totally autonomous businesses in different markets Examples Wrigley. Gillete General Electric 11 .

Understanding strategies – Unit-level strategies • Business unit strategies depend on two interrelated aspects 1) its mission & 2)its competitive advantage • There are a couple of famous models to fix the BU mission • One is the BCG Model and the other one is the GE Planning Model • These models basically try to match the industry and the unit in terms of opportunities/threats and strengths/weaknesses • Control system designers need to know what is the BU mission but not necessarily why the BU has chosen that mission 12 .

Understanding strategies – Business unit mission – BCG Model High Low High “Star” Hold “Question mark” Build High Market growth rate “Cash cow” Harvest Low High Relative Market share “Dog” Divest Low Low 13 .

Understanding strategies – Business unit mission – GE Model The Portfolio matrix & Recommended Business Strategies High Winners Invest Strongly Winners Invest Selectively Profit producers Winners Invest Selectively Avg bus Earn/ Protect ? Marks Dominate/ Delay/Divest Losers Harvest/ Divest Industry Attractiveness Average Low Earn/ Protect Strong Losers Harvest/ Divest Average Losers Harvest/ Divest Weak 14 Business strength .

Understanding strategies – Gaining competitive advantage • 3 interrelated questions should be considered – – What is the industry structure? – How should the BU exploit it? – What will be the basis of the BU’s competitive advantage? • Michael Porter has suggested 2 analytical approaches to develop & sustain competitive advantage – Industry analysis & Value chain analysis 15 .

Understanding strategies – Industry structure analysis – Porters 5 forces model Threat of New Entrants Suppliers Bargaining Power Intensity of Industry Competition Customers Bargaining power Threat From Substitutes 16 .

Understanding strategies – Industry structure analysis – Porters 5 forces model • 3 observations with regard to industry analysis – More powerful the 5 forces less profitable an industry is likely to be. conversely in high profitable industries these 5 forces are not strong – Depending on relative strength of the 5 forces the strategic issues would emerge and would differ from industry to industry – Understanding the nature of each force helps the firm to formulate effective strategies 17 .

Understanding strategies – Gaining competitive advantage – Porters model • The 5 force analysis is starting point to develop competitive advantage as it helps understanding external environment • Response from the firm can be on two fronts – low cost & differentiation • A firm should strive to achieve cost leadership and/or product differentiation to gain competitive advantage 18 .

Understanding strategies – Gaining competitive advantage – Porters model Superior Cost-cumDifferentiation advantage Differentiation advantage Relative Differentiation position Low cost Advantage Inferior Superior Stuck-inThe-middle Inferior Relative Cost Position 19 .

Understanding strategies – Gaining competitive advantage – Value chain analysis • Value chain disaggregates the firm into its distinct strategic activities • It is a complete set of activities involved in a product beginning with extraction of RM and ending with after sales service • The VC framework is a method of breaking down the chain into specific activities in order to understand behavior of costs and sources of differentiation. 20 .

Finance. Human Resources. IT 21 .Understanding strategies – Gaining competitive advantage – Value chain analysis Product Development Manufacturing Marketing And Sales Services/ Logistics Support Activities : .

BU can achieve cost-cum-differentiation advantage. Most importantly can we do 1. key questions are – 1. Can we reduce costs in this activity. Can we reduce assets in this activity holding costs and value (revenues) constant? 4.Understanding strategies – Gaining competitive advantage – Value chain analysis • For each value added activity. holding value (revenues)? 2. Can we increase value (revenues) in this activity holding costs constant? 3. 22 . 2 & 3 simultaneously? • By systematically analyzing costs. revenues and assets in each activity.

Goal CongruenceMeaning • • • Central purpose of a MCS is to ensure a high level of goal congruence In a goal congruent process actions people are led to take in accordance with their perceived self-interest are also in the best interest of the organization In evaluating any management control practice. 2 most important questions are – • • What actions does it motivate people to take in their own selfinterest? Are these actions in the best interest of the organization? 23 .

Manuals.Goal CongruenceInfluencing factors • INFORMAL FACTORS • • External • • • • • Work ethic – overall attitude of the working community Organization culture Management style Informal organization Perception and Communication Internal • FORMAL CONTROL SYSTEM • • MCS Rules – Physical controls. System safeguards etc 24 .

Goal congruenceFormal MCS Goals & strategies Rules Other Information Reward (feedback) Yes Strategic Planning Budgeting Responsibility Center performance Report Actual v/s Plan Was Performance Satisfactory? No Revise Revise Corrective action Measurement Feedback Communication 25 .

Types of organizations – A. Functional organization CEO Staff Manufacturing Manager Marketing Manager Staff Staff Manager Plant 1 Manager Plant 2 Manager Plant 3 Manager Region A Manager Region B Manager Region C 26 .

Types of organizations – B. Business unit organization CEO Staff Manager BU X Manager BU Y Manager BU Z Staff Staff Staff Plant Manager Marketing Manager Plant Manager Marketing Manager Plant Manager Marketing Manager 27 .

Matrix organization Chief Executive Officer Staff Function A Manager Project X Manager Function B Manager Project Y Manager Function C Manager Project Z Manager 28 .Types of organizations – C.

The system designer must always fit the system to the organization rather than the other way around • 29 .Organization Structure & implications for system design • Designers might be tempted to recommend the BU structure because of the apparently clear-cut profit responsibility. However they should not forget other considerations.

Functions of the Controller • • • • • • Design and operate information and control systems Preparing financial statements and reports Preparing and analyzing performance reports Compiling the annual operating plan (budget) Supervising internal audit and accounting control procedures Developing subordinates 30 .

Nature of Controllers role • Relation to line organization • • Controllership is a staff function Controller designs system. use is done by line managers Decisions made by controllers are primarily those that implement policies decided by line management Controllers play important role in preparation of strategic plans and budgets. They are also called to scrutinize reports prepared by line managers 31 • • • .

Nature of Controllers role The BU Controller – 2 possible relationships CC CC BUM BUM BUC BUC 32 CC – Corporate Controller. BUM .Business unit manager & BUC – Business unit controller .

Responsibility Centers .Basic • Responsibility Centers (RC) constitute the structure of a control system and the assignment of responsibility to organizational units must reflect the organizations strategy. RC is an organization unit that is headed by a manager who is responsible for its activities RC exists to accomplish some purpose that are called as its objectives • • 33 .

Responsibility Centers – Core operation • RC receives inputs. that can be either tangible (goods) or intangible (services) Inputs Work Resources used Measured by “cost” Outputs Goods or services • Management is responsible for ensuring the optimum relationship between inputs and outputs 34 . Using capital and assets it converts this input in an output.

Responsibility Centers – Measuring inputs and outputs • • Cost is a monetary measure of the amount of resources used by a RC It is much easier to measure the cost of input than to calculate the value of outputs. For example. a college can easily measure how many students have passed but it is difficult to measure how much education each of them acquired 35 .

Responsibility Centers – Measuring inputs and outputs – Efficiency and Effectiveness • • • • • Efficiency and effectiveness are the 2 performance measurement criteria for RC Efficiency is a ratio of input to output (doing things right) Effectiveness is determined by the relationship between a RC’s output and its objectives (doing right things) These 2 e’s are not mutually exclusive. each RC has to be efficient and effective as well Profit as a measure of performance measures both efficiency and effectiveness because profit is the major objective (effectiveness) and it is also the difference between output and input (efficiency) 36 .

Responsibility Centers - Types
Optimal relationship Can be established Outputs Work (physical)

Inputs (monetary value)

Example – Manufacturing Function

Above is the relationship between input and output in case of An ENGINEERED EXPENSE CENTER Characteristics : - 1. Input can be measured in monetary terms 2. Output can be measured in physical terms 3. Optimum relationship between amount of input for one unit of output can be established


Responsibility Centers - Types
Optimal relationship cant be established Outputs Work (physical)

Inputs (monetary value)

Example – R & D Function

Above is the relationship between input and output in case of An DISCRETIONARY EXPENSE CENTER


Responsibility Centers - Types
Inputs not related to outputs Outputs Work (monetary value)

Inputs (monetary value only for costs directly incurred)

Example – Marketing Function

Above is the relationship between input and output in case of a REVENUE CENTER


Types Inputs are related to outputs Outputs Work (monetary value) Inputs (monetary value) Example – BU Above is the relationship between input and output in case of a PROFIT CENTER 40 .Responsibility Centers .

Types Profits are related to capital employed Outputs Capital employed (monetary value) Inputs (monetary value) Example – BU Above is the relationship between input and output in case of an INVESTMENT CENTER 41 .Responsibility Centers .

o/p relationship Application Budget preparation Budgetary control Financial control During performance . emphasis differs) More at planning stage 42 I/p .Responsibility centers – difference between engineered & discretionary expense center Point Nature of expenditure Engineered EC Engineered costs are those for which standards can be easily established Optimal relationship can be established Manufacturing function Budget represents unit cost of performing task efficiently Difference between budget and actual is a measure of efficiency (since input and output optimum relationship can be established) Being “within budget” is important Discretionary EC Discretionary costs are those for which standards cant be easily established Optimal relationship cant be established Service function Budget determined by the magnitude of the job to be done Difference between budget & actual is not a measure of efficiency (since input and output optimum relationship cant be established) Doing the task is more important (doesn’t mean that budget is not to be adhered.

Revenue Center A responsibility center that is responsible for revenues but not for the expenses is revenue center. I/p .Responsibility centers – difference between Profit center & revenue center Point Meaning Profit Center A responsibility center that is responsible for both revenues and expenses is profit center.o/p relationship Optimal relationship is established between value of output (revenue) and value of input (expense) Business units Maximizing profit by controlling both revenue and expenses Optimal relationship cant be established between value of output (revenue) and value of input (expense) Marketing offices Maximizing revenue Application Goal 43 .

Responsibility Centers – General control characteristics of Discretionary EC’s • • • • • • • • Budget preparation – based on the magnitude of the task to be done Tasks divided into 2 – continuing and special MBO technique used Incremental Budgeting ZBB review Cost variability – not in short run Type of Financial control – planning important Measurement of performance – Doing the planned work is important 44 .

Responsibility Centers – Administrative and Support Centers – control problems & budget preparation • 2 important reasons for control problems • • Difficulty in measuring output Lack of goal congruence Section covering costs of “being in business” Discretionary activities Justification for proposed increases in budget • Budget preparation • • • 45 .

the other reporting it separately for each RC • Effectiveness of research is informed though progress reports ( these are not financial reports) 46 • • .Responsibility Centers – R&D centers–control problems. budget preparation & performance measurement • 2 important reasons for control problems • Difficulty in relating results to output • Lack of goal congruence Budget preparation • One should understand R & D continuum • Basic research – applied research – development – production engineering – testing • No scientific way of determining R & D budget • Some companies use % of revenue for R&D budget • For basic research. budget can be a lump-sum amount • For testing. number of testing can be a budget base Performance measurement • Monthly/quarterly reports on budgeted and actual expense • 2 types of financial reports – one reporting total R & D expense.

evaluating effectiveness is difficult because of influence of “other” factors on sales Marketing expenses are often budgeted at % of sales not because sales volume cause marketing expenses but because it gives larger affordability “Order-getting costs” are that way discretionary and controls cannot be easily standardized 47 • Marketing activities – control problems .Responsibility Centers – Marketing Centers – activities and related controls • Logistic Activities • These RCs are similar to expense centers in manufacturing plants and can be safely called as engineered expense centers • • • Measuring output is easy.

Responsibility Centers – Profit Centers • 2 conditions for delegating profit responsibility • • Access to relevant information needed for decision making Measurement of effectiveness of the trade-offs made by managers should be possible 48 .

Responsibility Centers – Profit Centers • Advantages of profit centers • • • • • • • • Improved quality of decisions Quick decisions HQ relieved from day-to-day decision making Effective use of imagination and initiative Training ground for managers Enhanced profit consciousness Information on profitability of individual units They respond well to improvement initiatives since their output is so readily measurable 49 .

Responsibility Centers – Profit Centers • Difficulties with profit centers • • • • • • • Loss of control Reduced quality of decisions Increased friction amongst units and HQ In-house competition may get substituted for cooperation Additional costs Non-availability of competent GMs Too much emphasis on short-run profitability 50 .

Responsibility Centers – Profit Centers • • Measurement of performance – Management performance and economic performance Measures of economic performance – measures of profitability • • • • • Contribution margin Direct profit Controllable profit PBT PAT 51 .

Responsibility Centers – Investment centers • Difficulties in measuring assets employed • • • • • • • • Cash. very less incentive to cut such expenditure as it would only reduce a part of if by way of capital charge 52 .actual cash held at HQ much less than that would have been required as an independent company Receivables – whether to include at SP or COGS? Inventories – how to deal with creditors? Working Capital in general – treatment of current liabilities – 2 extreme treatments Fixed Assets – which value to consider? Problems with depreciation Leased assets – preference for leased assets over owned assets so as to reduce capital charge Idle assets – exclusion from computation of assets employed Intangible assets – Capitalization of items like R & D and its repercussion on EVA – if capitalized.

RoI is a ratio. EVA is a value. RoI is more popular than EVA EVA is a bit difficult to calculate given the problems with calculating the capital 53 charge Calculation Superiority Popularity Simplicity of calculation . Conceptually EVA is superior than RoI As per one survey carried by Vijay Govindarajan of Fortune 1000 companies. It is found out by subtracting capital charge from Profit after Tax. Numerator is income and denominator is assets employed.Responsibility centers – Performance measures of an Investment center – ROI v/s EVA Point RoI EVA Meaning RoI is the comparison of the income generated with the assets employed. Conceptually EVA is superior than RoI As per one survey carried by Vijay Govindarajan of Fortune 1000 companies. RoI is more popular than EVA RoI is comparatively easy to calculate EVA is the residual profit after taking into account the capital charge.

– Simple to calculate. easy to understand and meaningful in an absolute sense – It is a common denominator that may be applied to any organizational unit responsible for profitability regardless of size or type of business 54 .Responsibility centers – Performance measures of an Investment center – RoI • Advantages of RoI – It is a comprehensive measure – anything that affects the financial statements affect the RoI.

Responsibility centers – Performance measures of an Investment center – Superiority of EVA over RoI • 4 points – EVA offer same profit objective for comparable investments. To induce managers at the BU level to enhance shareholders value. RoI creates a bias towards little or no expansion in high-profit business units while at the same time low-profit units are making investments at rates of returns well below those rejected by high-profit units . unlike RoI which may make a manager reluctant to accept lower RoI (20%) opportunities than the current RoI (30%) levels despite being more than CoC (10%). – Different interest rates can be used for different types of assets. – Units can increase RoI by actually decreasing its overall profits. – EVA as compared to RoI has a stronger positive correlation with changes in a company’s market value. With RoI this is not possible. 55 . For more riskier assets. This thing will not happen if EVA is measured. higher rates of costs of capital can be used. managers can be told to create and grow EVA.

First iteration of the new strategic plan 4. Second iteration of the new strategic plan 6.Strategic Planning Process 1. Deciding on assumptions and guidelines 3. Analysis 5. Final review and approval 56 . Reviewing and updating the strategic plan from last year 2.

Budgetary control – Budget preparation process • Organization • Budget Department • Budget Committee • • • • • Issuance of guidelines Initial budget proposal Negotiation Review and approval Budget revisions • Procedures that provide for systematic updation • Procedures that allow revisions under special circumstances 57 .

– It relieves the top management from day-to-day intervention and botheration as it can look only into activities that are outside the budget 58 . monthly and weekly budgets • Importance – It translates the strategic plan into an annual operating plan with reasonable details – It provides a basis for translating the strategic decisions into actions during the forthcoming year – It provides a good basis for controlling the actuals. Variances can be analyzed and corrective actions can be taken.Budgetary control – Types of budgets & importance – Types • • • • Fixed and flexible budgets Functional budgets Incremental & Zero Base budgets Annual. quarterly.

Budgetary control – Zero based budgeting • In contrast to incremental budgeting. 59 . However it demands some time and energy. ZBB starts the budget from the scratch (de novo) • Managers are required to justify the items with proper bases • Thus ZBB is an intensive review of the budgetary allocations • Certain basic questions are asked like – should the activity under review be performed at all? What should the quality level be? • It is a good way of doing budgeting and can eliminate a lot of waste.

The transfer price is the mechanism for distributing this revenue. manufacturing and marketing of a product they should share the revenue when the product is finally sold.Transfer Pricing . • Objective of TP – • To provide each BU with information to determine optimum tradeoffs between company costs and revenues • To induce goal congruent decisions • To measure economic performance of BU’s • It should be simple to understand and easy to administer 60 .basics • If 2 or more profit centers are jointly responsible for developing.

methods • Fundamental principle is that the TP should be similar to the price that would have been if the product was sold in outside market. the same is charged to the transferee unit on a periodical basis • Thus the two-step pricing would mean – the first step to charge the variable cost as the TP and in the second step a lump-sum charging of the fixed cost and the profit. • This method helps the transferee division to make appropriate short-term marketing decisions 61 .Transfer Pricing . • Methods – • Cost based • Standard Costs plus markup • Two-step pricing • Instead of building the fixed cost and profit element on a unit level as a part of the TP.

After the product is sold the BU share the contribution earned which is the SP minus the variable manufacturing and marketing cost.Transfer Pricing . • • Market price based Negotiated price 62 .methods • Methods – • Cost based • Profit sharing – this operates as under – 1. Product is transferred to marketing division at standard variable cost 2.

Transfer Pricing .methods Comparative usage of the TP methods by fortune 1000 Companies as per survey by Vijay Govindarajan 17% Cost based Market Price 52% 31% Negotiated price/other 63 .

methods • Methods – • Dual Pricing (2 sets of prices) • • • • Crediting transferor with outside sales price But charging the transferee with total standard costs Difference to be charged to a HQ account that will get eliminated at the time of consolidation This method is used when there are conflicts between the transferor and transferee division and any other method is not working 64 .Transfer Pricing .

Performance Measurement – Balanced Score Card • • • • Developed by Kaplan and Norton Provides a mechanism for linking strategy to action – creates awareness of the KRA’s • Translates strategy into measurable parameters A comprehensive measure of performance Four perspectives to measure performance • • • • Customer Internal Innovation and learning Financial • For each of this perspective appropriate performance measures should be developed 65 .

Profit Margin etc These measures can be quite accurately measured Since these measures are easily quantifiable and comparable. Employee Morale etc It is quite difficult to measure and quantify these measures Since these measures are not easily quantifiable and comparable. practically they are widely applied Non-financial measures These are performance measures that are not expressed in terms of financial parameters Customer satisfaction. EVA. 66 Examples Degree of accuracy in measurement Degree of attention . practically they are not that widely applied. However with the advent of BSC these measures are also getting importance.Performance Measurement – Balanced Score Card – Difference between financial and non-financial measures Point Meaning Financial measures These are performance measures that are expressed in terms of financial parameters Return on Investment.

Benefits • ABC tries to allocate costs on rational basis instead of ad-hoc basis like labor hours and machine hours or percentage of labor cost/material cost • Cost drivers are identified.Activity Based Costing (ABC)Nature. For example in purchasing activity. • Information provided by ABC can be used in policies relating to: – – – – – Full-line versus focused product line Product pricing Make or buy decision Product mix decisions Elimination of non-value-added activities etc 67 . These are real causes of cost incurrence. number of purchase orders is the cost driver – it causes costs to happen in the purchase department • The concept is quite useful given the fact that these days OHs are significant elements of costs and the number of products produced by a firm have increased. ABC gives more accurate costing of the products as compared to traditional methods.

basis of allocation Machine Hour. cost driver Based on actual consumption of resource measured through different cost drivers More accurate product costing Relatively difficult to use More number of products. Labor Hour etc ABC Activity. OH cost relatively less 68 . OH cost relatively high Accuracy in costs Simplicity Suitability Less accurate product costing Relatively simple to use Lesser number of products.Activity Based Costing (ABC)comparison with traditional costing Point Key concepts Basis of OH allocation Traditional Costing Cost Center.

MCS in service sector • Characteristics of service organizations in general • • • • Absence of inventory buffer Difficulty in controlling quality Labor intensive Multi-unit organizations – The above characteristics peculiar to service sector are the causes of differences in the nature of MCS that is used in the Manufacturing Sector 69 .

MCS in service sector – Professional service organizations • Special Characteristics • • • • • Goals Professionals Output and input measurement Small size Marketing Pricing Profit Centers and TP Strategic planning and budgeting Control of operations Performance measurement and appraisal 70 • MCS • • • • • .

MCS in service sector – Financial service organizations • Special Characteristics • • • • Monetary assets Time period for transactions Risk and reward Technology General principles of MCS apply but they need to be adapted to the above mentioned special characteristics • MCS • 71 .

MCS in service sector – Health Care Organizations • Special Characteristics • • • • • Difficult social problem Change in mix of providers Third-party payers Professionals Importance of quality control General principles of MCS apply Because of high cost of equipments. strategic planning process is important Annual budget preparation is conventional Huge quantity of information are available quickly for controlling of operating activities Financial performance is analyzed by comparison of revenues and expenses with budgets 72 • MCS • • • • • .

MCS in service sector – Nonprofit Organizations • Special Characteristics • • • • Absence of the profit measure Contributed Capital Fund Accounting Governance Product pricing Strategic planning and budget preparation Operation and evaluation 73 • MCS • • • .

internal audit. 74 . Purpose of these audits are different. cost audit. Findings from an audit can help strengthen future controls.Auditing as a control tool • • • • Auditing is a control tool that ensures through checking. An audit system makes the staff more vigilant. Audits like concurrent audit in banks actually act a continuous control system. verification of documents and evidence that the plans/policies of the management are implemented as desired Many big organizations have a special internal audit department that carries internal audit to see to it that the internal controls and checks as set by the management are being adhered to There are different types of audits like financial audit. management audit etc.

sness of control over costs decisions. Nature Mandatory as per statute. Not necessarily CA By Board of Directors Usually optional. Effectiveness of management 75 functions . Emphasis Compliance of Accounting Standards in Efficient use of Propriety/judiciou resources. Also known as statutory audit. Optional. Otherwise not mandatory.Auditing as a control tool – Different types Point Purpose Financial To verify trueness and fairness of financial statements Cost To check that the cost accounting plan is adhered to Internal To check that the internal checks and controls are being observed Management To investigate into specific issues or check effectiveness of corporate planning Not necessarily CA By Management Auditor Appointment Qualified CA By shareholders Qualified ICWA By Government & Management Ordered by the Central Govt.

that is. Management Auditor generally is a senior person with good allround knowledge and experience. He uses tools like questionnaire to gather audit evidence. the management auditor judges the effectiveness of the functions performed by the management. decision making. controlling and other such functions performed by the management. • • • 76 . The Management Auditor will check the planning. If used properly Management Audit can be a good control tool to provide feedback to the management about its own effectiveness.Management Audit • • Management Audit as the name suggests is the audit of the management itself.

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