Q.1 Short notes: a.

Impact of management style on management controls: Ans: The internal factor that probably has the strongest impact on management control is management style. Usually, subordinates attitude reflects that what they perceive their superiors attitude ultimately stem them from the CEO. Managers come in all shapes and sizes. Some are charismatic and outgoing, others are less ebullient. Some spend much time looking and talking to people, others rely more heavily on written reports. Examples: when Reginald Jones was appointed CEO of GE in the early 1970s, the company was a large, multi-industry company that performed fairly well in a number of mature markets. But the company did have its problems; price fixing scandals that sent several executive in jail, coupled with GEs sound defeat in, and subsequent retreat from, the mainframe company. Jones management style was well suited to bring more discipline to the company. Jones awes formal, dignified, refined, bright, and both willing and able to delegate enormous amounts of authority. He instituted formal strategist planning and built up one of the first strategic planning unit in Major Corporation. After Jones, jack Welch, outspoken, impatient, informal, entrepreneur. These qualities are well suited in the era of 80s & 90s. In 2001, when jack Welch after 20 years at the helm, Jeff Immelt was chosen as new chairmen an d CEO, Immelt plan to focus on GEs customer orientation, business mix, management diversity & technology. GE has well-deserved reputation for producing sterling business managers who have very different styles but a common ability to lead successfully. b. . Free Cash Flow: A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:

It can also be calculated by taking operating cash flow and subtracting capital expenditures. Free Cash Flow of the Firm is calculated as follows:A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.

Calculated as:

This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems.

c. Management control process in organization: Ans: Management control is the process by which managers influence other members of the organization to implement the organizations strategies. Management control process involves informal interactions between one manger and another manager and his or her subordinates. Informal communications occurs by means of memoranda, meetings, conversations, and even by facial expression. The informal interactions take place within a formal planning and control system. Such system includes the following activities: 1] Strategic planning, 2] Budget preparation, 3] Execution, 4] Evaluation of performance. Each activity leads to next in a regular cycle. 1] Strategic planning: it is process of deciding on the major programs that organization undertakes to implement its strategies and appropriate amount of resources that will be devoted to each. The output of the process called as strategic planning. This is the first step in management control cycle. 2] Budget planning: budget represent fine tuning of the strategic planning, incorporating most current information. In budget, revenue and expenses are rearranged from programme to the responsibility centre, thus budget shows the expenses that each managers expected to occur. The process of budget preparation is essentially one of the negotiations between the managers of each responsibility centre and their superior. 3] Execution: managers execute the programme or part of the programme for which they are responsible and also report on what has happened in the course of fulfilling that responsibility. Reports on responsibility centre may show budgeted and actual information, financial and non-financial performance measures, internal & external information. 4] Evaluation of performance: the process of evaluation is comparison of actual expenses and those that should have been incurred under circumstances. If the circumstances assumed in the budget process are unchanged, the comparison between budgeted and actual amounts.

If circumstances have changed, these changes are taken into accounts. Ultimately, the analysis leads to praise or constructive criticism of the responsibility centre managers.

d. Implication of differentiated strategies on controls: Ans: Any organization, however well aligned its structures is to the chosen strategy, can not effectively implement its strategies without a consistent management control system. While organization structure defines the reporting relationship and responsibilities and authorities of different managers, it needed an appropriately designed control system to the function effectively. Different corporate strategies imply the following differences in the context in which control systems need to be designed: 1. As firms become more diversified, corporate level managers may not have significant knowledge of, or experience in, the activities of the companys various business units. If so, corporate level managers for highly diversifies firms can not expect to control the different businesses on the basis of intimate knowledge of their activities and performance evaluation tends to be carried out at arms length. 2. Single industry and related diversified firms possess corporate wide core competencies on which the business units are based. Communication channels and transfer of competencies across business units. Therefore, are critical in such firms. In contrast, there are low levels of interdependence among the business units of unrelated diversified firms. This implies that as firm becomes more diversified, it may be desirables to the change the balance in control system from an emphasis on fostering cooperation to an emphasis on encouraging entrepreneurial spirit.

Q.2

Under which conditions Management is better advised not to create

Profit

Centers? Explain the advantage of creation of Profit Centers? Ans. When a responsibility centre`s financial performance is measured in terms of profit

(i.e by the difference between the revenue and expenditure) the centre is called the profit centre. Profit is particularly useful performance measure since it allows senior management to use one comprehensive indicator rather than several. Many management decisions involve proposals to increase expenses with the expectations of an even greater increase in sales revenue. Such decisions are said to involve expenses / revenue trade off. Additional advertising expense is an example. Before it is safe to delegate such a trade off decision to a lower level manager two conditions should exist. These are as follows :

i) The manager should have access to relevant information needed for making such a decision. ii) There should be some way to measure the effectiveness of trade offs the manager has made. A major step in creating profit centers is to determine. The lowest point in an organization where these two conditions prevail. Advantages Of Profit Centers:Establishing organization units as profit centers provides the following advantages:1. The quality of decisions may improve because they are being made by

managers closest to the point of decision. 2. The speed of operating decisions may be increased since they do not have to be referred to the corporate head quarters. 3. Headquaters management, relieved of day-to-day decision making can concentrate on broader issues. 4. Managers subject to fewer corporate restraints, are freer to use their imagination and initiative. 5. Because profit centers are similar to independent companies they provide an excellent training ground for general management. Their managers gain experience in managing all functional areas and upper management gains the opportunity to evaluate their potential for higher level jobs. 6. Profit consciousness is enhanced since managers who are responsible for profits will constantly seek ways to increase them. 7. Profit centers provide top management with ready-made information on profitability of the company`s individual components. 8. Because their output is readily measured profit centers are particularly responsive to pressures to improve their competitive performance.

3 (a) Describe the features of cost based and market price based transfer methods?

pricing

Ans:- In divisionalised companies where profit or investment centers are created there is likely to be interdivisional transfer of goods or services and this internal transfer create the problem of transfer pricing. A transfer price is that notional value at which goods and services are transferred between division in a decentralized organization. Transfer prices are normally set for intermediate products which are goods and services that are supplied by the selling division to the buying division. The goods that are produced by the buying division and sold to the outside world are known as final product. Broadly there are 3 bases available for determining transfer prices but many options are also available within each bases. 1. MARKET BASED PRICES:Market price refers to a price in an intermediate market between independent buyer and seller. When there is competitive external market for the transferred product, market prices work well as transfer prices. When transferred goods are recorded at market prices divisional performance is more likely to represent the real economic contribution of the division to total company profit. If the goods cannot be brought from a division within the company the intermediate product would have to be purchased from the current market price from the outside market. Divisional profits are therefore likely to be similar to the profits that would be calculated if the divisions were to be separate organizations. Divisional profits can be compared directly with the profitability of similar companies operating in the same type of business. No divisions can benefit at the expense of another division. The selling division can sell all that it produces at the market price transferring internally at a lower price would make that division worse off. Since the minimum transfer price for the selling division is the market price and the maximum price for buying division is also the market price the only possible transfer price is the market price. The market price can be used to resolve conflicts among the buying and selling division. Market price is optimal so long as the selling division is operating at full capacity. Market price may change often. Internal selling expense may be less than would be incurred if the products were sold to outside.

2. COST BASED PRICES:When external markets do not exist or are not available to the company or when the information about external market prices is not readily available companies may decide to use some form of cost based transfer pricing system. Under this method the transfer price is based on the total product cost. It has three characteristics. 1. It provides a varying price since cost per unit keeps changing as use of capacity changes. 2. It mixes short run and long run costs. 3. The concept is based on the equation of variable cost plus arbitrary mark up to cover capacity related cost and a targeted profit margin.

Q.3. (b) Explain the problems faced in pricing corporate services furnished by corporate services staff to business units in the company. Assume profit centers decentralization. Ans: There are some of the problems associated with charging business units for services

furnished by corporate staff units. Central accounting, public relations, administration these are the costs of central service staff units over which business units have no control if these costs are charged at all, they are allocated, and the allocations do not include a profit component. The allocations are not transfer prices. There remain two types of transfers: 1. For central services that the receiving unit must accept but can at least partially control the amount used. 2. For central services that the business unit can decide whether or not to use. Control over amount of service Business units may be required to use company staffs for services such as information technology and research and development. In these situations, the business unit manager cannot control the efficiency with which these activities are performed but can control the amount of the service received. There are three schools of thought:

 One school holds that a business unit should pay the standard variable cost of the discretionary services. If it pays less than this, it will be motivated to use more of the service than is economically justified. On the other hand, if business unit managers are required to pay more than the variable cost, they might not elect to use certain cervices that senior management believes worthwhile from the companys viewpoint. This possibility is most likely when senior management introduces a new service, such as a new project analysis program. The low price is analogous to the introductory price that companies sometimes use for a new product. A second school of thought advocates a price equal to the standard variable cost plus a fare share of the standard fixed costs-that is, the full cost. Proponents argue that if the business units do not believe the services are worth at least this amount, something is wrong with either the quality or the efficiency of the service unit. Full costs represent the companys long run costs, and this is the amount that should be paid. A third school advocates a price that is equivalent to the market price or to standard full cost plus a profit margin. The market price would be used if available (e.g. costs charged by a computer service bureau); if not, the price would be full cost plus a return on investment. The rationale for this position is that the capital employed by service units should earn a return just as the capital employed by manufacturing units does. Also, the business units would incur the investment if they provided their own service. Optional use of Services In some cases management may decide that business units can choose whether to use central service units. Business units may procure the service from outside, develop their own capability, or choose not to use the service at all. This type of arrangement is most often found for such activities as information technology, internal consulting groups, and maintenance work. These service centers are independent; they must stand on their own feet. If the internal services are not competitive with outside providers, the scope of their activity will be contracted of their services may be outsourced completely. Profit Centre Decentralization : Management style and culture influence concept of decentralized operation which top management chooses to run the organization. It is concerned with how control over divisional operations is exercised by top management through personal interactions, policies and

procedures, including planning system. The chief executive of a company has to distribute the responsibility for profit earning among the top executives, keeping the control with him. In a big company with diversified products manufactured and distributed through number of units scattered over wide geographical locations-there is danger of responsibility for profit being diffused. Under functional structure, the management of profit becomes a very hard task and may even cut into the efficiency of the firm. Decentralization is surely an effective means to overcome this diffusion of profit responsibility.

Q.4 What is a responsibility center? List and explain different types of Responsibility Centres in organizations. ANS: A responsibility centre may be defined as an area of responsibility which is Controlled by an individual. A responsibility centre is an activity such as department over which a manager exercises responsibility. Responsibility areas may be departments ( drilling or maintenance department), product lines ( chemicals or fertilizers), territories (North or South) or any other type of identifiable unit or combination of units. The specific types of responsibility areas depend on the nature of the firm and its activities. It is relatively easy to identify activities with specific managers. A plant manager is in charge of a plant and is usually responsible for producing budgeted quantities of specific products within budgeted cost limit. A sales manager is responsible for getting orders from customers, and so on. A responsibility center exists to accomplish one or more purposes, termed its objectives. The objectives of the companys various responsibility centers are to help implement these strategies. Types of Responsibility Centres Responsibility centres can be classified by the scope of responsibility assigned and decision-making authority given to individual managers. The following are four common types of responsibility centers. 1) Cost Centre A cost or expense centre is a segment of an organization in which the mangers are held responsible for the cost incurred in that segment but not for revenues. Responsibility in a cost center is restricted to cost. For planning purposes, the budget estimates are cost estimates; for control purposes, performance evaluation is guided by a cost variance equal to the difference between the actual and budgeted costs for a given period. Cost center managers have control over some or all of costs in their segment of business, but not over revenues. Cost centres are widely used forms of responsibility centers. In manufacturing organizations, the productions and service departments are classified as cost centre. Also, a marketing department, a sales region or a sales representative can be defined as a cost centre. Cost center may vary in size from a small department with a few employees to an entire manufacturing plant.

In addition cost centres may exist within other cost centres. For example, a manager of a manufacturing plant organized as a cost centres, with the department with a few employees to an entire manufacturing plant organized as a cost centre may treat individual departments within the plant as separate cost centres, with the department managers reporting directly to plant manager. Cost centre managers are responsible for the cost that are controllable by them and their subordinates. However, which costs should be charged to cost centres, is an important in evaluating cost centre managers.

2) Revenue Centre A revenue centre is a segment of the organization which is primarily responsible for generating-sales revenue. A revenue centre manager does not possess control cost, investment in assets, but usually has control over some of the expense of the marketing department. The performance of a revenue centre is evaluated by comparing the actual revenue with budgeted revenue and actual marketing expenses. The Marketing manager of a product line, or an individual sales representative are examples of revenue centres. For eg In 1999 two companies, Servico and Impac Hotel Group, merged to create Lodgian, Inc., one of the largest owners and operators of hotel in the United States. Lodgian reorganized itself into six regions, each with a Regional Vice-president, a regional operational manager, and a regional Director of sales and marketing. The sales and marketing functions were constituted as revenue centres, with the goal to significantly improve market share. In the highly competitive call centre industry environment of 2004, some companies successfully differentiated themselves by converting their services centres into revenue centres. The revenue streams were generated through after service sales. The call centre agents would address the calling customers needs and requests, provide the necessary service, and then offer some type of new product or service that would meet the customer needs. 3) Profit Centre A profit centre is a segment of an organization whose manager is responsible for both revenues and costs. Managers of profit centres have control over both costs and revenues. In a profit centre the manager as the responsibility and the authority to make decisions that affect both costs and revenues for the department or division. The main purpose of a profit centre is to earn profit. Profit centre managers aim at both the production and marketing of a product. The performance of the profit is evaluated in terms of whether the centre has achieved its budgeted profit. A division of the company which produces and markets the products may be called a profit centre. Such a divisional manager determines the selling price, marketing programmes and production policies. Profit centres make managers more concerned with finding ways to increase the centres revenue by increasing production or improving distribution methods. The manager of a profit centre does not make decisions concerning the plant assets available to the centre. For e.g., the manager of the sporting goods department does not make the decisions to expand the available floor space for the department. Mostly profit centres are created in an organization in which they sell products or services outside the company. In some cases, profit centres may be selling products or

services within the company. For example, repairs and maintenance department in a company can be treated as a profit centre if it is allowed to bill other production department in a company can be treated as a profit centre if it is allowed to bill other production department for the services provided to them. Similarly, the data processing department may bill each of companys administrative and operating departments for providing computer related services. An example of a profit centre in a departmental store having different retail department is displayed in Fig

Store Manager

Mens Clothing MMm Departme nt

Women s clothing Depart ment

Children s clothing departm ent

Toys depart ment

Shoe Depar tment

Medicines departme nt

Photogr aphy departm etn

4) Investment Centre An investment centre is responsible for both profits and investments. The investment centre manager has control over revenues, expenses and the amount invested in the centre assets. He also formulates the credit policy which has a direct influence on debt collection, and the inventory policy which determines the investment in inventory. The manager of an investment centre has more authority and responsibility than the manager of either a cost centre or a profit centre. Besides controlling costs and revenues, he has investment responsibility too. Investment on asset responsibility means the authority to buy, sell and use divisional assets. For example division of a large multinational companies. The division is assessed in terms of its contribution to overall profits.

Q.5 a. What are interactive controls ?

Interactive control is a subset of the management control information that has a bearing on the strategic uncertainties facing the business becomes the focal point. In industries that are subject to very rapid environmental changes, management control information can also provide the basis for thinking about new strategies. In a rapidly changing and dynamic environment, creating a learning organization is essential to corporate survival. Learning organization refers to the ability of organization employees to learn to cope with environmental changes on an ongoing basis. An effective learning organization is one in which employees at all levels continuously scan the environment, identify potential problems and opportunities, exchange environment information candidly and openly and experiment with alternative environment. The main objective of interactive control is to facilitate the creation of a learning organization. Interactive control

Todays Management Control system

Tomorrows Strategy

Interactive controls alert management to strategic uncertainties, either troubles ( e.g., loss of market share, customer complaints) or opportunities ( e.g., opening a new market because certain governmental regulations have been removed ). These become the basis for managers to adopt to a rapidly changing environment by thinking about new strategies. Interactive control has the following characteristics: 1) A subset of the management control information that has a bearing on the strategic uncertainties facing the business becomes the focal point. 2) Senior executives take such information seriously. 3) Managers at all levels of the organization focus attention on the information produced by the system. 4) Superiors, subordinates and peers meet face-to-face to interpret and discuss the implications of the information for future strategic 5) The face-to-face meetings take the form of debate and challenge of the underlying data, assumptions, and appropriate actions. Strategic uncertainties relate to fundamental, nonlinear shifts in the environment that potentially can create new business models. Firms should monitor the following technological discontinuities:

1. Internet and e-commerce growth have potential implication for many firms. Some of the particular items to monitor include : Growth in the number of internet users. Roll-out of broadband communications. Emergence of ubiquitous point-and-click interfaces that are based on open standards, cheap to set up and run, and global. Increasing power of computing and communication technologies. Growth in mobile communications for both voice telephony and internet access. Development and deployment of speech recognition and machine based language translation technologies that may make it possible for people speaking or writing different languages to communicate with each other in real time.

2. converging technologies will have the following effects: Convergence of voice, data, and image has implications for firms operating in consumer electronics (Phillips), telecommunications (British Telecom), and computer (IBM) industries. Integration of chemical and digital technologies has impact on firms such as Eastman Kodak. Blending of hardware and software has impact on firms such as Sony.

Merging of plant engineering and biotechnology opens up opportunities for firms I life sciences (Novartis, Merck, Pfizer). 4. Shift from physical goods to services is rapidly transforming the automobile industry (Ford) and consumer durable goods business (General Electic). Interactive controls are not a separate system; they are an integral part of the management control system. Some management control information helps managers think about new strategies. Interactive control information usually, but not exclusively, tends to be nonfinancial. Since strategic uncertainties differ from business to business, senior executives in different companies might choose different parts of their management control system to use interactively.

Q. 5 b Discuss the features of management control system in nonprofit organization.

Ans: A nonprofit organization was define by law, is an organization that cannot distribute assets or income to, or for the benefit of, its member, its officers, directors. The organization can, of course, compensate its employees, including officers and members, for services rendered and for goods supplied,. This definition does not prohibit an organization from earning a profit, on average, to provide funds for working capital and for possible rainy days. Characteristics of nonprofit organization o Absence of the Profit Measure o Contributed capital o Fund Accounting o Governance Management control System and its features in nonprofit organization Product Pricing Many nonprofit organizations give inadequate attention to their pricing policies. Pricing of services at their full const is desirable. A full-cost price is the sum of direct costs, indirect cost, and perhaps a small allowance for increasing the organizations equity. This principle applies to services that are directly related to the organizations objectives. Pricing for peripheral activities should be market-based. Thus a nonprofit hospital should price its health care services at full const, but prices in its gift shop should be market based. In general, the smaller and more specific the unit of service that is priced, the better the basis for decisions about the allocation of resources. For example, a comprehensive daily rate for hospital care, which was common practice a few decades ago, masks the revenues for the mix of services actually provided. Beyond a certain point, of course, the cost of the paper work associated with pricing units of service outweighs the benefits. As a general rule, management control is facilitated when prices are established prior to the performance of the services. If an organization is able to recover its incurred costs, management is not motivated to worry about cost control. Strategic planning and budget Preparation In nonprofit organizations that must decide how best to allocate limited resources to worth-while activities, strategies planning is a more important and more time-consuming process than in the typical business. Colleges and universities, welfare organizations, and organization in certain other nonprofit industries know before the budget year begins, the approximate amount of their revenues. They do not have the option of increasing revenues during the year by increasing their marketing efforts. They budget expense so that organization will at least break even at the estimated amount of revenue. They require that managers of responsibility centre limit spending close to the budget amounts. The budget is, thereof, the most important management control tool, at least with respect to financial institution.

Operation and Evaluation In most nonprofit organizations, there is no way of knowing what the optimum operating costs are. Responsibility centre managers, therefore, tend to spend whatever is allowed in the budget, even though the budgeted amount may be higher than is necessary. Conversely, they may refrain from making expenditures that have an excellent payoff simply because the expenditure was not included in the budget. Although nonprofit organizations have has a reputation for operating inefficiently, this perception has been changing for good reasons. Many organization have had increasing difficulty in raising funds, especially from government resources. This has led to belttightening and to increased attention to management control. As mention above, the most dramatic change has been in hospital costs, with the introduction of reimbursement on the basis of standard prices for diagnostic-related groups

Q.8 Explain various features of Financial, Operational and Management Audit (all of which are forms of Internal Audit). Illustrate with one example. Internal auditing is a profession and activity involved in helping organisations achieve their stated objectives. It does this by utilizing a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The scope of internal auditing within an organization is broad and may involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations. Internal auditing frequently involves measuring compliance with the entity's policies and procedures. However, Internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds.

Publicly-traded corporations typically have an internal auditing department, led by a Chief Audit Executive ("CAE") who generally reports to the Audit Committee of the Board of Directors, with administrative reporting to the Chief Executive Officer. The profession is unregulated, though there are a number of international standard setting bodies, an example of which is the Institute of Internal Auditors ("IIA"). Best Practices in Internal Auditing Measuring the internal audit function The measurement of the internal audit function can involve a balanced scorecard approach. [10] Internal audit functions are primarily evaluated based on the quality of counsel and information provided to the Audit Committee and top management. However, this is primarily qualitative and therefore difficult to measure. Customer surveys sent to key managers after each audit project or report can be used to measure performance, with an annual survey to the Audit Committee. Scoring on dimensions such as professionalism, quality of counsel, timeliness of work product, utility of meetings, and quality of status updates are typical with such surveys. Quantitative measures can also be used to measure the functions level of execution and qualifications of its personnel. Key measures include: Plan completion: This is a measure of the degree to which the annual plan of engagements is completed, measured at a point in time. This may be measured using the number of projects completed, weighted by the planned size of each project, with estimates for projects inprogress. Measured throughout the year, it is compared against the percentage of the year elapsed. Report issuance: This is a measure of the time elapsed from completion of testing to issuance of the final audit report, including managements action plans. This can be measured in average days or percentage of reports issued within a certain standard, such as 30 days. Establishing expectations for the timing of managements response to report recommendations is critical. In addition, the scope and degree of change involved in the reports action plans are key variables. For example, a report for a single retail store requiring only the store managers action might take 3-5 days to issue. However, a report consolidating findings from 20 retail stores, with action plans with national implications determined by top management, may take 30-60 days in complex organizations. Issue closure: Reported audit findings are often called issues or deficiencies. Professional standards require audit functions to track reported findings to resolution, which effectively requires the maintenance of an issues follow-up database. The number of days that reported issues remain open, or open after their agreed-upon closure date, are key measures. In addition, reporting database statistics such as the number of issues open (unresolved), closed (resolved), and issues opened/closed during a given period are useful statistics.

Staff qualifications: This can be measured through the percentage of staff with professional certifications, graduate degrees, and overall years of experience. Staff utilization rate: This is measured as the percentage of time spent on projects, as opposed to administrative time such as training or vacation. Many internal audit departments track time by audit project. This is typically captured in a database or spreadsheet. Staffing level: The number of positions filled relative to the authorized staffing level. Due to the challenge of finding qualified staff, departments may have rotational programs to bring in management to complete tours in the function or be "guest" auditors. Audit departments also "co-source," meaning they obtain contract auditors from service providers. Financial Audit: A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information.

Features: Simplified input of auditing tasks (audit sheets, recommendations and action plans) Instant information access and sharing for everyone Unified auditing methods Automated report generation Less labour intensive and time-saving during report review meetings Operational Audit: An Operational Audit Process understands the responsibilities and risks faced by an auditable faculty, department, unit or process (Hierarchy of Concerns for Audit and assess the level of control) exercised by management; identify, with management participation, opportunities for improving control. This includes: Reliability and integrity of financial and operational information;

Effectiveness and efficiency of operations; Safeguarding of assets; Compliance with laws , regulations and contracts. Normally, this involves the following six phases: 1) Pre-audit process The process normally begins with an introductory meeting to inform the unit's senior management that an audit will take place, to explain the process, and to gather background information. Following the introductory meeting, the auditor performs a preliminary gathering of information using various sources of information (for example, the unit's web site) to identify the possible components and concerns. At the end of this stage, a binder is prepared and is used in the risk assessment meeting with the auditees. 2) Risk assessment meeting with auditee The risk assessment meeting involves the key managers of the department or faculty or unit to be audited. One objective of the risk assessment meeting is to obtain confirmation of the components and major concerns of the unit . The key managers also perform an assessment of the importance of each concern (low, medium or high) for each component. They are also requested to perform a voting exercise to compare and rank the components and concerns. This step is preferably completed during the meeting, but may be completed separately with each manager. The result is a risk template. The high-risk areas identified by management will then provide the focus for the audit project. 3) Control matrix The auditor meets with the managers of the high-risk areas to identify the key management objectives and the key control activities performed. After these meetings, the auditor documents the key management objectives and the key controls. The lack of key controls identified, referred to as control design issues, is also documented in the matrix. Once the first draft of the control matrix is completed, it is sent back to the managers for confirmation and validation. The lack of key controls (control design issues) is also discussed with management. The key controls identified in the matrix represent the controls to be tested in the next phase. 4) Test design Once the matrix has been agreed upon with management, the auditor designs the test procedures for the identified key controls. The auditor prepares a test design for each key control activity identified in the matrix. The testing plan is reviewed before the testing phase begins. The testing phase usually requires the auditor's presence in the department to conduct interviews, examine documents, and obtain explanations. The auditor documents the results

of the tests, the conclusion, and any proposals. During testing, the auditor also discusses preliminary findings with individual managers. The test results become the basis for the first draft of the audit report. 5) Report drafting After the previous stages have been completed, the auditor can produce a draft report to be presented and discussed with management. The draft report uses the following standard structure: Memo Conclusion Background information Scope Objectives Proposals Risk template and key controls as an appendix Other appendices The report review and discussion process is designed to arrive at agreed action plans to resolve identified issues. Any management-accepted risks and differences of opinion are also reported. The report drafting process involves meetings with increasingly senior levels of the management hierarchy until the report has both the moral and monetary (if needed) support for the issues raised. 6) Final audit report The final report is distributed to all managers of an audited unit, the relevant members of senior management, the Vice-Principal, (Administration and Finance), the Chair of the Audit Committee of the Board, and the external auditors. Managerial Audit:

Q.9 Investment base used in performance evaluation of investment centres consists of various elements. Explain general practices used in organisation in treatment of each element and the likely response induced by the treatment of each of these elements in managers. PERFORMANCE MEASURES FOR INVESTMENT CENTERS Rate of Return on Investment (ROI)

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Advantages: 1) ROI allows management to assess both profitability and efficiency in using assets. 2) Divisions of unequal size can be com-pared. 3) Management is provided with information to make decisions on where to invest additional company funds. The company knows where it is getting "the most bang for its buck."

Disadvantage: If a manager is evaluated based on ROI, he or she will not invest in any project that will lower the division's ROI, even if it would increase the company's profitability. Residual Income The amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the income that individual had been putting toward the mortgage becomes residual income. Advantages: 1) It considers a company's minimum rate of return. 2) Any project that increases residual income will be pursued by division management. Disadvantage: The relative size of the divisions is not considered.

The balanced scorecard is a set of financial and nonfinancial measures that reflect multiple performance dimensions of a business. Transfer Pricing The Price at which Divisions of a company transact with each other. Transactions may include the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. Also known as " transfer cost " In managerial accounting, when different divisions of a multi-entity company are in charge of their own profits, they are also responsible for their own "Return on Invested Capital". Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance. Benefits of transfer pricing 1. Divisions can be evaluated as profit or investment centers. 2. Divisions are forced to control costs and operate competitively. 3. If divisions are permitted to buy component parts wherever they can find the best price (either internally or externally), transfer pricing will allow a company to maximize its profits. Few other Non - financial Performance Measurement Tool 1. 2. 3. 4. 5. Measures of product quality Customer complaints and warranty experience Customer satisfaction and retention rates Product availability and on-time performance New product time to market and market share

Q.10. Year and information about two expense centres in an organization Providing services is tabulated below to be used for review and performance appraisal. All figures are in Rs. : Centre Budget Actual Over Budget Under Budget A 13,30,893 13,85,154 54,261 B 11,76,302 11,30,073 46,229 Total 25,07,195 25,15,227

Number of personnel: A 46 46 B 26 24 2 Manager to whom the heads of these two centers report is not clear on how to use the available information for evaluation. Assuming that any further information requested would be available ( on proper justification), assistant Manager in his task of evaluation. Solution: Center B = 11,76,302/26 = 45,242.38 per person 45,242.38* (actual employee) 24 = 1,085,817.12 This should have been the actual base in the budget. Actual amount spent is = 44,255.88 = 1130073-1085817.12

1130073/24 = 47086.375- per person actual expense. 1176302/26 = 45242.38- per person actual expense. 47086.375-45242.38 =1843.995= 1844 Verification = 1844*24 = 44256 (Which is same as actual to be spent as per budget.) 44265 over spent For A budget = 1330893/46 = 28932.45 Actual = 1385154/46 = 30112.04 30112.04-28932.45 = 1179.59. Therefore verification = 1179.59*46 = Rs. 54261(over budget)

Q 11 omega co. has divisions-M & N. products required by div N are currently being outsourced at Rs.20/unit. Div M makes these products and can sell either to div N or to outside markets. Current capacity of div M is 50,000 units. Div N sells its products at Rs. 40/unit in the market. Income statement for both the divisions and the company is as underDiv M (Rs. Lacs) Sales 50,000 units @Rs 20/unit 20,000 units @Rs 40/unit 10 Div N Lacs) 8 (Rs. Omega Lacs) 10 8 co. (Rs.

Total Expenses Variable 50,000 units @Rs 10/unit 20,000 units @Rs 30/unit Fixed expenses Total expenses Gross income

10 5 3 (8) 2

8 6 1 (7) 1

18 5 6 4 (15) 3

Div M may be in a position to create an additional capacity of 20000 units at no additional fixed expenses. However, it can only continue to sell 50000 units in the market. (a) What should be done by the company as a whole? Justify with figures. (b) What would be the approach of managers of div M & N towards the possible capacity increase? What should it be? Why? (c) If you are commend interunit sale, what would be the recommended price? Why?

Ans: Income Statement with Production capacity: Unit M: 50000 * 20, Unit N 20000*40 Particulars Sales Unit M (In Lacs) 10 Unit N (In Lacs) 8 6 2 1 1 25% Total 18 11 7 4 3 38.88% (In Lacs)

Variable Exp. 5 Contribution Fixed Cost Profit PV Ratio 5 3 2 50%

Income statement with production capacity of additional 20000 units in Unit M Particulars Sales Unit M (In Lacs) 14 Unit N (In Lacs) 8 6 2 1 1 25% Total 22 13 9 4 5 40.90% (In Lacs)

Variable Exp. 7 Contribution Fixed Cost Profit PV Ratio 7 3 4 50%

a) What should be done by the company as a whole? Justify with figures. Ans: as per figures given in two tables mentioned above. The company can increase its production capacity with unit m. with no increase in Fixed cost for unit m the PV ratio remained same at 50%. As per additional increase in production of units, we can see PV ratio for entire company increased marginally from 38.88% to 40.90%. Looking at the increment in profit volume Ratio Company can increase its production with unit m. b) What would be the approach of managers of div M & N towards the possible capacity increase? What should it be? Why? Ans: the manager of div m should have positive outlook for additional increase in capacity with no burden of additional fixed cost. The manager of m division can take benefit of the leverage with increase in additional capacity. The manager of unit n should not worry of additional increase in capacity of unit m. the manger can outsource the additional capacity. The 70000 unit production capacity for unit n will bring the profit volume ratio to 40%, which will be in the favor of company.

c) If you are recommend interknit sale, what would be the recommended price? Why? Ans: as far as inter unit sale concerns, we would be happy to recommend same price as further reduction in the interunit price could hammer the PV ratio of unit m. It could also affect profitability of the overall firm. The reduction in the inter unit sale can affect the margins of the unit m. it could also affect margins of the outsource market. or

Q11 . Document processing is the activity in which Div DP of an org. is involved. This is the major activity of the org, which it, in fact, pioneered. However, between 1990 to 2000, market share of document products fell drastically by 40%. Competitive products

were being offered almost at prices equal to product costs of Div DP. Unfortunately for the company, the other div are showing fluctuating financial performance. Based on the information tabulated below and assuming that Div DP utilizes 70% of total company assets: (a) Compute ROA for Div DP for year 2001 and 2000. (b) Assuming that market exits should the company divest divisions other than Div DP? Why/why not? (c) Where do u think financial discipline by top mgt is immediately necessary? Justify one area.

Year Sales (Rs. Cr) Div DP Total company Net profit (Rs. Cr) Div DP Total company Financial position (Total company) Current assets (Rs. Cr) Total assets (Rs. Cr) Long term debt (Rs. Cr) Shareholders equity (Rs. Cr) Eps (Rs.) Dividend per share (Rs.)

2001 13.82 17.83 0.54 0.45 21.77 31.66 3.25 5.14 3.86 3.0

2000 13.58 17.97 0.55 0.24 20.18 31.64 7.15 5.05 1.66 3.0

Ans: a) Compute ROA for Div DP for year 2001 and 2000.

Formula for return on asset:

Net profit

*100

Total asset Particular Net Profit Asset utilized by DP Div i.e. 70% Of total asset of the company ROA 2001 0.54 22.162 2.44% 2000 0.55 22.148 2.48%

b) Assuming that market exits should the company divest divisions other than Div DP? Why/why not?

ROA Div DP Company

2001 2.44% 1.42%

2000 2.48% 0.76%

After assuming the condition that market exits, the company should not divest its Div DP. The answer for the question can be simply drawn from table mentioned above; locking at the ROA the Div DP has given better performance for the company as compared to its entire operations. c) Where do you think financial discipline by top management is immediately necessary? Justify one area. Ans: By observing financial data provided by the company, we think that Profitability or Increase in the Profit or Bottom-line Growth of Div DP is the area where top management should look into.

Net Profit Figure Div DP Company

2001 0.54 0.45

2000 0.55 0.24

Remark Profit down by 2% on year on year basis Profit up by 87% on year on year basis

The top management should look into bottom-line growth of div DP. This is area of concern for the company. The Div DP process constitutes major portion of he companys overall activity.

As mentioned in the problem Div DP utilize 70% asset out of the total asset of the company this makes skidding bottom line of the Div DP as area of concern for top management where they should look into.

Q.12) Vijay enterprises has three divisions. One of these manufactures Product A, which is sold to another division as component of its Product B. Product B is in turn sold to the third division which uses it as a component in its Product C. Product C is sold in outside market. Company has a rule that when products/components are transferred from one division to another standard cost plus 10% return on fixed assets and inventory would be charged to the buying division. Transfer price of products A and B as well as standard cost of Product C are required (to be used for performance appraisal of division) on the basis of following information:STANDARD COST PER UNIT Purchase of outside material (Rs.) Direct Labour (Rs.) Variable Overheads (Rs.) Fixed Overheads Per Unit (Rs.) Average Inventory (Rs.) Net fixed Assets (Rs.) Standard Production PRODUCT A 20 10 10 30 7 lacs 3 lacs 1 lac PRODUCT B 30 10 10 40 1.5 lacs 4.5 lacs 1 lac PRODUCT C 10 20 20 10 3 lacs 1.6 lacs 1 lac

Sol:Transfer to Product B:7 lac + 3 lac = 10 lac 10 lac * 10 % = 1 lac 1 lac 1 lac (units) =1

Transfer to Product C:1.5 lac + 4.5 lac = 6 lac 6 lac * 10% = 60,000 60,000 = 0.60

1 lac (units) PARTICULARS Purchase of outside material + Direct Labour (Rs.) + Variable Overheads (Rs.) + Fixed Overheads Per Unit (Rs.) Total + Transfer Price Total Transfer price of product A=Rs.71 pu Transfer price of product B=Rs. 161 pu Final cost of product C=Rs.222.06 pu (220+1+0.6+0.46) Comments: 1. The actual cost of the final product is only Rs.222, But the upstream margins added by product A was rs.1 per unit. For product B was Rs.0.6 per unit and C was Rs.0.46 per unit which increases the final cost to Rs.222.06 2. In a highly competitive market for eg. An export market it would be advisable for the company to sell the product for the price above Rs.220 and allocate the actual profit amongst the three divisions. PRODUCT A 20 10 10 30 70 1 71 PRODUCT B 30 10 10 40 90 71 + 0.60 161.60 PRODUCT C 10 20 20 10 60 161.60 222.06