PART ONE By taking a proactive approach to risk and risk
management, organizations will be able to achieve
Approaches to defining risk
Definitions of risk
o a chance or possibility of danger, loss, injury or
other adverse consequences
o at risk - exposed to danger
o risk is related to uncertainty of outcome
o Institute of Risk Management (IRM) - the
combination of the probability of an event and
its consequence
o ISO Guide 73 - the effect of uncertainty on
objectives
o Institute of Internal Auditors (IIA) - the
uncertainty of an event occurring that could
have an impact on the achievement of objectives
o risk in an organizational context - is anything
that can impact the fulfilment of corporate
objectives
Types of risks
risks are divided into four categories:
o compliance (or mandatory) risks; MINIMIZE
o hazard (or pure) risks; MITIGATE
- only result in negative outcome
- associated with a source of potential harm
o control (or uncertainty) risks; MANAGE
- associated with unknown and unexpected
events
o opportunity (or speculative) risks. EMBRACE
- relate to the relationship between risk and
return
Inherent level of risk
o risk matrix - is used to show the inherent level
of the risk in terms of likelihood and magnitude.
o absolute/gross risk - inherent level of risk
o residual level, net level or the managed level of
risk – current level of risk
Risk classification systems
Risks can be classified according to the:
- timescale for impact
- nature of the impact
- magnitude of the risk
Risk likelihood and magnitude
o are best demonstrated using a risk matrix
o risk matrix (risk map or heat map) - a commonly
used method of illustrating risk likelihood and
the magnitude of the event should the risk
materialize.
o horizontal axis - is used to represent likelihood.
o likelihood - refers to the chances of an unlikely
event happening
o severity - implies that the event is undesirable
the following four areas of improvement:
o Strategy
o Tactics
o Operations
o Compliance
- as risk exposure increases, the likely impact will
also increase
Risk and reward
o value at risk - represents the risk appetite of the
organization with respect to the activity that it
is undertaking.
Attitudes to risk
o risk attitude - indicates the long-term view of
the organization to risk
o risk appetite - indicates the short-term
willingness to take risk
Risk and triggers
o The left-hand side of the bow-tie represents the
source of a particular hazard and will indicate
the classification system used by the
organization for sources of risk.
o The right-hand side of the bow-tie sets out the
impact should the risk events occur
o In the center of the bow-tie is the risk event
o The purpose of using the bow-tie illustration is
to demonstrate the risk classification systems
used by the organization and the potential range
of impacts should a risk materialize.
Timescale of risk impact
o Hazard risks can be divided into:
a) risks to property
b) risks to people
c) risks to the continuity of a business
o Long-term risks will impact several years,
perhaps up to five years, after the event occurs
or the decision is taken
o Medium-term risks have their impact sometime
after the event occurs or the decision is taken,
and typically this will be about a year later
o Short-term risks have their impact immediately
after the event occurs.
o insurance is designed to provide protection
against risks that have immediate consequences
Four types of risk
o compliance risks
o hazard risks
o control risks
o opportunity risks
Opportunity management - is the approach that
seeks to maximize the benefits of taking
entrepreneurial risks.
Manage uncertainty risks
Control management - is concerned with reducing
the uncertainty associated with significant risks and
reducing the variability of outcomes.
Mitigate hazard risks
Hazard management is based on reducing the
likelihood and magnitude/impact of hazard losses.
o Risk management is the set of activities within
an organization undertaken to deliver the most
favorable outcome and reduce the volatility or
variability of that outcome.
The activities associated with risk management are
as follows:
o recognition of risks
o rating of risks
o ranking against risk criteria
o responding to significant risks
o resourcing controls
o reaction (and event) planning
o reporting of risk performance
o reviewing the risk management system
Enterprise risk management
o The main feature that distinguishes ERM from
what might be considered more traditional risk
management is the more integrated or holistic
approach that is taken in ERM. In many ways, it
can be considered to be a unifying philosophy
that draws together management of all types of
risks, rather than a new or different approach.
o Risk and Insurance Managers Society (RIMS) -
ERM is a strategic business discipline that
supports the achievement of an organization’s
objectives by addressing the full spectrum of its
risks and managing the combined impact of
those risks as an interrelated risk portfolio.
o unaware of obligations – INFORM;
o awareness of non-compliance – REFORM;
o actions to ensure compliance – CONFORM;
o achieve business opportunities – PERFORM;
o inactivity caused by obsession – DEFORM.
CHAPTER 2:
risk management standards
Scope of risk management standards
o a risk management standard is the combination
of a description of the risk management process,
together with the recommended framework
o the IRM Standard is a high-level approach aimed
at non-risk management specialist
o the Australian Standard and the COSO standard
are designed for use primarily by specialist risk
management practitioners
o For many stock exchanges, the greater emphasis
in the listing requirements and associated
corporate governance code is on internal control,
rather than risk management
o Orange book - contains a significant amount of
useful information on risk management tools and
techniques
Three distinct approaches followed in various
standards:
o ’risk management’ approach
o ’internal control’ approach
o ’risk-aware culture approach
Risk management process
o IRM Standard, ISO 31000, BS 31100, and the COSO
ERM framework are the best established risk
management approaches
Risk management context
o Standard - is a document that produces
information on both the risk management
process and the risk management framework
o Components of the RM context - risk,
architecture, strategy, and protocols (RASP)
o Risk architecture - defines roles, responsibilities,
communication, and risk-reporting structure
o Risk strategy - risk strategy, appetite, attitudes,
and philosophy are defined in the risk
management policy
o Risk protocols - are defined in the risk guidelines
for the organization and include the rules and
procedures, as well as the risk management
methodologies, tools, and techniques that should
be used
Two separate considerations of risk management
framework:
o It must be supportive of the risk management
process
o It must ensure that the outputs from the
process are communicated into the organization
and achieve the anticipated benefits from the
organization
COSO ERM cube
o COSO ERM approach - suggests that enterprise
risk management is not strictly a serial set of
activities, where one component affects only the
next
o it is multi-directional, iterative process in which
almost any component can and does influence all
other components
eight interrelated components:
o Internal environment - encompasses the tone of
an organization and sets the basis for how risk
is viewed and addressed
o Objective setting - objectives must exist before
management can identify potential events
affecting their achievement
o Event identification - internal and external
events affecting achievement of objectives
must be identified, distinguishing between risks
and opportunities
o Risk assessment - risks are analyzed, considering
likelihood and impact, as a basis for determining
how they should be managed
o Risk response - management selects risk
responses: avoiding, accepting, reducing, or
sharing risk
o Control activities - policies and procedures are
established and implemented to help ensure the
risk responses are effectively carried out
o Information and communication - relevant
information is identified, captured, and
communicated so that people can fulfill their
responsibilities
o Monitoring - the entirety of enterprise risk
management is monitored and modifications
made as necessary
Four risk categories
a. Strategic - high-level goals, aligned with and
supporting its mission
b. Operations - effective and efficient use of its
resources
c. Reporting - reliability of reporting
d. Compliance - compliance with applicable laws and
regulations
Features of RM standards
o British standard BS 31100 - the risk management
process should provide a systematic, effective,
and efficient way by which risks can be managed
at different levels throughout the organization
o The approach in CoCo is based on the evaluation
of the culture of the internal control
environment of the organization
Updating of existing standards
o Plan-implement-measure-learn (PIML) approach -
often referred to as plan-do-check-act (PDCA)
establishing the context
Scope of the context
The first stage in the risk management process is to
establish the context.
Three components of context:
a. Risk management context - is the risk
architecture, strategy, and protocols within the
organization
- must provide support for the risk management
process within the organization
- must ensure that the outputs from the risk
management process are communicated to the
internal and external stakeholders
b. Internal context - is the organization itself, the
activities it undertakes, the range of skills and
capabilities available within the organization, and
how it is structured
c. External context - is the environment within which
the organization exists
o Internal context - about the culture of the
organization, the resources that are available,
and how the organization makes decisions
o External context - about stakeholder
expectations, industry regulations and
regulators, the behavior of competitors, and
the general economic environment within which
the organization operates
External context
o ’establish the context’ - the first stage in the
risk management process
o
o Establishing the external context mush take
account of the expectations of external
stakeholders
o The most important group of external
stakeholders will be customers
o The FIRM risk scorecard provides a structure
for carrying out a detailed evaluation of the
context of the organization
o The overall purpose of evaluating the external
context is to determine the level of riskiness
associated with the external environment within
which the organization operates
Internal context
o Establishing the internal context of an
organization must consider the expectations of
internal stakeholders
o The financial component of the internal context
of an organization defines the financial
 procedures and the means by which money is
managed and profitability is achieved
o Infrastructure risks define the level of
inefficiency and dysfunction that may arise
during internal processes
Risk management context
o The RASP of an organization defines the
structure of the risk management context and
how the components of that context are
implemented to achieve the desired benefits
from the enterprise risk management initiative
o Risk attitude and risk appetite of the
organization - helps to define the risk
management context of the organization and to
provide the basis for undertaking risk
assessments and recording the results in the
risk register
o ’risk radar’ - provides the mechanism for early
warning
Designing a risk register
o Risk register - a document used for recording
risk management process for identified risks
- facilitate ownership and management of each risk
- records the results of the risk assessment related
to the process, operation, location, business unit, or
project under consideration
- forms an agreed record of the significant risks
that have been identified
enterprise risk management
Enterprise-wide approach
o ERM approach - an organization looks at all the
risks that it faces across all of the operations
that it undertakes
- is concerned with the management of the risks
that can impact the objectives, key dependencies, or
core processes of the organization
- with the ERM approach, the relationship between
risks is identified by the fact that two or more risks
can have an impact on the same activity or objective
Features of an enterprise-wide approach
a. Encompasses all areas of organizational exposure
to risk
b. Prioritizes and manages those exposures as an
interrelated risk portfolio rather than as individual
’silos’ of risk
c. Evaluates the risk portfolio in the context of all
significant internal and external contexts, systems,
circumstances, and stakeholders
d. Recognizes that individual risks across the
organization are interrelated and can create a
combined exposure that differs from the sum of the
individual risks
e. Provides a structured process for the
management of all risks, whether those risks are
primarily quantitative or qualitative in nature
f. Seeks to embed risk management as a component
in all critical decisions throughout the organization
g. Provides a means for the organization to identify
the risks that is willing to take in order to achieve
strategic objectives
h. Constructs a means of communicating on risk
issues, so that there is a common understanding of
the risks faced by the organization, and their
importance
i. Supports the activities of internal audit by
providing a structure for the provision of assurance
to the board and audit committee
j. Views the effective management of risk as a
competitive advantage that contributes to the
achievement of business and strategic objectives.
Definitions of ERM
o RIMS - ERM is a strategic business discipline that
supports the achievement of an organization’s
objectives by addressing the full spectrum of its
risks and managing the combined impact of
those risks as an interrelated risk portfolio
o COSO - ERM is a process, affected by an entity’s
board of directors, management, and other
personnel, applied in a strategy setting and
across the enterprise, designed to identify
potential events that may affect the entity,
manage risk to be within its risk appetite and to
provide reasonable assurance regarding the
achievement of entity objectives
o Institute of Internal Auditors - a rigorous and
coordinated approach to assessing and
responding to all risks that affect the
achievement of an organization’s strategic and
financial objectives
o HM Treasury - all the processes involved in
identifying, assessing and judging risks,
assigning ownership, taking actions to mitigate
or anticipate them and monitoring and reviewing
progress
Alternative approaches
Managing emerging risks
o New risks in known context - emerged in the
external environment, but are associated with
the existing strategy of the organization
o Known risks in new context - existing risks that
were already known to the organization, but
have developed or changed circumstances have
triggered the risk
o New risks in new context - risks that were not
previously faced by the organization, because
the risks are associated with changed core
processes
Increasing importance of resilience
o Organizational Resilience Standard - one of the
best established resilience standards and takes
an enterprise-wide view of risk management
o Prevent, protect, and prepare - resources and
assets
o Respond, recover, and review - when crisis
occurs
o Resilience - adaptive capacity of an organization
in a complex and changing environment
- capacity of an organization to consistently
achieve a desired state following a change in
circumstances
Three behaviors to achieve increased resilience
A. Awareness of changes in the external, internal,
and risk management environments
B. ’prevent, protect, and prepare’ in relation to all
types of resources
C. ’respond’ recover, and review’ in relation to
disruptive events
Different approaches
Headings that are used to evaluate the risk-aware
culture within an organization:
A. Purpose, vision, and mission
B. Commitment to integrity and ethical values
C. Capability, authority, and responsibilities
D. Learning and development competence
o The board is responsible for the governance of
risk and disclosure; and management is
responsible for the risk management design,
implementation and monitoring of the risk
management plan
Structure of management standards
o Operation - having the bulk of the management
system requirement, including the overall
process and management that will include
adequate criteria to control the processes
Future of risk management
o The challenge for risk managers and risk
management is to keep risk management
activities proportionate, aligned, comprehensive,
embedded, and dynamic (PACED)
Part three: risk assessment
Risk assessment considerations
Importance of risk assessment
o Risk assessment - involves the recognition of
risks and rating of them to determine the
significant risks facing the organization, project,
or strategy
- the overall process of risk identification, risk
analysis, and risk evaluation
- is the main risk management input into
strategy formulation
Risk assessment techniques
o The most common risk assessment approaches
are the use of checklist/questionnaires, and the
use of brainstorming sessions
o Operational risk management (ORM) - style of
risk management in quantification
o Risk workshops - the most common risk
assessment techniques
o SWOT and PESTLE analysis - the most common
qualitative brainstorming structures
o SWOT analysis - considers the upside of risk by
evaluating opportunities in the external
environment
o PESTLE analysis - considers the political,
economic, social, technological, legal, and ethical
(or environmental) risks
o Hazard and operability (HAZOP) studies and
failure modes effects analysis (FMEA) - most
common quantitative evaluation techniques
o HAZOP studies - often undertaken of hazardous
chemical installations and complex transport
structures, such as railways
Nature of the risk matrix
Definitions of likelihood
o Unlikely - has only occurred two or three times
over ten years in this organization
o Possible - has occurred in the organization more
than three times in the past ten years
o Likely - occurred more than seven times over ten
years
o Almost certain - has occurred nine or ten times
in the past ten years
Definitions of impact
o Small - no impact
o Moderate - minor temporary impact
o Severe - serious impact
o Catastrophic - death

o Risk matrix - can be used to record the outcome

of risk rating exercise and provide a simple
visual presentation of the significant risks that
have been recognized or identified
Attitude to risk
o Risk attitude - represents the long-term
approach of the organization to risk
o Four cs - comfort, cautious, concerned, and
critical
o ’universe of risk’ - used by internal auditors to
identify audit priorities
 MODULE NO. 1: personal financial
planning in action 2
LO1.1: Identify social and economic influences on
personal financial goals and decisions.
o personal money management or personal
financial planning – an organized process that
results to financial and personal satisfaction.
o Personal financial planning – is the process of
managing your money to achieve personal
economic satisfaction.
o financial plan – is a formalized report that
summarizes your current financial situation,
analyzes your financial needs, and recommends
future financial activities.
o adult life cycle – the stages in the family
situation and financial needs of an adult
o values – the ideas and principles that you
consider correct, desirable, and important.
Financial Planning in Our Economy
o debt security – investing in a bond and involves
borrowing by a company or government
o equity security – investing in a stock and
represents ownership in a corporation
o economics – is the study of how wealth is
created and distributed
o inflation – is a rise in the general level of prices,
decreasing the buying power of peso/dollar
- it is more harmful to people with fixed incomes
o consumer price index (cpi) – is a measure of the
average change in the prices urban customers
pay for a fixed “basket“ of goods and services
o hidden inflation – the cost of necessities may
rise at a higher rate than nonessential items
- results in a reported inflation rate much lower
than the actual cost of living increase being
experienced by consumers
o deflation – a decline in prices
- as prices drop, consumers expect they will go
even lower so consumers cut their spending,
causing damaging economic conditions.
o interest rates – represent the cost of money
Financial Planning Activities
a. obtaining
b. planning
c. saving
d. borrowing
e. spending
f. managing risk
g. investing
h. retirement and estate planning
o bankruptcy – a set of federal laws allowing you
to either restructure your debts or remove
certain debts
LO1.2 Develop personal financial goals
types of financial goals
o short-term goals – will be achieved within the
next year or so
o intermediate goals – have a time frame of two
to five years
o long-term goals – involve financial plans that are
more than five years off
o consumable-product goals – occur on a periodic
basis and involve items that are used up
relatively quickly
o durable-product goals – involve frequently
purchased, expensive items
o intangible-purchase goals – may relate to
personal relationships, health, education,
community service, and leisure
Goal-setting guidelines
o specific – so you know exactly what your goals
are and can create a plan designed to achieve
those objectives
o measurable – by a specific amount
o action-oriented – providing the basis for the
personal financial activities that you will
undertake
o realistic – involving goals based on your income
and life situation
o time-based – indicating a time frame for
achieving the goal, such as three years
LO1.3 Opportunity Costs and the Time Value of
Money
o opportunity cost – is what you give up by making
a choice
- commonly referred to as the trade-off of a
decision
o time value of money – involves the increases in
an amount of money as a result of interest
earned
three amounts are used to calculate the time value
of money for savings in the form of interest earned
a. the amount of the savings (principal)
b. the annual interest rate
c. the length of time the money is on deposit
o future value – the amount that will be available
at a later date
o present value – the current value of an amount
desired in the future
five methods for calculating time value of money:
a. formula calculation – math notations are used
b. time value of money tables
c. financial calculator
d. spreadsheet software
e. websites and apps
o future value – is the amount to which current
savings will grow based on interest rate and a
certain period
o compounding - future value computations
o annuity – a series of equal deposits or payments
o present value – the current value for a future
amount based on a particular interest rate for a
certain time
o discounting – present value computations which
allow you to determine how much to deposit now
to obtain a desired total in the future
LO1.4: A Plan for Personal Financial Planning
The Financial Planning Process
o STEP 1: Determine your current financial
situation
o step 2: develop your financial goals
o step 3: identify alternative courses of action
- continue the same course of action
- expand the current situation
- change the current situation
- take a new course of action
o step 4: evaluate your alternatives
common risks to consider:
a. inflation risk – due to rising or falling prices
that cause changes in buying power
b. interest rate risk – resulting from changes in
the cost of money
c. income risk – may result from loss of a job or
encountering illness
d. personal risk – involves tangible and intangible
factors that create a less desirable situation
e. liquidity risk – occurs when savings and
investments that have potential for higher
earnings are difficult to convert to cash or to
sell without significant loss in value
o step 5: create and implement your financial
action plan
o step 6: review and revise your plan
career choice and financial planning
o dashboard – a tool used by organizations to
monitor key performance indicators
o personal finance dashboard – used to assess
financial situation
module 2: money management skills
components of money management
o money management – the day-to-day financial
activities necessary to manage current personal
economic resources while working toward long-
term financial security
three major money management activities
a. storing and maintaining personal financial records
and documents
b. creating personal financial statements
c. creating and implementing a plan for spending and
saving
a system for personal financial records
o an organized system of financial records
provides a basis for
a. handling daily business activities
b. planning and measuring financial progress
c. completing required tax reports
d. making effective investment decisions
e. determining available resources for current
and future spending
o safe deposit box – a private storage area at a
financial institution with maximum security for
valuables and difficult-to-replace documents.
o where to keep your financial records
- home files, home computer or online
- safe deposit or fireproof home safe
- computer, tablet, phone
personal financial statements
o personal balance sheet and the cash flow
statement
- starting point for financial planning
o balance sheet/net worth statement/statement
of financial position – reports what you own and
what you owe
- items of value (what you own) – amounts owed
= net worth
o assets – are cash and other tangible property
with a monetary value
o liquid assets – cash and items of value that can
easily be converted to cash
o real estate – a land, home, condominium,
vacation property that a person owns
o personal possessions – are a major portion of
assets for most people
o investment assets – funds set aside for long-
term financial needs
o liabilities – amounts owed to others but do not
include items not yet due
- a debt you owe now, not something you may owe
in the future
o current liabilities – debts you must pay within a
short time, usually less than a year
o long-term liabilities – debts you do not have to
pay in full until more than a year from now

o mortgage – an amount borrowed to buy a house
or other real estate that will be repaid over a
period
o net worth – is the difference between total
assets and total liabilities
- the amount you would have left if all assets
were sold for the listed values and all debts were
paid in full
o insolvency – the inability to pay debts when they
are due; it occurs when a person’s liabilities far
exceed available assets
o cash flow – the actual inflow and outflow of
cash during a given time
o cash flow statement/personal income and
expenditure statement – a summary of cash
receipts and payments for a given period, such
as month or a year
- provides data on your income and spending
patterns
o checking account – can provide information for
your cash flow statement
o inflows – deposits to the account
o outflows – checks written, cash withdrawals,
and debit card payments
o income – the inflows of cash for an individual or
a household
o take-home pay/net pay – is a person’s earnings
after deductions for taxes and other items
- also called disposable income or the amount a
person or household has available to spend
o discretionary income – is money left over after
paying for housing, food, and other necessities
o fixed expenses – are payments that do not vary
from month to month
o variable expense – are flexible payments that
change from month to month
o deficit – exists if more cash goes out than comes
during a given month
- the amount by which actual spending exceeds
planned spending
o surplus – amount available for saving, investing,
or paying off debts
- actual spending is less than planned spending
o emergency fund – used for unexpected expenses
or for living costs if one did not receive their
salary
o a cash flow statement reports the actual
spending but a budget documents projected
income and spending
o budget/spending plan – a specific plan for
spending income
o budget variance – is the difference between the
amount budgeted and the actual amount
received or spent
successful budgets are commonly viewed as being:
- well planned
- realistic
- flexible
- clearly communicated
types of budgeting systems
a. mental budget – exists only in a person’s mind
b. physical budget – involves envelopes, folders, or
containers to hold the money or slips of paper
c. written budget – can be kept in a notebook or
with multicolumn accounting paper
d. digital budget – may involve a spreadsheet
program
module 3: taxes in your financial
plan
types of tax
o taxes on purchases – paying sales tax on many
purchases
- excise tax – a tax imposed on specific goods
and services, such as gasoline, cigarettes,
alcoholic beverages, tires, and air travel
o taxes on property
- real estate property tax – based on the value
of land and buildings
- personal property tax – based on the value of
automobiles, boats, furniture, and farm
equipment
o taxes on wealth
- estate tax – imposed on the value of a person’s
property at the time of death
- inheritance tax – is paid for the right to
acquire the inherited property and is levied on
the value of property bequeathed by a
deceased person
o taxes on earnings
- social security tax – created to fund the old-
age, survivors, and disability insurance portion
of the SSS and the Medicare
- income tax – from your own paycheck or
business
o taxable income – the net amount of income after
allowable deductions
types of income
a. earned income – money received for personal
effort, such as wages, salary, commission, fees,
tips, or bonuses
b. investment income/portfolio income – money
received in the form of dividends, interest, or rent
from investments
c. passive income – results from business activities
in which you do not actively participate
o exclusion – an amount not included in gross
income
o tax-exempt income – income not subject to tax
o tax-deferred income – income that will be taxed
at a later date
o adjusted gross income – a gross income after
certain deductions have been made
o tax shelter – investments that provide
immediate tax benefits and a reasonable
expectation of a future financial return
o tax deduction – amount subtracted from
adjusted gross income to arrive at a taxable
income
o standard deduction – a set amount on which no
taxes are paid
o itemized deductions – expenses a taxpayer is
allowed to deduct from adjusted gross income
- medical and dental expenses
- taxes
- interest
- contributions
- casualty and theft losses
o exemption – a deduction from adjusted gross
income for yourself, your spouse, and qualified
dependents
o marginal tax rates – used to calculate tax on the
last (and next) dollar of table income
o average tax rate – based on the total tax due
dividend by taxable income
o alternative minimum tax – designed to ensure
that those who receive tax breaks also pay their
fair share of taxes
o tax credit – an amount subtracted directly from
the amount of taxes owed
o earned-income credit – tax credit for working
parents with a taxable income under a certain
amount
o withheld amount – based on the number of
exemptions and the expected deductions claimed
filing your federal income tax return
o five filing status categories:
a. single – never married, divorced, or legally
separated individuals with no dependents
b. married, filing joint return – combines the
spouses’ incomes
c. married, filing separate returns – each spouse
is responsible for their tax
d. head of household – an unmarried individual
or a surviving spouse who maintains a household
for a child or a dependent relative
e. qualifying widow or widower – an individual
whose spouse died within the past two years and
who has a dependent; limited to two years after
the death of the spouse
major sections of form 1040
a. filing status and exemptions
b. income
c. adjustments to income
d. tax computation
e. tax credits
f. other taxes
g. payments
h. refund or amount you owe
o h&r block at home and TurboTax – software
packages that allow you to complete needed tax
forms and schedules and either print for mailing
or file online
factors to consider when selecting tax software
- your personal situation – are you employed or
do you operate your business?
- special tax situations
- features in the software
- technical aspects
o IRS services
a. publications
b. recorded messages
c. phone hotline
d. walk-in service
e. interactive tax assistant
f. DVD
g. IRS2Go app
types of tax services
a. enrolled agents – government-approved tax
experts
b. accountants
c. attorneys
o tax audit – a detailed examination of your tax
return
types of audits
- correspondence audit – requires you to clarify
or document minor questions
 - office audit – requires you to visit an IRS office
to clarify some aspect of your tax return
- field audit – an IRS agent visits you at your
home, business, or the office of your accountant
to have access to your records and to verify
whether you have a home office if claimed
tax planning strategies
o tax avoidance – the use of legitimate methods
to reduce one’s taxes
o tax evasion – the use of illegal actions to reduce
one’s taxes
o home equity loans – second mortgages that
allow you to use a line of credit for various
purchases
o flexible spending accounts – also called health
savings account; allow you to reduce your
taxable income when paying for medical
expenses or child care costs
o tax-exempt investments – interest income from
municipal bonds
o tax-deferred investments – give you an
advantage of paying taxes in the future rather
than now
- tax-deferred annuities
- section 529 savings plans
- retirement plans
o capital gains – profits from the sale of capital
asset such as stocks, bonds, or real estate
module 4: financial services: savings
plans and payment accounts
types of financial services
- savings – provides safe storage of funds for
future use
- time deposits – money in savings accounts and
certificates
- payment services – offer an ability to transfer
money to others for daily business activities
- demand deposits – checking accounts and other
payment methods
- borrowing
- other financial services – include insurance,
investments, tax assistance, and financial
planning
o trust – a legal agreement that provides for the
management and control of assets by one party
for the benefit of another
o asset management account – also called a cash
management account; provides a complete
financial services program for a single fee
financial service activities:
a. text banking
b. mobile web banking
c. banking apps
o automatic teller machine (ATM) – also called a
cash machine; a computer terminal used to
conduct banking transactions
o debit card/cash card – a plastic access card used
in computerized banking transactions
o prepaid debit cards – “pay before“
o credit card “lock and limit“ app – controls
spending and block unauthorized transactions
types of financial institutions
o deposit institutions – serve as intermediaries
between suppliers and users of funds
a. commercial banks – a financial institution that
offers a full range of financial services to
individuals, businesses and government agencies
b. savings and loan associations (S&Ls) –
specialized in savings accounts and mortgages
c. mutual savings banks – owned by depositors
and specializes in savings accounts and mortgage
loans
d. credit unions – a user-owned, nonprofit,
cooperative financial institution organized for
the benefit of its members
o non-deposit institutions
a. life insurance companies
b. investment companies – also called mutual
funds; offer a money market fund or a
combination of savings and investment plan
c. brokerage firms
d. credit card companies
e. finance companies
f. mortgage companies
o financial supermarkets – one-stop financial
service operations
o problematic financial businesses
- pawnshops
- check-cashing outlets
- payday loan companies
- rent-to-own centers
- car title loan companies
savings plans
o regular savings accounts – involve a low or no
minimum balance and allow you to withdraw
money as needed
o share accounts – a credit union
o certificate of deposit – a savings plan requiring
a certain amount be left on deposit for a stated
time to earn a specified interest rates
o rising-rate or bump-up CDs – have higher rates
at various intervals
o liquid CDs – offer an opportunity to withdraw
money without a penalty
o xero-coupon CD – purchased at a deep discount
(a small portion of the face value) with no
interest payments
o indexed CDs – have earnings based on the stock
market
o interest-earning checking accounts – have a
savings feature but pay a low interest rate
o money market accounts and funds – offer
earnings based on current interest rates, and
both have minimum-balance restrictions and
allow check writing
o money market account – a savings account that
require a minimum balance and has earnings
based on the changing market level of interest
rates
o US savings bonds – a low-risk savings program
guaranteed by the federal government
o EE bonds – increase in value as interest accrues
monthly and compounds semiannually
o HH bonds – the interest is deposited
electronically to your bank account every six
months
o I bonds
Evaluating savings plan
o rate of return – also called yield; the percentage
of increase in the value of savings as a result of
interest earned
o compounding – a process that calculates interest
based on previously earned interest
o annual percentage yield – the percentage rate
expressing the total amount of interest that
would be received on a deposit based on the
annual rate and frequency of compounding for a
365-day period
comparing payment methods
electronic payments
o debit card transactions
o online payments
o mobile transfers
o stored-value cards
o smart cards
o peer-to-peer payments
checking accounts
o regular checking accounts – have a monthly
service charge that you may avoid by keeping a
minimum balance in the account
o activity accounts – charge a fee for each check
written
o interest-earning checking accounts
evaluating checking and payment accounts
o overdraft protection – an automatic loan made
to checking account customers to cover the
amount of checks written in excess of the
available balance in the checking account
o certified check – a personal check with
guaranteed payment
o cashier’s check – a check issued by a financial
institution
o traveler’s check – allow you to make payments
when you are away from home
managing your checking account
o individual account – only one person is allowed
to write checks
o joint account – has two or more owners
o deposit ticket – used for adding funds to your
checking account
o endorsement – your signature on the back of the
check
- blank endorsement – is just your signature,
which should only be used when you are actually
depositing or cashing a check
- restrictive endorsement – consists of the words
for deposit only; followed by your signature
- special endorsement – allows you to transfer a
check to someone else with the words pay to the
order of followed by the name of the other
person and your signature
module 5: consumer credit:
advantages, disadvantages, sources,
and costs
o credit – an arrangement to receive cash, goods,
or services now and pay for them in the future
o consumer credit – the use of credit for personal
needs
advantages of credit
- enables people to enjoy goods and services now
- permit the purchase of goods even when funds
are low
- credit is more than a substitute for cash
- it is safe and convenient
disadvantages of credit
- it provides the temptation to overspend
- failure to repay a loan may result in loss of
income, court action, and bankruptcy
- it does not increase total purchasing power
- it costs money
types of credit
o closed-end credit – one-time loans that the
borrower pays back in a specified period and in
payments of equal amounts
a. installment sales credit – a loan that allows
you to receive merchandise, usually high-priced
items such as large appliances.
b. installment cash credit – a direct loan of
money for personal purposes, home
improvement, or vacation expenses
c. single lump-sum credit – a loan that must be
repaid in total on a specified day, usually within
30 to 90 days
o open-end credit – a line of credit in which loans
are made on a continuous basis and the borrower
is billed periodically for at least partial payment
o line of credit – the maximum dollar amount of
credit the lender has made available to you
o interest – a periodic charge for the use of credit
o revolving check credit – also called a bank line of
credit; a prearranged loan from a bank for a
specified amount
o convenience users – cardholders who pay off
their balances in full each month
o borrowers – cardholders who do not pay off
their balances every month
o finance charge – the total dollar amount paid to
use credit
o smart cards – is a plastic card equipped with a
computer chip that can store 500 times as much
data as a normal credit card
o mobile ecommerce – the ability to purchase using
a mobile device
sources of consumer credit
o loans – involve borrowing money with an
agreement to repay it, as well as interest, within
a certain amount of item
- inexpensive loans
- medium-priced loans
- expensive loans
- home equity loans
general rules of credit capacity
o debt payments-to-income rate – is calculated by
dividing your monthly debt payments by your net
monthly income
o debt-to-equity ratio – is calculated by dividing
your total liabilities by your net worth
the five cs of credit
o character – the borrower’s attitude toward their
credit obligations
- will you repay the loan?
- what kind of person they are lending money
to
o capacity – the borrower’s financial ability to
meet credit obligations
- can you repay the loan?
- your ability to pay additional debts
o capital – the borrower’s assets or net worth
- is the amount of your assets that exceed
your liabilities, or the debts you owe
o collateral – a valuable asset that is pledged to
ensure loan payments
- what if you don’t repay the loan?
o condition – the general economic conditions that
can affect a borrower’s ability to repay a loan
- what if your job is insecure?
- credit rating – a measure of a person’s
ability and willingness to make credit
payments on time
your credit report
o credit report/credit file – the record of your
complete credit history
o credit bureaus – agencies that collect
information on how promptly people and
businesses pay their bills
- three major credit bureaus: Experian,
TransUnion, and Equifax
o credit score – is a number that reflects the
information in your credit report
o fico and vantage score
other factors considered in determining
creditworthiness
o age
o public assistance
o housing loans
redlining – banning of discrimination against you
based on the race or nationality of the people in
the neighborhood where you live or want to buy
your home
what can you do to improve your credit score?
o get copies of your credit report then make sure
information is correct
o pay your bills on time
o understand how your credit score is determined
o learn the legal steps to take to improve your
credit report
o beware of credit-repair scams
finance charge and annual percentage rate
o finance charge – total dollar amount you pay to
use credit
o annual percentage rate – the percentage cost of
credit on a yearly basis
o simple interest – interest computed on principal
only and without compounding
billing errors and disputes
o fair credit billing act (FCBA) – sets procedures
for promptly correcting billing mistakes,
refusing to make credit card payments on
defective goods, and promptly crediting
payments
o skimming – involves the recording of data on the
magnetic strip of a credit or debit card
o cosigning a loan – means you agree to be
responsible for loan payments if the other party
fails to make them
consumer credit and protection laws
o fair credit and charge card disclosure act –
requires that solicitations for credit cards in the
mail, over the phone, in print, or online must
provide the necessary terms of the account
o equal credit opportunity act – against creditor
discrimination
o fair credit billing act – for a creditor that fails
to follow the rules that apply to correcting any
billing errors
o fair credit reporting act – for a creditor that
violates the rules regarding access to your credit
records, or that fails to correct errors in your
credit file
o consumer credit reporting reform act – places
the burden of proof for accurate credit
information on the credit bureau rather than on
you
o electronic fund transfer act –
o credit card accountability responsibility and
disclosure act
module 6: consumer purchasing
strategies and wise buying of motor
vehicles
Practical purchasing strategies
o comparison shopping – is the process of
considering alternative stores, brands, and
prices
o impulse buying – involves unplanned purchasing,
which can result in financial problems
Techniques for wise buying
o timing purchases
o purchase location
o brand comparison
a) national-brand products – highly advertised
items available in many stores
b) store-brand and private-label products – sold
by one chain of stores, are low-cost alternatives
to famous-name products
o label information
- product labeling for appliances includes
information about operating cost to assist
you in selecting the most energy-efficient
models
- open dating describes the freshness or shelf
life of a perishable product
o price comparison
- unit pricing uses a standard unit of
measurement to compare the prices of
packages of different sizes
- a rebate is a partial refund of the product’s
price
Wise online buying activities
o conduct online search
o compare stores
o make purchase
o plan for future purchases
Warranties
o warranty – a written guarantee from the
manufacturer or distributor of a product that
specifies the conditions under which the product
can be returned, replaced, or repaired
o express warranty – created by the seller or
manufacturer
two forms:
a. full warranty – states that a defective
product can be fixed or replaced during a
reasonable amount of time
b. limited warranty – covers only certain aspects
of the product, such as parts, or requires the
buyer to incur part of the costs for shipping or
repairs
o implied warranty – covers a product’s intended
use or other basic understandings that are not in
writing
a. implied warranty of title – indicates that the
seller has the right to sell the product
b. implied warranty of merchantability –
guarantees that the product is fit for the
ordinary use for which it is intended
o used-car warranties – have implied warranty of
merchantability (the used car is guaranteed to
run)
o new-car warranties – provide buyers with an
assurance of quality
main conditions are:
a. coverage of basic parts against defects
b. power train coverage for the engine,
transmission, and drive train
c. corrosion warranty

o service contracts – an agreement between a
business and a consumer to cover the repair
costs of a product
- frequently called extended warranties
Research-based buying
o Phase one: pre-shopping activities
o Phase two: evaluating alternatives
o Phase three: selection and purchase
o Phase four: post-purchase activities
Major consumer purchases: buying motor vehicles
Phase one: pre-shopping activities
o problem identification
o information gathering
information sources
a) personal contracts – allow you to learn about
product performance, brand quality, and prices
from others
b) business organizations – offer advertising,
product labels, and packaging that provide
information about price, quality, and availability
c) media information (television, radio,
newspapers, magazines, websites) – can provide
valuable information with purchasing advice
d) independent testing organizations – such as
consumers union, provide information about the
quality of products and services each month in
consumer reports
e) government agencies
f) online reviews – can provide buying guidance
and shopping suggestion
Phase two: evaluating alternatives
o selecting vehicle options
categories of optional equipment for cars:
a) mechanical devices to improve performance
b) convenience options
c) aesthetic features that add to the vehicle’s
visual appeal
o comparing used vehicles
common sources of used cars:
a) new-car dealers
b) used-car dealers
c) individuals selling their own cars
d) auctions and dealers that sell automobiles
e) used-car superstores
certified pre-owned vehicles – are nearly new
cars that come with the original manufacturer’s
guarantee of quality
o leasing a motor vehicle
leasing – a contractual agreement with monthly
payments for the use of automobile over a set
period
true costs:
a) capitalized cost – the vehicle’s price
b) money factor – the interest rate being paid
on the capitalized cost
c) payment schedule – the amount paid monthly
and the number of payments
d) residual value – the expected value of the
vehicle at the end of the lease
Phase three: determining purchase price
o used-car price negotiation
o price bargaining for new cars
sticker price label – presents the base price of
the car with costs of added features
invoice price – the dealer’s cost
set-price dealers – use no-haggling car selling
with the prices presented to be accepted or
rejected as stated
car-buying services or auto broker – businesses
that help buyers obtain a specific new car at a
reasonable price
o comparing financing alternatives
upside-down or negative equity – the value of
your car may be less than the amount you still
owe in two to three years
Phase four: post-purchase activities
lemon laws – require a refund for the vehicle after
the owner has made repeated attempts to obtain
servicing
o automobile operation costs
two categories:
a) fixed ownership costs – depreciation, interest
on auto loan, insurance, license, registration,
taxes, and fees
b) variable operating costs – gasoline and oil,
tires, maintenance and repairs, parking and tolls
o motor vehicle maintenance
o automobile servicing sources
Resolving consumer complaints
o step one: initial communication
o step two: communicate with the company
o step three: consumer agency assistance
mediation – the attempt by an impartial third
party (mediator) to resolve a difference
between two parties through discussion and
negotiation
arbitration – is the settlement of a difference
by a third party (arbitrator) whose decision is
legally binding
o step four: legal action
legal options for consumers:
small claims court – a person may file a claim
involving amounts below a set dollar limit and
employs a process in which the litigants usually
do not use a lawyer
class-action suit – a legal action taken by a few
individuals on behalf of all the people who have
suffered the same allege injustice
other legal alternatives
legal aid society – one of a network of publicly
supported community law offices that provide
legal assistance to consumers who cannot afford
their own attorney
 strategic management - In the stable areas, efficiency is
- the identification of the purpose of the emphasized.
organization and the plans and actions to achieve - In the variable areas, innovation is
that purpose. emphasized.
- a set of managerial decisions and actions that o Reactors — includes companies that lack a
determine the long-term performance of a consistent strategy culture relationship.
business enterprise
- involves formulating and implementing strategies Concept of business policy
that will help in aligning the organization and its o business policies
environment to achieve organizational goals - set of rules that guide the decisions and
actions of the members of the organization
Definitions of strategic management - guide the conduct of the business in pursuit
o guides internal activities and determines of profit and other objectives
the long-term performance of the organization
o a set of managerial decisions and actions that Concept of tactics
determine the long run performance of a o tactic
corporation - short series of actions with the aim of
o a framework that revolves around the idea of achieving of a short-term goal
shaping the destiny of an organization - are the actions taken to support that
strategy
Three most highly rated benefits of strategic
management Five types of strategy and the tactics used to
- clearer sense of strategic vision for the firm achieve strategic goals:
- sharper focus on what is strategically important o sales channels
- improved understanding of the rapidly changing o marketing activities
environment o team
o partners and resources
Concept of strategy
- strategy - the top management’s plan to attain Differences between strategy and policy
the outcomes consistent with the organization
mission and goals. strategy policy
best plan opted from set of common rules
strategy in three vantage points: several plans and regulations
1. strategy formulation - developing the strategy plan of action principle of action
2. strategy implementation - putting the strategy dynamic in nature uniform in nature
into action associated with define the rules for
3. strategic control - modifying the strategy or situations not routine activities,
its implementation to ensure that the desired encountered or which are repetitive in
outcomes are attained experienced earlier nature
concentrated toward decision-oriented
o Intended strategy - the original strategy that actions
management plans and intends to implement sub-strategies are made by top
o realized strategy refers to the actual and formulated at the management
eventual strategy that management implements. middle level
deal with external made for the internal
o strategic type is a category of firms based on environmental factors environment of
common strategic orientation and combination of business
structure, culture and process consistent with used to achieve the set determine what is to be
strategy. target done and what should
not be done
Competing firms within a single industry can be
categorized on the basis of their general Differences between tactics and strategy
strategic orientation into four types as
follows. strategy tactics
o Defenders — includes companies with a product integrated plan properly organized
line that focus on improving the efficiency of actions
their existing operations a subset of strategy
a unified set of try to find out the
activities that can help methods through which
o Prospectors —include firms with broad product the organization to strategy can be
lines that focus on product innovation and gain an advantageous implemented
market opportunities position
- they tend to emphasize creativity over formulated by top level fformulated by middle-
efficiency. management level management
involve lower risk
o Analyzers —includes business organizations competitive in nature preventive
that operate in at least two different product- for long duration for short duration
market areas, one stable and one variable remains the same for a frequently change
long period
 reactive approach
made for the future made for present
Bases of policies and strategies
o Legal Mandate – formulating policies on the
basis of the provisions of the charter or legal
basis for existence of the business
o Vision and mission statement – refers to the
leadership bias and the sense of direction and
mission for which the organization was
established
o Specific Objectives – the corporate objectives
purposely developed for the organization and
for its employees
o Program and policies – specific
programs and policies set forth by the
organization's policy makers in pursuit of short
and long term goals
Developing policy and strategy
o Top-bottom approach – come from the top
management with rank
o Bottom-top approach – emanate from the
bottom from which top management develops
concrete policies and strategies for the lower-
ranked employees to observe
o Top-bottom-top – policy and strategy initiatives
are taken by the top management then filtered
down to the lower-ranked personnel for
consultations then returned back to the top
management for refinements
What it takes for a decision to be considered
strategic:
o Rare - strategic decisions are unusual and
typically have no precedent to follow
o Consequential - strategic decisions should
commit substantial resources and demand a
great deal of commitment from people at all
levels
o Directive - strategic decisions set precedents for
lesser decisions and future actions throughout
the organization.
Four most typical approaches or modes of
strategic decision-making
o Entrepreneurial mode - strategy is made by one
powerful individual and the focus is on
opportunities, problems are secondary
o Adaptive mode - characterized by reactive
solutions to existing problems, rather than
proactive search for new opportunities.
o Planning mode - includes both the proactive
search for new opportunities and the reactive
solution of existing problems
o Logical mode - a synthesis of planning, adaptive
and to a lesser extent, the entrepreneurial modes
Step 1 – Evaluate current performance results in
terms of a return of investments, profitability and
so forth, and
b) current mission, objectives, strategies and
policies.
Step 2 – Review corporate governance, that is the
performance of the Corporate Board of Directors
and Top Management.
Step 3 – Scan and assess the external environments
to determine the strategic factors that pose
opportunities and threats.
Step 4 – Scan and assess the internal corporate
environment to determine the strategic factors that
are Strengths (especially core competencies) and
Weaknesses.
Step 5 – Analyze strategic (SWOT) factors to
a) pinpoint problem areas and
b) review and revise the corporate mission and
objectives as necessary.
Step 6 – Generate, evaluate and select the best
alternative strategy in the light of the analysis
conducted in Step 5.
Step 7 – Implement selected strategies via program,
budgets, and procedures.
Step 8 – Evaluate and implement strategies via
feedback systems and the control of activities to
ensure their minimum deviation from plans.
Role of the board of directors
o Monitor - acting through committees or being a
part of the management team
o Evaluate and influence - examine management
proposals, decisions, actions, agree or disagree
with them, give advice and offer suggestions
and outline alternatives
o Initiate and determine - delineate a corporate’s
mission and specify strategic options to its
management
module 2: stakeholders, mission,
governance, and business ethics
Stakeholders
o Internal stakeholders - stockholders and
employees, including executive officers, other
managers, and board members.
o External stakeholders - all other individuals and
groups that have some claim on the company
- customers, suppliers, creditors (including banks
and bondholders), governments, unions, local
communities, and the general public.
Stakeholder impact analysis
- identify stakeholders
- identify stakeholders’ interests and concerns
- identify what claims stakeholders are likely to
make on the organization
- identify the stakeholders who are most
important from the organization’s perspective
- identify the resulting strategic challenges
The mission statement
o a key indicator of how an organization views the
claims of its stakeholders.
o mission - describes what it is that the company
does
Components of an effective mission
o Customers
Who are your customers? How do you benefit
them?
o Products or services
What are the main products or services that you
offer? Their uniqueness?
o Markets
In which geographical markets do you operate?
o Technology
What is the firm’s basic technology?
o Concern for survival
Is the firm committed to growth and financial
soundness?
o Philosophy
What are the basic beliefs, values and
philosophies that guide an organization?
o Self-concept
What are the firm’s strengths, competencies,
or competitive advantages?
o Concern for public image
Is the firm socially responsible and
environmentally friendly?
o Concern for employees
How does a company treat its employees?
Notes
o vision - lays out what the company would like to
achieve
o values – state how managers and employees
should conduct themselves, how they should do
business, and what kind of organization they
should build to help a company achieve its
mission
o goal - is a precise and measurable desired future
state that a company attempts to realize.
four main characteristics of a well-constructed
goals
They are precise and measurable.
They address crucial issues.
They are challenging but realistic.
They specify a time period in which they should be
achieved when that is appropriate.
Ethics and strategy
o ethics - accepted principles of right or wrong
that govern the conduct of a person, the
members of a profession, or the actions of an
organization
o business ethics - are the accepted principles of
right or wrong governing the conduct of
businesspeople.
o ethical decisions - are in accordance with those
accepted principles of right and wrong
o unethical decision - is one that violates accepted
principles.
The roots of unethical behavior
- business ethics are not divorced from personal
ethics
- they simply fail to ask the relevant question—is
this decision or action ethical?
- incorporation
Behaving ethically
- the businesses must explicitly articulate values
that place a strong emphasis on ethical behavior
- having articulated values in a code of ethics or
some other documents
- incentive and promotional systems that reward
people who engage in ethical behavior and
sanction those who do not
- decision-making processes
- ethics officers
- strong corporate governance
- moral courage
module three: external assessment
o External assessment is a step where a firm
identifies opportunities that could benefit it
and threats that it should avoid
importance of business environment
- environment is complex
- it is dynamic
- environment is multi-faceted
- it has a far-reaching impact
- its impact on different firms within the same
industry differs
- it may be an opportunity or a threat to expansion
- changes in the environment can change the
competitive scenario
- sometimes, developments are difficult to predict
with any degree of accuracy
Michael e. porter’s five force analysis: the five
forces
1. threat of new entrants
seven major sources of barriers to entry
a. economies of scale - relative cost advantages
associated with large volumes of production, that
lower a company’s cost structure
b. Product differentiation - strong brand loyalty
makes it difficult for new entrants to take market
share away from established companies
c. capital requirements - the need to invest large
financial resources in order to compete
d. Switching costs - are the one-time costs that a
customer must bear to switch from one product to
another
e. Access to distribution channels - the more limited
the wholesale or retail channels are, tougher will be
the entry into an industry
f. Cost disadvantages independent of size - some
existing companies may have advantages other than
size or economies of scale.
These are derived from:
(i) Proprietary technology
(ii) Preferential access to raw material sources
(iii) Government subsidies
(iv) Favorable geographical locations
g. Government policy
h. Expected Retaliation - how new entrants believe
that the existing companies may react
New entrants are likely to fear expected retaliation
if:
(a) Existing companies have previously responded
vigorously to new entrants
(b) Existing companies possess substantial resources
to fight back
(c) Existing companies seem likely to cut prices to
protect their market share
(d) Industry growth is slow, so newcomers can gain
volume only by taking the market share from
existing companies.
2. Intensity of rivalry among industry competitors
Rivalry - the competitive struggle between
companies in an industry to gain market share from
each other.
The intensity of rivalry is greatest under the
following conditions:
(a) Numerous competitors or equally powerful
competitors
(b) Slow industry growth
(c) High fixed but low marginal costs
(d) Lack of differentiation or switching costs
(e) Capacity augmentation in large increments
(f) High exit barriers
The common exit barriers are:
a. Investment in specialized assets like plant and
machinery are of little or no value and cannot be put
to alternative use.
b. High costs of exit such as retrenchment benefits,
that have to be paid to the redundant workers when
a company ceases to operate.
c. Emotional attachment to an industry keep owners
or employees unwilling to exit from an industry for
sentimental reasons.
d. Economic dependence on the industry when the
firm depends on a single industry for revenue and
profit.
e. Government and social pressures discourage exit
of industries out of concern for job loss.
f. Strategic interrelationships between business
units and others prevent exit because of shared
facilities and image.
3. Bargaining power of buyers
- refers to the ability of buyers to bargain down
prices charged by firms in the industry or driving up
the costs of the firm by demanding better product
quality and service
Buyers are most powerful under the following
conditions:
a) There are few buyers.
b) The products are standard or undifferentiated.
c) The buyer faces low switching costs.
d) The buyer earns low profits.
4. Bargaining power of suppliers
A supplier’s bargaining power will be high under the
following conditions:
a) few suppliers
b) product is differentiated
c) dependence of supplier group on the firm
d) importance of the product of the firm
e) threat of forward integration
f) lack of substitutes
5. threat of substitute products and services
A substitute performs the same or a similar function
as an industry’s product.
it will suffer in terms of profitability and growth
potential in the following circumstances:
- it offers an attractive price and performance
- the buyer’s switching costs to the substitutes is
low
industry analysis
Industry - is a group of firms producing similar
products or services that customers perceive to be
substitutes for one another.
1. Industry Features
factors:
a. overall size
b. market growth rate
c. geographic boundaries of the market
d. number and sizes of competitors
e. pace of technological change
f. product innovations
2. Industry boundaries
Firms within the same industry could differ across
various parameters, such as:
(a) Breadth of market
(b) Product/service quality
(c) Geographic distribution
(d) Level of vertical integration
(e) Profit motives
3. Industry environment
o Fragmented Industries - consist of a large
number of small or medium-sized companies,
none of which is in a position to determine
industry price.
o Consolidated Industries - dominated by a small
number of large companies (an oligopoly) or by
just one company (a monopoly).
o Mature industries - those who reached the
maturity stage of their life cycle.
o Declining industries - those in the transition
stage from maturity to decline.
o Global industries - with manufacturing bases and
marketing operations in several countries.
4. Industry structure - Structural attributes are the
enduring characteristics that give an industry its
distinctive character.
Four elements:
o Concentration - the extent to which industry
sales are dominated by only a few firms
o Economies of scale - firms that enjoy economies
of scale can charge lower prices than their
competitors, because of their savings in per unit
cost of production
o Product differentiation
o Barriers to entry - the obstacles that a firm must
overcome to enter an industry
5. Industry attractiveness
Industry attractiveness is dependent on the
following factors:
a. Profit potential
b. Growth prospects
c. Competition
d. Industry barriers
6. Industry performance
This requires an examination of data relating to:
a. Production
b. Sales
c. Profitability
d. Technological advancements
7. Industry practices - what most players in the
industry do with respect to products, pricing,
promotion, distribution
This aspect involves issues relating to:
a. Product policy
b. Pricing policy
c. Promotion policy
d. Distribution policy
e. R&D policy
f. Competitive tactics
8. Industry’s future prospects
The future outlook of an industry can be anticipated
based on such factors as:
a. Innovation in products and services
b. Trends in consumer preferences
c. Emerging changes in regulatory mechanisms
d. Product life cycle of the industry
e. Rate of growth
competitive analysis
o is the process of identifying competitors and
evaluating their strategies in order to
determine their weaknesses and strengths in
order to better your own company
four types of competition in a free market system:
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly
o Under monopolistic competition, many sellers
offer differentiated products—products that
differ slightly but serve similar purposes. By
making consumers aware of product
differences, sellers exert some control over
price.
o In an oligopoly, a few sellers supply a sizable
portion of products in the market. They exert
some control over price, but because their
products are similar, when one company lowers
prices, the others follow.
o In a monopoly, there is only one seller in the
market. The market could be a geographical area,
such as a city or a regional area, and does not
necessarily have to be an entire country. The
single seller can control prices.
Most monopolies fall into one of two
categories: natural and legal.
o Natural monopolies include public utilities, such
as electricity and gas suppliers. They inhibit
competition, but they’re legal because they’re
important to society.
o Legal monopoly arises when a company receives
a patent giving it exclusive use of an invented
product or process for a limited time, generally
twenty years.
Two theories of economics
o Theory of monopoly - a single firm is protected
by barriers to entry and has an opportunity to
appropriate all the profits generated in the
industry.
o Theory of perfect competition - competition is
unbridled and entry to the industry is easy.
module 4: internal analysis TOWS matrix
o Internal analysis - is also referred to as internal o an extension of the SWOT matrix
appraisal, organizational audit, internal o proposed by Heinz Weihrich as a strategy
corporate assessment formulation – matching tool.
o illustrates how internal strengths and
weaknesses can be matched with external
Analytical techniques: opportunities and threats to generate four sets
- RBV of possible alternative strategies
- SWOT analysis o SO Strategies - are generated by thinking of
- Value chain analysis ways in which a company can use its strengths
- Benchmarking to take advantage of opportunities
- IFE Matrix
o ST Strategies - use a company’s strengths as a
Systematic internal analysis helps the firm: way to avoid threats
1. To find where it stands in terms of its strengths o WO Strategies - attempt to take advantage of
and weaknesses opportunities by overcoming its weaknesses.
2. To exploit the opportunities that are in line with o WT Strategies - defensive strategies and
its capabilities primarily aimed at minimizing weaknesses and
avoiding threats
3. To correct important weaknesses
o blocking strategies - use a strength to eliminate
4. To defend against threats a weakness
o remedial strategies - overcome a weakness to
5. To assess capability gaps and take steps to take advantage of an opportunity or eliminate a
enhance its capabilities threat

SWOT analysis
- is a widely used framework to summarize a
company’s situation or current position.
o Opportunities - a major favorable situation in a
firm’s environment
o Threats - a major unfavorable situation in a
firm’s environment
o Strengths - something a company possesses or
is good at doing
o Weaknesses - something a company lacks or
does poorly.
Steps in SWOT analysis
1. Identification
a. Identify company resource strengths and
competitive capabilities.
b. Identify company resource weaknesses and
competitive deficiencies.
c. Identify company’s opportunities.
d. Identify external threats.
2. Conclusion
a. Draw conclusions about the company’s overall
situation.
3. Translation
a. Match the company’s strategy to its strengths
and opportunities.
b. Correct important weaknesses.
c. Defend against external threats.
Advantages of SWOT
1. It is simple.
2. It portrays the essence of strategy formulation:
matching a firm’s internal strengths and
weaknesses with its external opportunities and
threats.
3. Together with other techniques like Value Chain
Analysis and RBV, SWOT analysis
improves the quality of internal analysis.
Limitations
1. It gives a static perspective and does not reveal
the dynamics of a competitive environment.
2. SWOT emphasizes a single dimension of strategy
(i.e. strength or weakness) and ignores other
factors needed for competitive success.
3. A firm’s strengths do not necessarily help the
firm create value or competitive advantage.
4. SWOT’s focus on the external environment is too
narrow.
5. Hill and Westbrook criticize SWOT analysis by
saying that it is not a panacea. According to them,
some of the criticisms against SWOT analysis are:
(a) It generates lengthy lists
(b) It uses no weights to reflect priorities
(c) It uses ambiguous words and phrases
(d) The same factor can be placed in two categories
(e) There is no obligation to verify opinions with
data or analysis.
(f) It is only a simple level of analysis. There is no
logical link to strategy implementation.
(g) SWOT helps only as a starting point. By itself,
SWOT analysis rarely helps a firm develop
competitive advantage that it can sustain over time.
 module 5- organizational appraisal
internal assessment
o corporate level internal analysis - is about
identifying your businesses value proposition or
core competencies.
When matching strategy with culture, it is important
to understand:
1. There is no ’best’ and ’worst’ culture.
2. This matching of strategy and culture is likely to
become embedded over a period
Value chain analysis
o value chain - identifies where the value is added
in the process and links it with the main
functional parts of the organization
- views the organization as a chain of value-
creating activities
o value - is the amount that buyers are willing to
pay for what a product provides them
Customer value is derived from three basic sources:
1. Activities that differentiate the product
2. Activities that lower its costs
3. Activities that meet the customer’s need quickly.
Value chain activities are divided into two broad
categories:
o Primary activities - contribute to the physical
creation of the product or service, its sale and
transfer to the buyer and its service after the
sale.
o Support activities - include such activities as
procurement, and HR which either add value by
themselves or add value through primary
activities and other support activities.
Primary Activities
o Inbound Logistics
These activities focus on inputs. They include
material handling, warehousing, inventory control,
vehicle scheduling, and returns to suppliers of inputs
and raw materials.
o Operations
These include all activities associated with
transforming inputs into the final product, such as
production, machining, packaging, assembly, testing,
equipment maintenance
o Outbound Logistics
These activities are associated with collecting,
storing, physically distributing the finished products
to the customers. They include finished goods
warehousing, material handling and delivery, vehicle
operation, order processing and scheduling.
o Marketing and Sales
These activities are associated with purchase of
finished goods by the customers and the inducement
used to get them buy the products of the company.
They include advertising, promotion, sales force,
channel selection, channel relations and pricing.
o Services
This includes all activities associated with enhancing
and maintaining the value of the product.
Installation, repair, training, parts supply and
product adjustment are some of the activities that
come under services.
Support Activities
o Procurement Activities
Associated with purchasing and providing raw
materials, supplies and other consumable items as
well as machinery, laboratory equipment, office
equipment. Included are such activities as
purchasing raw materials, servicing, supplies,
negotiating contracts with suppliers, and securing
building leases.
o Technology Development Activities
relating to product R&D, process R&D, process
design improvements, equipment design, computer
software development
o Human Resource Management Activities
associated with recruiting, hiring, training,
development, compensation, labor relations,
development of knowledge-based skills
o Firm Infrastructure Activities
relating to general management, organizational
structure, strategic planning, financial and quality
control systems, management information systems
Conducting a Value Chain Analysis
1. Identify activities - divide a company’s
operations into specific activities and group them
into primary and secondary activities
2. Allocate costs - each activity in the value chain
incurs costs and ties up time and assets
3. Identify the activities that differentiate the
firm - sources of differentiation advantages
relative to competitors.
4. Examine the Value Chain - managers need to
identify the activities that are critical to buyer
satisfaction and market success
In assessing the value chains there are two levels
that must be addressed:
1. Interrelationships among the activities within the
firm.
2. Relationships among the activities within the firm
and with other organizations that are a part of the
firm’s expanded value chain.
Cost and value drivers
Cost Drivers
o Economies of scale
o Pattern of capacity utilization
o Linkages between activities
o Interrelationships
o Geographical location
o Policy choices
o Institutional factors
Value Drivers
o Policy choices
o Linkages between activities
Organizational Capability Factors
- resources are how an organization generates
value.
- Resource Based View (RBV) considers the firm as
a bundle of resources – tangible resources,
intangible resources, and organizational
capabilities.
- Competitive advantage - arises from the creation
of bundles of distinctive resources and
capabilities.
Resources
- resource can be an asset, skill, process or
knowledge controlled by an organization
- an organization’s resources include both those
that are owned by the organization and those that
can be accessed by the organization to support its
strategies.
Typically, resources can be grouped into four
categories:
1. Physical resources - plant and machinery, land and
buildings, production capacity
2. Financial resources - capital, cash, debtors,
creditors
3. Human resources - knowledge, skills and
adaptability of human resources
4. Intellectual capital - is an intangible resource of
an organization.
Capabilities
Organizational capabilities are the skills that a firm
employs to transform inputs into outputs
- they reflect the ability of the firm in combining
assets, people, and processes to bring about the
desired results
- a function of the firm’s resources, their
application and organization, internal systems and
processes, and firm specific skill sets
- are rarely unique, and can be acquired by other
firms as well in that industry
- may become “distinctive competencies“ when a
firm performs them better than its rivals.
Core Competence
Core competence - set of distinctive competencies
that provide a firm with a sustainable source of
competitive advantage.
- reflect the firm’s ability to deploy different
resources and capabilities in a variety of contexts
to gain and sustain competitive advantage
- are activities or processes that are critically
required by an organization to achieve
competitive advantage
- they create and sustain the ability to meet the
critical success factors of particular customer
groups better than their competitors in ways that
are difficult to imitate
To achieve this advantage, core competencies must
fulfill the following criteria. It must be:
a. an activity or process that provides customer
value in the product or service features.
b. an activity or process that is significantly better
than competitors.
c. an activity or process that is difficult for
competitors to imitate.
o Competence is something an organization is good
at doing.
o Core competence is a proficiently performed
internal activity
o Distinctive competence is an activity that a
company performs better than its rivals.
o Distinctive competencies become the basis for
competitive advantage
Strategic Importance of Resources
Strategic capability - is the ability of an organization
to put its resources and capabilities to the best
advantage so as to enable it to gain competitive
advantage.
There are three types of resources:
o Available Resources
Strategic capability depends on the resources
available to an organization because it is the
resources used in the activities of the organization
that create competences.
o Threshold Resources
A set of basic resources are needed by a firm for
its existence and survival in the marketplace.
o Unique Resources
Unique resources are those resources that are
critically required to achieve competitive
advantage. They are better than competitors’
resources and are difficult to imitate.
Critical Success Factors
Critical Success Factors (CSFs) - the resources, skills
and attributes of an organization that are essential
to deliver success in the marketplace
- are also called “Key Success Factors“ (KSFs) or
“Strategic Factors''
- the key factors which are critical for
organizational success and survival
Importance of Critical Success Factors
o Structure of the industry
o Competitive strategy, industry position and
geographic location
o Environmental factors
o Temporal factors
benchmarking
Benchmarking is the process of comparing the
business processes and performance metrics
including cost, cycle time, productivity, or quality to
another that is widely considered to be an industry
standard benchmark or best practice
- provides a snapshot of the performance of a
business and helps one understand where one is in
relation to a particular standard
best practice benchmarking or process
benchmarking - organizations evaluate various
aspects of their processes in relation to best
practice companies' processes, usually within a peer
group defined for the purposes of comparison.
Types of Benchmarking
o Process benchmarking: the initiating firm
focuses its observation and investigation of
business processes with a goal of identifying and
observing the best practices from one or more
benchmark firms.
o Financial benchmarking: performing a financial
analysis and comparing the results in an effort
to assess your overall competitiveness and
productivity.
o Benchmarking from an investor perspective:
extending the benchmarking universe to also
compare to peer companies that can be
considered alternative investment opportunities
from the perspective of an investor.
o Performance benchmarking: allows the initiator
firm to assess their competitive position by
comparing products and services with those of
target firms.
o Product benchmarking: the process of designing
new products or upgrades to current ones.
o Strategic benchmarking: involves observing how
others compete.
o Functional benchmarking: a company will focus
its benchmarking on a single function to improve
the operation of that particular function.
o Best-in-class benchmarking: involves studying
the leading competitor or the company that best
carries out a specific function.
o Operational benchmarking: embraces everything
from staffing and productivity to office flow
and analysis of procedures performed.

The following is an example of a typical

benchmarking methodology:
o Identify your problem areas.
o Identify other industries that have similar
processes.
o Identify organizations that are leaders in these
areas.
o Survey companies for measures and practices.
o Visit the "best practice" companies to identify
leading edge practices.
o Implement new and improved business practices.
 o Brochures - are pamphlets of fliers that endorse
chapter 1: technical writing new a product in such a way that the potential
normal customer will be convinced that the product is
effective and eventually avail of the product.
What is technical writing?
o refers to writings about scientific subjects and o Proposals - written suggestions on how to make
about various technical subjects associated with the company or organization more productive
sciences and successful
o is characterized by certain formal elements, such
as its scientific and technical vocabulary, its use o Memoranda - inter-office written communication
of graphic aids, and its use of conventional used to disseminate information
report forms
Technical writing vs. Creative writing Five important principles in good technical writing
o Always have in mind a specific readers, real or
Technical Creative imaginary, when you are writing a report
writing writing
o Before you start to write, always decide what
content Factual, Imaginative, the exact purpose of your report is, and make
straightforward symbolic sure that every paragraph, every sentence,
every word makes a clear contribution to that
audience specific general purpose.
purpose Inform, Entertain, o Use language that is simple, concrete, and
instruct, captivate familiar
persuade
style Formal, Informal, o At the beginning and end of every section of
standard, artistic, your report, check your writing according to this
academic figurative principle: “first you tell the reader what you’re
tone objective subjective going to tell him, then you tell him what you’ve
told him.“
vocabulary specialized general
organization systematic Arbitrary Purposes of technical writing
(subjective) o It serves as basis for management decision
o It furnishes needed information
o It gives instructions
o It records business transactions through
proposals
Products of technical writing o It procures business proposals
o Business letter - a type of written o It serves as basis for public relations
communication. It is written using formal o It provides report to stockholders of companies
language and follows formal elements of letter
writing.
Properties of technical writing
o Contract - a written agreement between two o Subject matter
people under mutually agreed terms
o Audience
o Monograph - a detailed essay or book on a very o Expression
specific topic. It is usually written by o Style
professionals or academicians on topics of o Arrangement of materials
interest concerning their specific fields.
o Printed action memo - a ready-format Writing can be grouped into FIVE basic types:
memorandum that only requires a check mark on o Technical writing - conveys specific information
the appropriate box that contains the message. about a technical subject to a specific audience
for a specific purpose.
o Graphic aids - drawings, sketches, and
illustrations that aid the readers in o Creative writing - includes fiction - poetry, short
understanding the presented data stories, plays, and novels and far more different
from technical writing.
o Instructional manuals - written to guide the
readers on how to assemble, maintain, and o Expressive writing - subjective response to a
operate an apparatus, machine, or gadget personal experience-journals and diaries-
whereas technical writing might be objective
observations of a work-related experience or
research.

o Expository writing - “exposes“ a topic
analytically and objectively, such as news
reports. Like technical writing, the goal of
expository writing is to explain or reveal
knowledge, nut expository writing does not
necessarily expect a response or action from the
reader.
o Persuasive writing - depends on emotional
appeal. Its goal is to change one’s attitude or
motivate them to action.
relevant laws and ethical
considerations related to technical
writing
The four bodies of law relevant to technical
communication
o Copyright law - covers the protection of the
rights of the author
o Trademark law - pertains to federal protection
(different from registered trademark)
o Contract law - covers written warranties or
their implied warranties
o Liability law - pertains to responsibilities or
obligations of writers especially claims they
made on their paper
Technical writers are like researchers. Both take
into consideration the bounds and limitations to the
things they write. They carefully study the
information to be presented and they are aware
that PRUDENCE has to be exercised.
Do’s of technical communication
o Abide by relevant laws
o Abide by the appropriate corporate or
professional code of conduct
o Tell the truth
o Be clear
o Avoid discriminatory language
o Acknowledge assistance from others
Don’ts of technical communication
o False implications - assuming the outcomes of a
project or making sweeping generalizations
o Exaggerations - expressing situations in extreme
proportions
o Euphemisms - writing about situations in
seemingly good conditions even though they are
not
o Don’t mislead your readers
The writing process
o Pre-writing stage
o Writing stage
o Re-writing stage
Pre-writing stage
o is the first stage in writing process where the
writer composes or supplies information
pertaining to the following:
A. Purpose of the paper
B. Choice of topic
C. Gathering information
Pre-writing techniques
o Keep a writer’s journal by recording personal
experiences, perceptions, and ideas
o Do free writing
o Cluster by drawing lines and circles to show
connection between ideas
o Ask questions (5w’s and H)
o Read with focus
o Listen with focus
o Observe by noticing details around you through
the senses
o Imagine. Use ’what if’ approach
Writing stage
o is the part where we begin to write our first
draft
Do’s and don’ts of writing first draft:
o Do not overanalyze your writing
o Feel free to follow the flow of ideas
o Do not exaggerate details
o Work on the details as much as possible to keep
the story fresh in your mind
o Do not worry yet about how good your writing
is
o Have fun!
Re-writing stage
- is also known as the revision stage to ensure the
following:
o The content of the paper is relevant
o There is organization and coherence in the
arrangement of ideas
o Grammar and mechanics are clearly observed
chapter 2: exploring expository Expanded definition
- is done by stipulation, operation, explication, cause
techniques and effect, classification, example, and other
rhetorical functions
Expository techniques:
A. Classification
B. Definition Pointers in defining terms
C. Description of a process A. Never give definitions of a term that include any
D. Description of a mechanism of its derivatives (for example: definition is the act
of defining)
B. Do not use “is where“ or “is when“ to define a
term
Classification C. Use the simple present tense (active and passive
- it is dividing something into groups, classes, voice)
categories D. Use relative clauses to give additional information
- normally done in accordance with several criteria
(standards or principles based on judgment)
- done when the writer believes that there are Description of a process
shared qualities or characteristics about a subject There are writing tasks that entail an explanation
matter of:
- how something works
- how something is done
How to classify? - how something is made
- look for the relationships among them and organize
them into group
- it may either be on the basis of their similarities or Process description includes:
differences - sequence
- instruction
- procedure
Definition
- is a useful technique in oral or written
communication Two separate concepts in description of a process:
- it is a must for a technical writer to be able to A. How to do something
define the terms with multiple meanings and those B. How something occurs
that are unfamiliar to the reader
- when we define words or unfamiliar terms, we give
concise but exact meanings of unfamiliar words and Process of description
special meanings of familiar words - it is also a description of equipment, materials, and
procedures
- graphic materials are used for detailed
Two methods of defining terms presentation of the process
A. Simple definition - the writer makes use of sequence makers (first,
B. Extended definition second, then, next, subsequently, finally, at last) to
follow the natural or mechanical system
Simple definition - in describing a process or procedure, use the
- can be formulated by its three parts: present passive tense: is/are + verb + ed (for
A. Species example: is manufactured, is controlled)
B. Genus
C. Differentia
Description of mechanism
Species (term Genus (the Differentia (a - it is an explanation of a system or parts of an
to be defined) class where characteristic apparatus
the term of the term) - it includes the characteristics and functions of a
belongs) piece of the device and the totality of the
language Is a form Of mechanism
communication - it also explains the arrangement and shape of an
object in space
An architect Is a Who designs
professional building
In writing a description of a mechanism, the writer
communication Is a process Of giving and may be guided by the following questions:
receiving - what is it?
information in - what are its principal parts?
an - what is its function?
understandable - what does it look like?
manner - how does it work?
Chapter 3 lesson 1 writing effective Internal documents produced in one organization
business correspondence document Description of Purpose(s)
document of
documents
People are highly engaged in various daily
communications through email, texting, chatting, transmittal Memo Inform;
formal presentation or even face to face accompanying persuade
conversation. This phenomenon leads to unending document, reader to
quest on how to communicate effectively to survive telling why it is read
the digital era. No matter how technological the being document;
workplace may become, there will always be the real forwarded to build image
power in the written world (Roberts). technology the receiver and
has not eliminated the need for people to write goodwill
clearly, it merely simplified the writing process. Monthly or Report Inform;
quarterly report summarizing build image
If we compare writing with other micro skills such profitability, and
as listening, speaking, reading, viewing, writing productivity, goodwill
probably is the most difficult skill because it covers and problems (report is
a great deal of knowledge as well as principles of during period. accurate,
organization to produce a good composition Used to plan complete;
(tangpermpoon). since then, writing business activity for writer
correspondence never goes out of styles especially next month or understand
in the corporate world. Employers keep on looking quarter. s company)
for professionals who can communicate messages Performance Evaluation of Inform;
well both in written and oral, inside and outside of appraisal an employee’s persuade
an organization. performance, employee
with to improve
recommended
areas of
improvement
Communication in business and organization or
Communication in business recommendatio
- effective communication is the key to success n for
promotion
- business depends so much on communication Memo of Congratulation Promote
- people must communicate to plan products, hire, congratulations s to an goodwill
train, and motivate workers, coordinate employee who
manufacturing and delivery, persuade customers to have won
buy, and bill them for sale awards, been
promoted, or
- communication can’t be set apart from business earned
for it gives life and light to any business community
transactions recognition
quotation Letter giving Inform;
price for a promote
Business communication specific goodwill
- refers to how people communicate product, (reasonable
fabrication, or price)
service
Organizational communication
Claim/adjustme Letter granting Inform;
- deals with whom to communicate nt or denying promote
customer goodwill
Communication in business request to be
- is a two-way process that follows the common given credit
communication process of sending and receiving for defective
messages goods
- uses paper, pen, typewriter, or computer to make Annual report Report to Inform;
the message tangible to the receiver stockholders persuade
summarizing stockholder
financial s to retain
Basic functions of communication information stock and
- to inform for year others to
- to persuade buy; build
- to promote goodwill goodwill
(company is
a good
corporate
citizen
Thank you letter Letter to Promote
suppliers, goodwill
 customers, or Business letter vs personal letter
other people Business letter Personal letter
who have nature Impersonal Fully personal
helped and universal in nature
individuals or in nature
the company
purpose Exchange Exchnage
various personal or
business- family-related
related issues affairs and
Two basic structures that make up the and information
communication channels of an organization: information
A. Formal channel of communication - follows the scope Scope is wide Scope is
usual pattern of an organizational chart where the and contains limited and
superiors are classified from the subordinates various types contains only
through connecting the lines of communication to of business personal
every member of the organization information information
structure Follows Does not
B. Informal channel of communication - follows an officially follow any
unstructured channel of communication where lines recognized recognized
and patterns of the organization are vague. This is structure structure
sometimes referred to as grapevine because it formality Maintains informal
usually relays more information than the formal formal rules
communication through chismis or rumor-mongering and
procedures
size Concise in size May be
and avoids concise or
irrelevant large in size
Chapter 3 lesson 2 personal and matters
business letters types Can be
Generally
categorized cannot
Two basic kinds of letter differently categorized
A. Personal letter differently
B. Business letter salutations Sir, dear sir, Dear friends,
dear mr. x my dear x,
dear x
Personal letter language Should be easy May be easy,
- is a written type of communication of an individual and simple poetic,
to another concerning personal or family affairs emotional
rather than business matters copy A copy should A copy may or
- it does not follow certain rules or structures and always be may not be
uses a less formal wording or colloquial language preserved preserved
- it maintains and develops personal relationships method Uses direct Uses only
with people whom you consider a friend or a family and direct method
- it can be type-written or handwritten depending persuasive
on the length of content method

Business letter Techniques in writing business letters

- it is a formal type of written letter concerning
business transactions and other business related
issues and information
- it must adhere to certain rules, restrictions,
formats, and must use formal language
- it is commonly written in 8 1/2 x 11 inch-size
- it follows certain margin, free from dirt and
scratches in order to build a good impression to the
reader
A. Write from the “you“ attitude - every person is
interested primarily in himself and thus responds to
a letter written from his point of view
B. Accentuate the positive - even a letter that has
to say “no“ can be written from a positive point of
view
C. Make your letter smile - a business letter should
leave a pleasant presentation (phrases - we shall be
glad to…, it is a pleasure…, thank you, with our
compliments)

D. Make your copy live - the reader should feel what

you say. If possible, create a visual experience. Let
the reader see himself doing something-running
machine, telling his friends about his triumphs,
selling more, reinterpreted the same copy.
 Chapter 3 lesson 3 characteristics C. Receiver - completes the elements of the
communication process
and elements of a business letter - main role: decode the message of a business letter
and provide a feedback that will complete the entire
To ensure that we are writing an effective business communication
letter, there are “ten c’s“ we should consider:
A. Completeness - refers to the inclusion of
complete information. The business letter should
answer the question WHO, WHAT, WHEN, WHERE,
and HOW to produce a good and complete business Chapter 3 lesson 4 parts of business
letter
letter
B. Correctness - refers to the correct grammar, Parts of business letter
punctuation, spacing, information, and structure. It The heading
also refers to the correct format of a business
letter. - contains the return address with the date on the
last line
C. Conciseness - refers to being direct and brief
without compromising the complete idea. Recipient’s address
-the address you are sending the letter to
D. Coherence - refers to the smooth flow of ideas
in a business letter. (you can use synonyms, The salutation
transitional words, pointers, repetition of words, - if unsure about the person’s title or gender, then
and sentence patterns) just use their first name

E. Clarity - refers to readability of information The body

which is easy to understand
F. Concreteness - refers to the use of specific
words, not general words
G. Courteousness - refers to the politeness of the
tone of the business letter
H. Consideration - refers to the use of professional
tone to show respect to the reader of the letter.
Also, we need to anticipate the “YOU“ attitude in
writing our letter.
I. Consistency - refers to the uniformity of the time
and style of the writer of a business letter (Example:
abbreviations, figure/table, headings)
J. Credibility - refers to the personality of the
writer as himself which might reflect on his writings
Elements of a business letter
A. Sender - the one who is writing it
- the receiver of the letter should be known by the
sender
- include the complete name, position, and the
receiver’s address
- must be knowledgeable in basic grammar,
punctuation, spelling, and mechanics skills to build a
good impression on the receiver
- is the meat of the letter
The complimentary close
- is a short and polite remark that ends your letter
The signature line
- composed of the complete typewritten name of
the writer and his official designation or name of
the company
Written signature
- refers to the sender clearly scribing or affixing his
specimen signature on the space between the
complimentary close and the signature line
Enclosures
- for enclosed documents such as resume
Format and font
Block
- the entire letter is justified to the left and single-
spaced except for a double space between
paragraphs
Modified block
- the body of the letter and the sender’s and
recipient’s addresses are left justified and single-
spaced.
- the date and closing are tabbed at the center point

B. Message - the reason that moves the sender to Semi-block

start the communication process - each paragraph is indented instead of left justified
- should be well-written, simple, and understandable
- should be direct and persuasive and should avoid
including unnecessary information
- should be concise and complete
Optional parts of a business letter
Attention line
- if the letter is going to a large company, an
attention line can provide the bit of necessary
emphasis you need so that the letter goes where it
needs to go (Attention: Human Resources)
- should go two lines below the recipient’s address
- used when the letter urgently needs to be received
by the best person who can handle it
Subject or reference line
- can focus the recipient on the letter’s actual
purpose
- start with a “subject:“ or a “re:“ or write in all caps
- used in short reports to let the reader know the
content of the letter immediately
Identification initials or reference initials
- includes the initials of the secretary or typist who
took the dictation in lower case and the initials of
the one who dictated or dictator in upper case
Enclosed or enclosed reference or enclosure
notation
- composed of the attached materials on the letter
- usually abbreviated “inc.“ and placed below the
reference initials
Copy notation
- consists of the names or departments of other
people who also received the letter
- carbon copy
- blind carbon copy
Chapter 3 lesson 5 business letter
punctuations and style
Punctuation style
A. Open punctuation
- no line of letter part, except the body, has any
punctuation at the end unless an abbreviation
requires a period
- does not include any punctuation after the part of
the letter except the body of the letter of the
message
B. Mixed/standard punctuation
- a colon follows the salutation; a comma follows the
complimentary close
- most common style of punctuating a business
letter which includes punctuation on salutation and
complimentary close only.
C. Closed punctuation
- requires a punctuation mark after the date line,
each line of the inside address, the complimentary
closing and each line of the signature.
Business letter styles
- full block style
- modified block style
- semi-block style
- simplified style
- indented style
- hanging-indented style
Chapter 3 lesson 6 types of business
letter
A. Application letter
- is sometimes called a cover letter
- composed persuasively whenever you are applying
for a job
- usually accompanied by a resume for additional
information on experiences and skills
Format:
1st paragraph - determine the reason/s why you are
applying for the job. Mention if the job is solicited
or unsolicited
2nd paragraph - explain why you deserve the job
without being too boastful. You may support it by
citing your qualifications
3rd paragraph - even if you think you are hired or
not, thank the hiring personal.
Styles of Resume
A. Chronological resume - focuses on the
employment history of the applicant
- ideal for those who already have several work
experiences showing steady career growth
B. Functional resume - focuses on skills rather than
on employment history
- ideal for fresh graduates seeking their first job
C. Combination resume - focuses on drawing the
best features or strong points of chronological and
functional resume styles.
B. Letter of Inquiry’
- a letter that asks for a particular information or
assistance
- direct and questions are constructed to get the
information straightforward
1st paragraph - begin with the most important
question or a summarizing statement
2nd paragraph - may contain an explanation or list
of questions
3rd paragraph - should tell the reader what you
want to be done and when
C. Letter of Reply or Response
- written in response to a letter of inquiry that H. Adjustment letters
directly answers all inquiries regarding the - a response to a complaint letter
company’s products or services - be humble in the response and offer potential
solutions
- use your response as a relationship-building tool
Steps in writing a letter of response
1st - acknowledge the inquiry by mentioning the I. Bad newsletters
important details from the letter of inquiry you - soften the blow
received. - remind the receiver about what actually works in
2nd - build goodwill and pave the way for future your business relationship before breaking the bad
contacts by using a cordial or friendly tone news to them
Last - answer the question fully and send prompt
replies J. Acknowledgement letters
- meant to acknowledge that you received an item
from someone, or that you are aware of a fact or
error they pointed out
D. Letter of Request
- main purpose is to request something you need K. Memos
- often used to spread important news and
1st paragraph (orientation) - the introduction part directives inside a company
where you begin with the details of the event or - be fast and to the point
activity. The date, time, and venue should be
indicated. L. Congratulatory letters
2nd paragraph (information) - you need to mention - stay on point and avoid sounding over-the-top or
the requested materials or equipment or even venue mocking
Last paragraph (action) - thank the person in charge - describe what motivated you to send
to promote goodwill congratulations and the positive feedback that you
have already heard
- keep it concise
E. Letter of Order
- for purchasing items that are for sale M. Sales letter
- require a strong call to action or hook at the
The order letter usually has the following: beginning so that the receiver continues to read and
A. Name of product/services discovers the benefits of whatever you are selling
B. Description of each item, giving size, style, - make sure to provide information so that they can
quality, material, color, weight, or whatever will help easily respond
in identifying the item wanted
C. Catalog number of the item, if it is available N. Resignation letter
D. Quantity of the item wanted - about giving notice that you are leaving a position,
E. Price of each item and the total price of the order providing a last day of employment, and explaining
F. Method of shipment desired by the buyer what is causing you to leave
G. Address where the goods are to be delivered
H. Date of the shipment
I. Credit references, if payment is made from an
account
J. Mode of payment

F. Thank you letters

- can be great for networking and relationship
building
- provide more details about what they did and how
it helped you, and then close with a second
expression of thankfulness

G. Complaint letters
- demonstrate that you are displeased without being
over-the-top angry
- suggest how the receiver of the letter might
correct the situation
 Chapter 3 lesson 7 writing sent to other Complimentar
readers y copies can be
memoranda sent to other
Memo readers
- most frequently used words in the corporate world Delivery time Determined by Determined by
- sometimes it denotes something negative a company’s the destination
especially if one learn it came from their superior in-house mail Could be
- short official note sent by one person to another procedure delivered
within the same company or organization to remind Could be within three
the recipient delivered days but may
- clipped or shortened term for memorandum within three take more
- one type of correspondence together with days than a week
business letters for the purpose of effective
management Basic elements of a Memo
o Heading
o Dateline - the actual date when the memorandum
Two essential facts about inter-office memorandum is issued
A good memo passes departments, between o Number - refers to the frequency of the issued
individuals in different departments, between memos
management and staff, and others. o Receiver - the person whom the memorandum be
sent
o Sender - the person who issued the memo
Most firms provide printed forms and restrict inter- o Subject - the topic or title of the memo
office correspondence to one subject to encourage o Enclosure - an optional part which includes the
conciseness and clarity, and to facilitate filing and attachments
references.

Memorandum vs letters Memorandum FOR vs Memorandum TO

characteristic memorandum letter o Memorandum FOR is usually written by a
s subordinate addressed to his superior
o Memorandum TO is usually written by a superior
destination Internal; External; addressed to his subordinates
correspondenc correspondenc
e written to e written
colleagues outside the Effective memo checklist
within the business o Does your introduction tell why you are writing
company and what you are writing about?
format Identification Includes o Does the body explain exactly what you want to
lines include letterhead say?
“date“, address, date, o Does the conclusion tell what’s next, providing
“to/for“, reader’s either a complimentary or a directive close?
“from“ and address, o Is your page layout reader friendly?
“subject“ - the salutation, o Is your writing concise?
message text, o Is your writing clear?
follows these complimentary o Have you written appropriately to your
close, and audience?
signature o Are errors eliminated?
audience Generally high- Generally low-
tech or low- tech and lay
tech, mostly readers, such
business as vendors and
colleagues clients
topic Generally high- Generally high-
tech or low- tech or low-
tech; tech;
abbreviations abbreviations
and acronyms and acronyms
are often are often
allowed defined
tone Informal (peer More formal
audience) (audience of
vendors and
clients)
Attachment Hard-copy Additional
or enclosure attachment information
can be stapled can be
to the memo enclosed
Complimentar within the
y copies can be envelope
 chapter 1: overview to financial
controllership
What is the task/function of accounting in a
corporation?
o accounts payable transaction processing
o accounts receivable transaction processing
o asset transaction processing
o debt transaction processing
New accounting tasks
o coordination and consolidation of accounting at
subsidiaries
o currency translations
o margin analysis
o non-product cost analysis
o operation of accounting software
New tasks assigned to the accounting function of
smaller company
o hedging and letter-of-credit transactions
o internal auditing programs
What are the roles and responsibilities of controller?
o traditionally, the role of the controller has been
the one who manages a few key transaction
cycles, monitors assets, and delivers financial
statements
o due to the vastly increased interaction with
other departments, the controller must be highly
skilled in interdepartmental dealings
o additionally, the controller must govern a group
of employees that is much more educated than
was previously the case
Impact of ethics in accounting role
o the accounting function can have a serious
negative impact on a company’s ethical
standards through nothing more than
indifference or lack of caring
o if the controller does not maintain a high ethical
standard, the rest of the accounting staff will
have no ethical leader and will quickly lapse into
apathy
o the controller can have an additional impact on
the pervasive attention to ethics within the
corporation by requiring its consideration as
part of the capital budgeting process
Illustrative topics to include in code of ethics
o bidding, negotiating, and performing under
government contracts
o compliance with antitrust laws
o compliance with securities laws and regulations
o conflicts of interest
o cost consciousness
o employee discrimination on any grounds
o gifts and payments of money
o hazardous waste disposal
o meals and entertainment
o restrictive trade practices
o international boycotts
o political contributions
o standard of conduct
o workplace and product safety
o leave for military service
o preservation of assets
o use of company assets
A code of ethics becomes the starting point in the
series of judgments a controller must follow when
confronted with an ethical issue. The logical series
of steps to work through are:
o consult the code of ethics
o discuss with immediate supervisor
o discuss with a trusted peer
o discuss with the Board’s audit committee
o consider leaving the company
Evolving role of accounting
o the accounting function is in the midst of a
fundamental change from being a clerical group
without significant training to a cadre of
experienced technicians and managers
o these trends will force the accounting
department of the future to stock up on highly
trained personnel with good management skills
o the accounting department is likely to become a
more common route to top management
positions
o it is likely that there will be a decrease in the
proportion of purely clerical positions in the
accounting area, in favor of more senior
personnel with extra technical and management
skills
chapter 2: cost accounting & cost
system
Cost accounting – is a form of managerial
accounting that aims to capture a company’s total
cost of production by assessing the variable costs
of each step of production as well as fixed costs,
such as a lease expense.
Different types of costs
o fixed costs
o variable costs
o operating costs
o direct costs
o indirect costs
Input: Data collection systems
Data collection tools
o punch clocks
o electronic time clocks
o bar code scanners
o terminal data entry
o radio frequency identification (RFID)
o paper-based data entry
Processing: Data summarization system
Various costing methodologies
1. Job costing – an accounting method designed to
help track the cost of individual projects and jobs.
Three specific categories of job costing:
o labor
o materials
o overhead
Who uses job costing?
o marketing and advertising agencies
o construction companies
o consulting firms
o energy utilities
o engineering offices
o manufacturers
o retailers
o transportation and logistics providers
o healthcare and life sciences organizations
How to calculate job costing?
a. calculate labor cost
o labor costs = (no. of working days x daily pay
rate x number of workers)
b. calculate material cost
o add all direct and indirect cost
c. calculate overhead
o account for the total overhead needed to
complete a project, including rent on a
company’s office spaces and manufacturing
facilities, electricity, internet, and other
business expenses
2. Process costing – an accounting practice by which
companies assign costs to a collection of products
or project outputs generated
- most often used by companies mass producing
many identical or near-identical products at once
Who uses process costing?
o manufacturers that produce a large volume of
identical items
How is process costing calculated?
o average cost for each item = total process
cost/total number of items
3. Activity-Based costing (ABC) – a costing method
that assigns overhead and indirect costs to related
products and services
Formula in computing ABC
o activity cost per unit = total cost of
activity/total number of units of the cost driver
4. Target costing – a company plans in advance for
the price points, product costs, and margins that it
wants to achieve for a new product
- not just a method of costing, but rather a
management technique wherein prices are
determined by market conditions
o target costing = selling price – profit margin
Variance analysis – an analysis of the difference
between planned and actual numbers
two categories of variances:
o favorable variance
o unfavorable variances
common cause of variance
o change in sales volume
o changes in pricing
o changes in costs
o production inefficiencies
o unexpected events
o errors in budgeting or planning
chapter 2: cost accounting & cost
system
How to use ratios and trends
o ratios are very useful for determining the
interrelationship between numbers
o a trend line is commonly used to plot revenues
or specific expense line items
other items a controller should know about to plot a
strong management course in the sea of business
uncertainty:
o branding
o company organization
o competitors
o goals
o management team
o market place
o monopoly situations
o new market activities
o product pricing
Measures for profitability
o gross profit margin – measures how much profit
is left over after deducting the cost of goods
sold from revenue
gross profit margin = (revenue – COGS) /
revenue x 100%
o operating profit margin – measures the
percentage of revenue left after deducting all
operating expenses
operating profit margin = operating
income/revenue x 100%
o net profit margin – measures the percentage of
revenue left after deducting all expenses,
including taxes and interest
net profit margin = net income/net revenue x
100%
o return on assets – measures how efficiently a
company uses its assets to generate profits
return on assets = net income/total assets x
100%
o return on equity – measures how much profit a
company generates for each dollar of
shareholder equity
return on equity = net income/shareholders’
equity x 100%
o earnings per share – measures the amount of
profit generated for each share of stock
earnings per share = net income/number of
shares outstanding
Measures for the balance sheet
o debt/equity ratio = total liabilities/total
shareholders’ equity
o return on assets = net income/total assets
o return on shareholder equity = net income/total
shareholder equity
o current ratio = current assets/current liabilities
o quick ratio = (current assets-inventory) /
current liabilities
o ratio of sales to accounts receivable =
sales/accounts receivable
o accounts payable turnover = COGS/accounts
payable
o ratio of repairs and maintenance expense to
fixed assets = RME/fixed assets
o fixed asset turnover = revenue/fixed assets
o ratio of returned earnings to capital = retained
earnings/capital
o economic value added = non-operating profit
after tax – (cost of capital x capital invested)
o working capital productivity = revenue/working
capital
trend analysis
o involves the collection of information from
multiple time and plotting the information on a
horizontal line for further review
o its intent is to spot actionable patterns in the
presented information
o based on the idea that what has happened in the
past gives traders an idea of what will happen in
the future
three main types of market trend to consider
o upward trend
o downward trend
o sideways trend
ratio analysis – a quantitative method of gaining
insight into a company’s liquidity, operational
efficiency, and profitability by studying its financial
statements
- it is a cornerstone of fundamental equity
analysis
Types of ratio analysis
o liquidity ratios
o solvency ratios
o profitability ratios
o coverage ratios
o market prospect ratios
chapter 3: cost volume profit
analysis
o cost-volume-profit (CVP) analysis – is a way for
companies to determine how changes in costs
(both variable and fixed) and sales volume
affect a company’s profit
o income statement = cvp analysis
Other formulas
o breakeven point in unit – will tell exactly how
many units must be sold to turn a profit
- if a company sold more units beyond this
point, they will be making a profit
formula:
fixed cost/contribution margin per unit
o breakeven sales – is the amount of your product
that you will need to produce and sell to cover
total costs of production
formula:
fixed cost/contribution margin percentage
chapter 4: internal control systems
and internal audit function
Internal Control Systems
o internal controls – used to combat fraud and to
monitor the consistency and completion speed of
transactions
Objectives
o authorization – is the transaction authorized by
the management?
o reconciliation – periodic reconciliations of
physical assets to records, or control accounts
should be made
o recording – transactions should be recorded not
only in proper account, but also at the proper
time with proper description
o safeguarding – physical assets should not be
under the physical custody of those responsible
for related record keeping functions
o valuation – provision should be made for
assurances that assets are properly valued in
accordance with generally accepted accounting
principles
Responsibility of internal controls
o board of directors – responsible for the
company’s control systems and total company
performance
o senior management – responsible for adequacy
of controls from a practical perspective
o financial management – most responsible for the
adequacy of controls for they are presumed to
have the highest degree of training and
experience in this area
o internal audit staff – responsible for reviewing
the existence and effectiveness of control
systems in various areas, and reports to
management on the adequacy of those controls,
as well as any deficiencies
o independent auditor – customary to determine
the strength of the underlying control systems
that support those statements
Types of fraud
o expense account abuse – employees run extra
expenses through their expense reports that are
not allowed by company policy, or use false
receipts to charge extra expenses that did not
actually occur.
o nonpayment of employee advances - employees
who have requested an advance payment of
their paychecks or an advance to cover trip
expenses will not pay back the company for
these expenses.
o purchases for personal use - employees can take
advantage of the authorization systems built
into the purchasing system to order items for
their personal use.
o supplier kickbacks - employees in the purchasing
function can arrange with suppliers to buy their
products and services at inflated costs in
exchange for direct payments back to the
employees.
o theft of cash and investments - the primary
target of many employees who commit fraud is
cash.
o theft of fixed assets - fixed assets that are not
bolted down, are small in size, and have a high
resale value are subject to theft.
o theft of inventory or supplies - employees can
remove supplies and inventory from the
company, either for personal use or for resale.
Preventing Fraud
The high-level fraud indicators are:
o creates an overly complex organizational
structure
o has an excessive emphasis on meeting profit
goals
o has an aggressive attitude toward financial
reporting
o is unwilling to pay for good controls
o is dominated by one person
o Management turnover is high
o is forcing a rapid pace of growth
o is acquiring a large number of companies
Warning signals to look for at an employee level that
may be indicators of fraud.
o Bad debt write-off
o Inventory discrepancies
o Invoicing discrepancies
o Lack of supervision
o Large personal expenditures
o No competitive bidding
o No payment from the sale of assets
o No vacations
o Supplier addresses match employee addresses
How to deal with a fraud situation
Bring criminal charges
o Demand restitution and fire the employee.
o Dismiss employee for cause. Permit employee to
resign
o Demand restitution and permit the employee to
stay.
o Do nothing.
Internal Audit function
Reporting Relationships
o Head of Internal Audit Department - reports to
o Controller to CFO
o Head of Internal Audit - reports to CEO
o Head of Internal Audit - reports to the Board of
Directors
Internal Audit Committee Responsibilities
o hire the external auditor and oversee its audit
o develop criteria for determining what types of
non-audit fees charged by an external auditor
will interfere with its independence from the
company
o investigate management's response to problems
outlined by the external auditor in Its
management letter
o hire the internal audit director and approve the
internal audit work plan. also review ratings of
the internal audit team's work by target areas
within the company
o oversee the corporate control structure, which
includes the investigation of known control
breaches, consideration of additional controls
recommended by the internal or external
auditors, and knowledge of high-risk areas
o review related-party circumstances that may
impact the system of internal controls
o review the financial statements and be
knowledgeable regarding accounting policies
that have an impact on reported results and the
potential variances in results arising from those
policies
o verify the existence and adequacy of a
corporate ethics statement, as well as the
system used by employees to report ethics
violations, its confidentiality, and the
subsequent investigation and resolution of the
alleged violations report
its findings on all of the above issues to the
Board of Directors.
Role of Audit Committee
a) Tasks related to company management
o Review expenses incurred by the management
team
o Review business transactions between the
company and the management team
b) Tasks related to external auditors
o Recommend the hiring of external auditors
o Review Auditor Recommendation
o Review disputes between external auditors and
management
o Review the other use of external auditors for
other services
c) Tasks related to internal audits
o The audit committee should be heavily involved
in the selection of the internal audit director and
should certainly have final approval over the
person selected to fill this position
o Review the replacement of the internal audit
director
o Review the internal audit staff's objectives,
work plans, training, and reports
o Review the cooperation received by the internal
auditors
d) Tasks related to financial systems
o Investigate fraud and other forms of financial
misconduct
o Review corporate policies for compliance with
laws and ethics
o Verify that financial reports address all
information requirements of lenders
o Review all reports to shareholders, including
special reports, for consistency of information.
Internal Audit Objectives
o That control systems will adequately safeguard
company assets
o That company financial statements follow
generally accepted accounting principles (GAAP)
and are accurate
o That the company is following operating policies
and procedures
o That computer systems are accurately
processing data
o That the company is following an approved set
of ethical guidelines
o That it creates an annual audit plan that
addresses all of these objectives
o That it provides written reports of its findings
to those levels of management needing the
information in order to correct faulty systems
Internal Audit Activities
1. Objective: That control systems will adequately
safeguard company assets
o Cash
o Fixed assets
o Inventory
2. Objective: That company financial statements
follow GAAP and are accurate
o Cost of Goods Sold
o Expenses
o Revenue
3. Objective: That the company is following
operating policies and procedures
o Determine labor productivity.
o Investigate and determine the cause of
transactional errors.
o Review the appropriateness of expenses for new
construction.
o Review the fixed-asset purchasing goals after-
the-fact to see if goals were met.
o Review the obsolescence of existing equipment.
Verify the appropriateness of pay levels based
on experience and education.
o Verify from a sample of expense reports that
only those approved types of travel expenses
are being reimbursed.
o Verify that bank reconciliations are regularly
performed and reviewed.
o Verify that financial statements are published
within specified due dates.
o Verify that machine run rates are within
expected levels.
o Verify that product quality levels match
minimum standards.
o Verify that production scrap rates are within
expected levels.
o Verify that shipments are made on scheduled
ship dates.
o Verify the accuracy and timeliness of all key
transactions.
4. Objective: That computer systems are accurately
processing data
o Verify from a sample of transactions that the
computer system is correctly calculating
accounting transactions
o Verify that data from an acquired company are
accurately entered into the existing computer
system.
o Verify that new systems under development are
designed with an appropriate number of control
points to ensure proper processing of
transactions.
o Verify that there are a sufficient number of
safeguards built into the system to ensure a
rapid recovery from catastrophic computer
damage.
o Verify that there is sufficient testing of
systems and data during a conversion of
computer systems to a replacement system.
5. Objective: That the company is following an
approved set of ethical guidelines
o Follow up on reported ethics cases and
determine the extent to which formal ethics
training programs would have avoided the
situations.
o Verify from training records that each employee
has received at least the minimum number of
ethics training hours per year.
o Verify that the training materials used to teach
ethics to employees contain information that
matches and supports the principles described in
the company's official ethics policy.
6. Objective: That the department creates an annual
audit plan that addresses all of these objectives
o Verify that a broad range of managers are
consulted regarding the contents of the annual
audit plan.
o Verify that the annual audit plan contains some
reviews for all of the previous audit objectives
related to control over assets, ethics,
operations, financial accuracy, and operations.
o Verify that the key control problems pointed out
by the external auditors are being addressed by
the annual audit plan.
7. Objective: That the department provides written
reports of its findings to those levels of
management needing the information in order to
correct faulty systems
o Verify that feedback is solicited from auditees
regarding the findings and recommendations
made in audit reports.
o Verify the degree to which recommendations
have been implemented, subsequent to the
release of audit reports.
 chapter 4: recruiting, training, and
supervision
recruiting sources
o Recruiting Cost - tends to have a low level of
importance if the recruiting task must be
completed at once and a higher one if there is a
long timeline involved. Also, the lower-cost
approaches tend to involve extra time by the
controller to screen recruits, whereas more
expensive approaches, such as using a search
firm, tend to require less screening time,
because this task is completed by the
intermediary
o Recruiting quality - The quality of the person
hired tends to go up if there is a time interval
for the recruiting process.
o Recruiting time - As noted in the first two
factors, the time allowed to conduct a recruiting
campaign will usually result in higher costs if
there is little time available, because a controller
must resort to expensive sources. Also, there is
a chance that the quality of candidate recruited
will be lower if the recruiting period is short,
because there is only enough time to meet with
and evaluate a limited pool of candidates
o Audit and Consulting Firms - It is common for a
controller to hire from the ranks of the auditing
and consulting firms that work for the company.
This approach is very inexpensive, because the
controller probably already knows the best
performers within these firms and just calls
them to see if they are interested in a position.
o Campus Recruiting - good recruiting source for
lower-level positions is the college campus.
However, it is difficult to determine the quality
of the people hired, because they have never
worked before.
o Employees. One of the best sources of recruits
is current employees. This approach works best
when a company offers recruiting bonuses to
employees.
o Former employees. A controller should go to
great lengths to maintain contact with quality
employees who have left the company.
o Internet postings. Using the Internet can involve
either posting a job or reviewing posted
resumes. Either alternative is inexpensive but
requires screening inordinate number of
potential recruits
o Newspaper advertisements. This approach
involves placing ads in newspapers to attract
candidates.
o Professional publications. This involves
advertising in a professional publication to which
an accounting person subscribes, such as the
Journal of Accountancy
o Search firms. This is the most expensive
recruiting approach, for search firms typically
charge between one-quarter and one-third of a
hired person's first year's salary as their fee.
Factors to consider when recruiting
o Integrity. The accounting department has some
control or influence over the disposition of
assets, the reporting of financial information,
and the use of controls. If a person lacks
integrity, a controller may find that assets go
astray, financial information is incorrectly
reported, or controls are not enforced. The
resulting havoc occurs because accounting
personnel were not concerned about doing the
right thing
o Process knowledge. The accounting function is
similar to manufacturing in that it involves highly
predictable process flows that must be carefully
organized in order to reach peak levels of
efficiency.
o Communication skills. An invaluable attribute is
excellent communication skills. In order to
succeed, a candidate should be able to actively
participate in meetings with other employees,
clearly summarize and present information, and
create understandable written reports.
o Drive. Though a candidate may have an
overwhelmingly impressive set of credentials,
strong interpersonal skills, great integrity, and
fine background experience, none of these
factors will be of much use if the person lacks
the drive to complete work in a timely manner
and take the initiative in undertaking new
projects.
o Technical capability. An accounting recruit must
have the basic accounting knowledge that can be
imparted only through a regular course of
training. which can include a bachelor's or MBA
degree.
o Teamwork skills. An applicant must be able to
function with the rest of the group. It is easier
to identify characteristics that will inhibit
integration rather than those that will guarantee
it.
o Turnover likelihood. Because it is a time-
consuming and expensive process to hire a
professional, it follows that the people who are
hired should have a high probability of staying
with the company.
Importance of Reduced Turnover personal lives that might otherwise interfere
with company business.
By keeping the staff turnover rate as low as
possible, a controller can avoid many problems that o Recognize employee efforts. Some employees
result in gross inefficiencies, poor customer service, make exceptional efforts on behalf of the
high error rates, and increased costs. These companies where they work, yet receive no
problems are: recognition for these efforts. After going to
extra lengths to help the company, these
o Increased costs. Not only must a controller pay employees should receive some special
for recruiting costs to replace someone (e.g., recognition, which makes them want to stay with
newspaper advertisements, search firm fees, the company-not because they are making more
and travel expenses), but there are the added money or have a fancy title, but because they
and less clearly defined costs of training new feel appreciated.
employees and correcting the inevitable
mistakes that they will make as they learn their o Review employees frequently. Employees want
jobs. to know where they stand in terms of
performance, potential advancement, and the
o Increased inefficiency. The typical new hire, impression given to coworkers.
unless vastly experienced, will not reach the
efficiency levels of the person being replaced
for at least six months.
o Increased time by the controller. The recruiting
process is a very time-consuming one, and the
time a controller puts into it takes away from
other tasks, such as preparing and evaluating
financial statements, undertaking new cost-
reduction projects, or analyzing various
accounting-related proposals from around the
company.
o Loss of specialized knowledge. Every company
has a unique set of processes. When a company
loses an employee, it also loses that person's
knowledge of the processes
o Risk of an inappropriate hire. Bringing in a new
person carries with it the risk that the person
hired is so inappropriate for the position that
termination is the only answer, and then of
finding that the new employee has sued the
company for wrongful termination.

Ways to reduce turnover

o Clarify jobs and related procedures. There is
nothing more irritating for a new employee than
to be unceremoniously dumped into a new job
without any clue regarding what the job entails
or how to perform tasks.
o Improve communications. Employees want to
know what is going on. For example, a controller
can sit down with the accounting staff every
month, after financial statements are published,
and go over the company's results with them.
o Increase pay. Many companies have a policy of
paying employees the median pay rate for their
job classifications
o Look for a history of job longevity. A controller
can avoid turnover up front by hiring only
recruits with a history of staying with their
previous companies for long periods.
o Meet special employee needs. Employees may
have special needs, such as flex time, so that
they can handle various aspects of their