Chapter 4
> or = 100% - effective
7 Es
Mostly used in planning phase, but can be used in
other phases too like recommendation.
The 7 Es tell what areas to focus on.
A very useful tool to organize the focus themes while
planning operational audits.
It is simple, yet it addresses some of the most
important aspects of any organization.
It examines short-term dynamics and long-term
ones. They are helpful in considering the structure of
the organization and the operating practices of the
organization.
These Es, when used in the form of themes, can
help the auditor add considerable value to the
engagement and show audit clients that auditors are
genuinely interested in helping the organization
succeed.
These can be incorporated into the planning
process, making sure that interview questions,
document reviews, goals and objectives, flowcharts,
walkthroughs, and other activities performed during
the audit
1. Probe for the presence of these attributes
2. Verify that these are functioning effectively
3. Are considered when making
recommendations for improvement
Effectiveness
Effectiveness is the process of evaluating the
degree to which the organization, program, or
process is achieving its goals and objectives.
It consists of comparing the planned outputs with the
actual outputs.
Goals and objectives provide identifiable markers of
the achievement of something, and help establish
tactical actions to work toward. These are more
immediate and facilitate the assignment of
resources that can be aligned with the mission.
This can be simply expressed as achieving X
percent of the goal. If the number is under 100%, the
goal was not fully achieved, and conversely, if above
100%, the goals was surpassed.
Effectiveness Ratio Formula: Actual output /
Planned output or sales
<100% - not effective
Realistic output or forecast – consider the
bottlenecks or disruptions from historical data
(maximum capacity minus the bottleneck or
disruption).
Trending Effectiveness Metrics: a useful
technique that allows management, and auditors
during their review, to ascertain the degree to which
there is consistent accomplishment of goals. It
provides context to metrics that in isolation may
appear satisfactory.
Trend Analysis – technique used to examine or
predict movements of an item based on current and
historical data. These are supplemental data.
Efficiency
Relates to the use of inputs and other resources
toward the achievement of goals and objectives in
some form of productive activity.
The ratio between the actual production (outputs)
and the actual inputs (resources) constitutes the
degree of efficiency of the organization’s operations.
Formula: Actual input / Actual output
Examples:
- Cost per unit (Formula: Total cost (input) /
Number of units produced (output))
- Cycle time (Formula: Net production time /
Number of units produced)
Operating Efficiency Ratio Formula: (COGS +
OPEX) / Net Sales
The lower the rate, the more efficient an organization
is.
Keys (contributing factors) to higher efficiency
and productivity:
1. More education, and a better use of
individual’s skills and their tools at work.
2. Role of technology.
Economy
Refers to the price paid for organizational resources.
Historically, the main criteria to assess economy
was the price of goods and services used by the
organization.
The key is to buy based on value, not merely price,
so company procedures should focus on the
assessment of value when defining allowable
purchases.
A better approach to assessing economy is to
consider the entire value of the item.
Resources are considered the inputs. These include
raw materials, labor, and manufacturing overhead.
Economy Percentage Formula: Actual input /
Planned input
The lower the rate, the more economical a business
is since the costs are lower.
Excellence
This can be seen through high quality.
Another key aspect of organizational priorities is the
performance of all work with high quality. In
developed economies, and increasingly so in
emerging markets as well, products and services are
commoditized and differentiation based on price is a
high-risk proposition.
Relying on low costs only to secure customers can
be very dangerous as margins become increasingly
smaller unless other activities improve results, such
as efficiency and relentless cost cutting.
If a product has a low cost, the quality and customer
relation/retention can be sacrificed.
Differentiation is based on the perceived value that
customers derive from the product or service and
when developed and applied correctly, can result in
higher profits. If the customers perceive that what
they bought is overpriced, the customer is likely to
ask for a refund, or complain, including the use of
social media. At some point, customers will likely
abandon the organization and seek product or seller
substitution.
Differentiation is the strategy of making your
products unique. These are the characteristics that
make your products or services stand out.
If based on amount, customers buy if price is lower.
Nowadays, aside from price, we need to consider
quality too in buying.
Ethics
The Merriam-Webster dictionary defines ethics as
the rules of behavior based on ideas about what is
morally good and bad, it deals with what is good and
bad behavior, what is morally right or wrong, and
moral duty and obligation.
It is critical subject for internal auditors because an
individual’s viewpoint regarding what is right and
wrong will drive most aspects of decision-making
and corporate behavior.
Ethics is the study of moral values and the principles
of conduct governing an individual or a group.
The Code of Ethic for Professional Accountants
by the IESBA (International Ethics Standards
Board for Accountants) or International Code of
Ethics for Professional Accountants
1. Integrity
- A professional accountant should be
straightforward and honest in all professional
and business relationships.
2. Objectivity
- A professional accountant should not allow
bias, conflict of interest or undue influence of
others.
3. Professional Competence and Due Care
- A professional accountant has a continuing
duty to maintain professional knowledge and
skill at the level required to ensure that a
client or employer receives competent
professional services based on current
developments in practice, legislation and
techniques. A professional accountant
should act diligently and in accordance with
applicable technical and professional
standards when providing professional
services.
4. Confidentiality
- A professional accountant should respect the
confidentiality of information acquired as a
result of professional and business
relationships and should not disclose any
such information to third parties without
proper and specific authority unless there is
a legal or professional right or duty to
disclose. Confidential information acquired
as a result of professional and business
relationships should not be used for the
personal advantage of the professional
accountant or third parties.
5. Professional Behavior
- A professional accountant should comply
with the relevant laws and regulations and
 should avoid any action that discredits the principles described in the Code of Business
profession. Conduct
4. Provide answers on a confidential basis to all
IIA Code of Ethics
employee questions concerning ethics
1. Integrity
Equity
2. Objectivity
3. Confidentiality It relates to the treatment of others with dignity and
4. Competency respect. This should be done consistently, by
everyone, always. Equity is often thought of in terms
Two Approaches
of fairness, reciprocity, and impartiality.
1. Teleological or Prescriptive Approaches
When discussing the subject of equity, most people
- These focus on the consequences of the act.
think about it in the context of compliance with laws
They determine the morality of a decision
and regulations.
based on the outcome or consequences.
- Example is utilitarianism. Work environments lacking equity and fairness
- Distributive justice is based on the concept of experience motivation problems. The lack of equity
fairness and considers ethical decisions is a problem whether it is in fact, or in appearance.
those that lead to the equitable distribution of
Ecology
goods and services.
2. Deontological Approaches Environmental concerns have reached high levels
- Other ethical systems are based on rules or over the past years and will likely to continue to
principles that govern decisions under the garner much attention in the future. In addition,
premise that individual should do what is customers, employees, local communities,
right out of goodwill and duty, with no regard regulators, and other stakeholders increasingly
for the consequences of the decision. They expect organizations to act responsibly toward the
refer to the duties or obligations of an environment.
individual or group.
Organizations Embracing Environmental
Table 4.2 Ethical Guiding Principles Strategies
Guiding Principles 1. Procter and Gamble (P&G)
Rights and duties What are the legal and - Working with UNICEF to sell NutriStar, which
moral obligations? has a high nutritional content to combat
Justice Guidance of fairness, malnutrition.
equity, and impartiality - PuR product consists of low cost water filters.
Utilitarian analysis What is the greatest - P&G also changed the design of its bottles to
food for the greatest
save over 500 million dollars and 2 million
number?
tons of waste.
Care How will this action
affect my relationships? - Their European distribution program has
Virtue How does this action saved them 25 million dollars and 10 million
affect my (or my km of transportation.
company’s) character? 2. Starbucks
Golden rule Would you want the - Build businesses on fair trade and ethical
same treatment? sourcing of coffee, tea, and cocoa.
- Engages in supplier diversity initiatives that
Ethics committee started in 1997 by funding literacy programs
in US and Canada.
1. Monitor distribution and understanding of the - The SB Foundation gave 13.1 million dollars
Code of Business Conduct within the Group in 2014, making 144 grants to nonprofit
2. Provide recommendations concerning organizations.
ethical issues - Promotes sustainable coffee farming.
3. Draw attention to risks associated with
individual behaviors that fail to abide by
3. AREVA Solar
- Designs, manufactures, and installs solar
steam generators.
- Focus on reducing greenhouse gas
emissions and have a portfolio of operations
in four renewable energy segments: offshore
wind, bioenergy, concentrated solar power,
and energy storage.
4. Grameen
- Bangladesh
- Provides micro credit to poor women without
collateral.
- Grameen Bank has grown over to two dozen
enterprises (trust, communications, energy,
telecom, education, fisheries, business
development, phonoe services)
- Muhammad Yunus, founder, received Nobel
Peace Prize in 2006 and micro lending is
now offered by many organizations helping
poor around the world.
5. Fair Trade
- From Ten Thousand Villages and SERRV
International, to Oxfam Trading, Siem Fair
Trade, and Ben & Jerry’s, there are
thousands of organizations now engaged in
fair trade.
- The World Fair Trade Organization (WFTO)
reports that it operates in over 70 countries
around the world and established 10
principles that they follow.
- The WTFO carries out monitoring to ensure
the principles are upheld.
- Principles: creating opportunities for
economically disadvantaged producers;
transparency and accountability; fair trading
practices; payment of a fair price; ensuring
no child labor and forced labor; commitment
to nondiscrimination, gender equity, and
freedom of association; ensuring good
working conditions; providing capacity
building; promoting fair trade; and respect for
the environment.
6. Patagonia
- Designs, markets, and sells products
produced under safe, legal, fair, and humane
working conditions in their supply chain.
- Mission: “build the best product, cause no
unnecessary harm, use business to inspire
and implement solutions to the
environmental crisis.
7. Whole Foods Market
- Chain of supermarkets specializing in natural
and organic foods that also invests heavily in
the markets where it operates.
8. Ecolab
- Global provider of water, hygiene, and
energy technologies and services to the
food, energy, healthcare, industrial, and
hospitality markets.
- Recognized in 2007 as among the “100 Best
Corporate Citizens”, based on criteria of
diversity, community, governance,
shareholders, and environment.
- Products are used for cleaning, sanitizing,
food safety, and infection control.
- Operates in more than 160 countries.
9. Coca-Cola
- Its global water stewardship program
requires the company become more efficient
in its water use by reducing the amount it
uses per liter of product produced.
- Recycles wastewater and “returns it to
nature cleaner than required by law.”
- System is replenishing, or balancing, the
water used- an estimated of 35% so far, with
the goal of being water in neutral in 2020, to
protect or conserve water, or sanitation to
people in the communities they serve.
Additional notes:
If sa ACTUAL ang kulang, ang formula is to multiply
the planned sa percentage.
If sa PLANNED ang kulang, ang formula is to divide
the actual sa percentage.
COGS: beginning inventory + purchases – ending
inventory
Net Sales: Sales – (returns + discounts)
If PURCHASES ang kulang, ang formula is COGS +
Ending inventory minus Beginning inventory
If COGS ang nawawala at wala rin ang
PURCHASES, ang formula ay Net Sales multiplied
by the Operating Efficiency %, then yung sagot at
minus mo yung OPEX.