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Module V Personnel costs, Auditing and accounting, Audit Techniques, HR Audit, HRD Audit, Balance Score Card, HRD

Score Card Accounting and Financial Statements. PERSONNEL COSTS

personnel costs are defined as the total remuneration, in cash or in kind, payable by an employer to an employee (regular and temporary employees, as well as home-workers) in return for work done by the latter during the reference period. Personnel costs are made up of wages, salaries and employers' social security costs. They include taxes and employees' social security contributions retained by the employer, as well as the employer's compulsory and voluntary social contributions. Average personnel costs (or unit labour costs) equal personnel costs divided by the number of employees (persons who are paid and have an employment contract). Difference between Auditing and accounting.


The role of accountancy is to record the transaction in the book of accounts, extraction of trial balance, preparation of

Trading and profit and loss account and balance sheet etc. On the other hand auditing is the examination of books of account and checking the financial statement for the purpose of finding out the true and fair position and results of operation of a concern. Audit is concerned with detailed examination of the complete accounting records but it does not involve the preparation of accounts. 2. If the auditor is asked to write the books of accounts, extract an agreed trial balance and profit and loss account and

Balance sheet, he would be doing the work of an accountant and not the work of an auditor. Preparation of account is not the part of auditing. An auditor, using his appointing authority, needs to check thoroughly, whether the Profit and Loss account and the Balance Sheet have been properly drawn up and revel the 'true and fair view' of the state of affairs and results of operation of the concern and report it to the parties interested. 3. Auditing without the prior existence of accounts is not possible. When the accountant finishes his work, the

auditor starts his work.

Objectives of Audit

For a better understanding we could classify the objective of audit as: 1. Primary Objectives2. Secondary Objectives.

Primary Objectives: To determine and judge the reliability of the financial statement and the supporting accounting records of a particular financial period is the main purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations to appoint a auditor who, after the examination and verification of the books of account, disclose his opinion that whether the audited books of accounts, Profit and Loss Account and Balance Sheet are showing the true and fair view of the state of affairs of the companys business. To get a true and fair view of the companies affairs and express his opinion, he has to thoroughly check all the transactions and relevant documents of the company made during the audited period. Which will help the auditor to report thefinancial condition and working result of the organization. While carrying out the process of audit, the auditor maycome across certain errors and frauds. But detection of fraud or errors are not the primary objective of the audit. They are come under the secondary objectives of audit. Audit also disclose whether the Accounting system adopted in the organization is adequate and appropriate in recording the various transactions as well as the setbacks of the system. Auditing technique

Auditing technique is defined as any technique used by auditors to determine deviations from actual accounting and controls established by a business or organization as well as uncovering problems in established processes and controls. Auditing techniques can be used to aid organizations by uncovering errors in business practices and providing a means of correction. Some businesses have used irregular accounting methods to hide certain monetary transactions and non-compliant behavior which has been uncovered by the use of varied auditing techniques. Other businesses have found new ways to save money and streamline business practices through various auditing techniques which have found waste in certain processes. Auditing techniques can be used to uncover these issues in order to ensure ethical business practices and to minimize waste or possible oversights within an organization. The applied techniques can determine if any income is hidden or improperly categorized or reported; transactions are being completed between the organization and regulated or prohibited persons, groups, or countries; uncovering of environmental waste discrepancies; finding of data

inconsistencies; or any other business practice that can be considered as a process error, oversight, or violation of ethics, regulations, and laws.
Audit techniques can be classified into four types including Operational audit, Financial audit, compliance audit Information systems audit. Operational audit is the one which examines the use of unit resources in the operations to evaluate the efficiency examine with the which accounting receipt controls to the assets and and over laws, audit have been used. Financial used This to audit report audit is the to done to

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this system to ensure that unethical practices are con conducted. Propriety audit is concerned with management functions relating to income and expenditure of the concern. The income and expenditure is checked. The examination shows the proper or otherwise use of business funds. The large scale companies are interested in such type of audit. The operational audit is concerned with review of departmental operation as service management. The operational audit relates to production, procedure, designs, storage, transport, quality control, repairs, sales, employees, finance, research and development. Cash audit relates to cash transactions only. The receipts and payments of business is examined in detail. There may be doubt of error or fraud. The auditors can co9llect any information he likes but his main work is concerned with cash books and bank accounts.

Joint audit is conducted by two independent auditors. An enterprise may have two business places. The management can engage two auditors. One auditor can examine the accounts at one place. The other auditor can check the record of second place. The auditor can present joint report.

A healthy HR function in an organization is as important as the physical and mental well being of a human body. Typically the basic reason why organizations prefer to conduct an HR audit is to get a clear judgment about the overall status of the organization and also to find out whether certain systems put in place are yielding any results. HR audit also helps companies to figure out any gaps or lapses and the reason for the same. Since every company plans certain systems and targets, an HR audit compares the plans to actual implementation.

The concept of HR audit has emerged from the practice of yearly finance and accounting audit, which is mandatory for every company, to be done by external statutory auditors. This audit serves as an examination on a sample basis of practices and systems for identifying problems and ensuring that sound accounting principles are followed. Similarly, an HR audit serves as a means through which an organization can measure the health of its human resource function. Organizations undertake HR audits for many reasons: 1 To ensure effective utilization of human resources. 2 To review compliance with tons of laws and regulations. 3 To instill a sense of confidence in the human resource department that it is well-managed and prepared to meet potential challenges and opportunities. 4 To maintain or enhance the organization's reputation in a community. An audit is a systematic process, which examines the important aspects of the function and its management, and is a means to identify strengths, weaknesses and areas where rectification may be warranted. An audit is done on sampling basis. And in sampling, not every instance or situation can be examined.

An HR audit can be used by an organization for multiple purposes. Some of the more common reasons are:

To identify and address HR-related problems. To seek out HR-related opportunities. To conduct due diligence for mergers and acquisitions. To support initial public offerings.

How an audit is conducted is very often determined by its intended use. For instance, the type of audit used to ascertain HR practices may be significantly different from the type of audit used to support an initial public offering. Although the areas examined may be similar, the process used and the depth of inquiry will vary from the intended outcome. THE AUDIT PROCESS The HR audit process is conducted in different phases. Each phase is designed to build upon the preceding phase so that the organization will have a very strong overview of the health of the HR function, at the conclusion of the audit. These phases include: Pre-Audit Information: This phase involves the acquiring and review of relevant HR manuals, handbooks, forms, reports and other information. A pre-audit information request is forwarded to the client who compiles the necessary information for review by auditors. Pre-Audit Self-Assessment: In order to maximize the time spent during subsequent portions of the audit, a pre-audit self-assessment form, if sent to the client can be of use. The selfadministered yes/no questionnaire asks a number of questions about current HR policies and practices. The completion of this self-administered questionnaire allows auditors to identify key areas for focus during the HR audit. On-site Review: This phase involves an on-site visit at the client's facility interviewing staff regarding HR policies and practices. A very in-depth HR audit checklist is completed.

Records Review: During the on-site visit, a separate review is conducted of HR records and postings. Employee personnel files are randomly examined as well as compensation, employee claims, disciplinary actions, grievances and other relevant HR related information are checked. Audit Report: The information gathered is used to develop an HR audit report. The audit report categorizes action needs into three separate areas. The areas that are urgent and important (UI), not urgent needs but important (NUI), not urgent but not important needs (NNI)), and important opportunities needs (IO). As a result of this scheme of classification, managements can prioritize their steps. The critical areas The comprehensive HR audit covers all areas of HR management like recruitment practices, training and development, compensation and benefits, employee and union relations, health, safety and security, miscellaneous HR policies and practices-welfare, strategic HR issues, manpower planning/budgeting. Besides classifying needs in each of the above areas, the HR audit also cites relevant laws, cases and research to support the recommendations. PREPARATION FOR AN AUDIT Auditor engagement: If external firm carrying out the audit, it is preferable to set terms in writing defining and agreeing on scope .If using internal resource it is better to appoint them formally with clarity on scope and select persons who are non political or those who are not high on hierarchy. Also, if internal persons are auditing there must be training in auditing. Documents, manuals, handbooks, forms and reports auditor must have access to relevant information contained in employee files and other confidential documents of the organization. Auditors must be given unrestricted access to records, once they sign agreement for confidentiality. Data gathering: Completion of a self-assessment questionnaire significantly expedites the audit process and allows for better audit planning.

On-site access: The on-site portion of the audit is the most critical. Using audit findings How does an organization use HR audit results? Since the HR audit results are classified, an important aspect is already taken care of. Critical needs should be the first ones to be addressed. Organizations generally have three options for dealing with audit results. * Use the HR audit as a blueprint or action plan for addressing HR needs. * Address as many needs as possible using the organization's internal expertise and resources. * Contract out those need areas where internal expertise and resources are not available or do not fit in the core competencies of the organization. An HR audit is much like an annual health check. It can perform the same function for the organization. An audit is a means by which an organization can measure where it currently stands and determine what it has to accomplish to improve its HR functions. It involves systematically reviewing all aspects of human resources, usually in a checklist fashion, ensuring that the government regulations and company policies are being adhered to. The key to an audit is to remember that it is a tool to discover and not to test. There will always be room for improvement in every organization. Where a human resource associate comes and makes sure that your employee files are up to date

In the last two decades a large number of corporations have established Human Resources Development Departments, introduced new systems of HRD, and made structural changes in terms of differentiating the HRD function and integrating it with HR function. A good number of CEOs saw a hope in HRD for most of their problems, issues and challenges. HR systems are people intensive and require a lot of managerial time. There are examples of corporations where HRD has taken a drivers seat and has given a lot of benefits. In to-days competitive world, people or employees can give a good degree of competitive advantage to the company. To get the best out of HR, there should be a good alignment of the function, its strategies, structure, systems, and styles with business and its goals (financial, customer etc.parameters).

It should be aligned both with the short-term goals and long term strategies. If it is not aligned, HR could become a big liability to corporations. Besides this alignment, the skills and styles of HR staff, the line managers and the top management should synergize with the HR goals and strategies. HRD audit is an attempt to assess these alignments and ensure the same. HRD audit is a comprehensive evaluation of the current human resource development strategies, structure, systems, styles and skills in the context of the short and longterm business plans of a company. HRD audit attempts to find out the future HRD needs of the company after assessing the current HRD activities and inputs available. A team of auditors visit the corporation and using a variety of methodologies assess the appropriateness and adequacy of the various HRD systems, strategies, structures, competencies, culture, processes etc. The methodology used includes: Interviews; Questionnaires; Observation; Secondary data analysis; and Examination of documents and communications.

The audit starts with a brief by the CEO and the Chief of HR who may set an agenda and focal areas of evaluation. The interview with the top management starts with finding out details of the future plans of the organizations and uses it as a base for outlining the competency requirements of the organization. The current competencies, structures, HRD systems etc. are assessed in terms of their capability to prepare the Organization for the future. Suggestions are made to improve for achieving the future business goals and plans. The HRD audit is contextual and at the same time uses the available knowledge of the potential of the HRD systems in helping the corporation achieve its goals.


These are described in some detail below. 1) Individual Interviews: The auditors normally make it a point to interview the top level management and senior managers individually. Such individual interviews are a must for capturing their thinking about the future plans and opportunities available for the company. Also by virtue of occupying strategic positions the top management provides a perspective required for a good HRD audit. Thus a good HRD audit begins with individual interviews of top management. Individual interviews also are essential when sensitive matters and sensitive information has to be obtained. Such information is available particularly about the styles and culture through individual interviews. Union leaders, departmental heads, some

strategic clients and informal leaders are all interviewed individually. In addition if the organization is small and is manned by largely professionals an attempt is made to enlarge the coverage and randomly selected representative sample of employees from different levels and different functions could be interviewed. 2) Group Interviews: Normally for the audit of companies having thousands of employees, it is not feasible to meet everyone individually. It is the experience of the author that group discussions and interviews is a good mechanism of collecting information about the effectiveness of existing systems. Group interviews are conducted normally for groups of four to eight individuals. It is preferable to have employees drawn from same or similar levels. This is because in Asian cultures there is likely to be inhibition on the part of junior employees to freely express their views in the presence of their seniors. However, it is quite common to give cross functional representation of employees in the same group. If the organisation is large, an attempt is made to conduct group interviews for each function separately to keep the levels homogenous. In the individual and group interviews for HRD audit normally the following open ended questions are asked: 1) What do you see as the future growth opportunities and business directions of the company? 2) What skills and competencies does the company have which you are proud of? 3) What skills and competencies do you need to run your business or to perform your role more effectively at present? 4) What are the strengths of your HRD function? 5) What are the areas where your HRD function can do better? 6) What is good about your HRD sub-systems like performance appraisal, career planning, job rotation, training, quality circles, induction training, recruitment policies, performance counselling, worker development programmes, HRD departments, etc? 7) What is weak about them? What can be improved? 8) What changes do you suggest to strengthen HRD in your company? 9) What do you think are the ways in which line managers can perform more development roles, etc?

3) Workshop: In some cases the individual and group interviews are substituted by large-scale workshops. In the workshop a large number of participants ranging from 30 to about 300 could be gathered in a room and could be asked to do the HRD audit. Normally in the workshop the participants work in small groups either around various sub-systems of HRD or around different dimensions of HRD, do a SWOT analysis and make a presentation. The workshops also can be used focusing specifically on individual HRD systems like performance appraisal. The HRD audit if conducted through participatory methods in itself may initiate the change process. Even if it does not, it is a potential diagnostic tool and

can provide a lot of information to the top management on human processes and help them plan further interventions. 4) Questionnaire Method: TVRLS has developed a comprehensive questionnaire which has to be administered to the executives of a company. This questionnaire has over 250 items and requires about 90 minutes to complete. This questionnaire can be administered individually or in a group. It was found useful to call groups of respondents selected randomly to a room and explain the objectives and the process of HRD audit and administer the questionnaire then and there itself. This ensures uninterrupted answering of the questionnaire and provides scope for getting more credible data due to the personal explanations given by the auditors. A number of other questionnaires have been developed since the time the first comprehensive HRD audit questionnaires were prepared by Rao and Pareek. These questionnaires attempt to assess various dimensions of HRD including the competency base of HRD staff, the styles of line managers, the implementation of various HRD systems etc. The utility of the questionnaire is that it helps in benchmarking. TVRLS a consulting firm specialising in HRD audit over the last several years have bench marking data from several organisations. 5) Observation: In addition to the above the auditors should physically visit the workplace including the plant, the machinery, the canteen, the toilets, the training rooms, the hostels, the hospital, school, living colony, etc. These visits and observations are meant to assess the extent to which a congenial and supportive human welfare oriented climate exists in the company. This is essential because employees are not likely to give their best if they do not live in good surroundings, their health and education are not taken care of, they do not have good communication and other facilities and their work conditions are poor. The observations can be conducted using a check list of questions. 6) Analysis of Secondary Data: Analysis of secondary data can give lot of insights into the HRD assets and liabilities of the company. For example, in a company that had about 50 HR people only two were found to have the required technical training in HRD area. When an analysis of the training programmes attended by others was carried out, it was found that a large number of them did not attend any HRD programme in the last five years. Such analysis of secondary data can throw up many insights. Analysis of age profiles of the employees, analysis of the training attended, analysis of the minutes of the meetings held etc., help in determining the assets and liabilities. Such an analysis should also pay attention to the costs incurred by thecompany in terms of maintaining the HRD infrastructure, etc. 7) Analysis of Reports, Records, Manuals and other Published Literature: Published literature of the company including annual reports, marked hand-outs, training calendar, personnel manual, and various circulars issued from time to time are also likely to help immensely in assessing the strengths and weaknesses of HRD.

BALANCE SCORE CARD Balance score card is having four major aspects in it. They are financial planning, customer planning, internal process and learning and growth. The company frames balance scorecard keeping all the vision, mission, goals, short term plans and long term plans. Balance score card is prepared for the individual employees or a team. In the balance score card, the weight age is given in certain percentage to each and every aspect. For every company, financial aspects are more important. It is seen in most of the balance scorecard more weight age is given to it. They directly show how the company is benefited in the monetary terms. The next important is customer planning or management, internal process and learning and growth. For an example in the percentage of 100%, 60% will be given for finance; remaining 40 % is distributed among the other three aspects. On the basis on the score on the balance score card, the company rewards the employee. The financial aspect in the scorecard is done to see how the company has increased its revenues. The customer management is done to see how the customers can be satisfied and what next can be done for the customers. Internal process depends upon how the employee has did marketing and how he has come up with new idea in the decision making process. Leaning and growth is nothing but to know how the technology in the organization has been used and what next can be implemented for the employees to do their work more easily and quickly. On the basis on the score, the company decides the rewards for the employee. When the employee is able to get maximum score in the finance, he will be awarded with more in terms of money, such as bonus, increment in salary and others etc. On the basis on the score of other three aspects the company, will reward the employee in terms of promotion, increase in the responsibility etc. When reward management is done, various factors are also considered. Factors such as market, job role, job evaluation, and employee benefit. All these factors will decide the total pay of the employee. Thus the balance scorecard is used for the reward management.

HR SCORECARD The HR scorecard is a method for Human Resources to position itself as a strategic planning partner with line managers and executives in the organization. The premise for an HR scorecard is that HR can and should develop metrics to demonstrate how HR activities impact profitability. The process we recommend is: 1) Identify the critical deliverables for Human Resources. 2) Identify HR's customers (for the deliverables).

3) Define HR activities that provide the critical deliverables (such as high-talent staffing or a retention initiative). 4) Conduct a cost-benefit analyses of activities that provide deliverables. Lastly, it's important to ask the right questions to determine if HR is providing the appropriate deliverables. Examples of these questions are:

How many exceptional candidates do we recruit and retain for each strategic job opening?

How many hours of results-oriented training do new employees receive annually? What is the differential in merit pay between high-performers and lowperformers?

ACCOUNTING Accounting "the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information!.
It suggests that accounting is about providing information to others. Accounting information is economic information - it relates to the financial or economic activities of the business or organisation. Accounting information needs to be identified and measured. This is done by way of a "set of accounts", based on a system of accounting known as double-entry bookkeeping. The accounting system identifies and records "accounting transactions". The "measurement" of accounting information is not a straight-forward process. it involves making judgements about the value of assets owned by a business or liabilities owed by a business. it is also about accurately measuring how much profit or loss has been made by a business in a particular period. As we will see, the measurement of accounting information often requires subjective judgement to come to a conclusion The definition identifies the need for accounting information to be communicated. The way in which this communication is achieved may vary. There are several forms of accounting communication (e.g. annual report and accounts, management accounting reports) each of

which serve a slightly different purpose. The communication need is about understanding

that needs the accounting information, and what they need to know! Accounting information is communicated using "financial statements"

The purpose of financial statements

There are two main purposes of financial statements: (1) To report on the financial position of an entity (e.g. a business, an organisation); (2) To show how the entity has performed (financially) over a particularly period of time (an "accounting period"). The most common measurement of "performance" is profit. It is important to understand that financial statements can be historical or relate to the future. The process by which accounting information is collected, reported, interpreted and auctioned is called "Financial Management". Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to: (1) Create wealth for the business (2) Generate cash, and (3) Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested In preparing accounting information, care should be taken to ensure that the information presents an accurate and true view of the business performance and position. To impose some order on what is a subjective task, accounting has adopted certain conventions and concepts which should be applied in preparing accounts. For financial accounts, the regulation or control of what kind of information is prepared and presented goes much further. UK and international companies are required to comply with a wide range of Accounting Standards which define the way in which business transactions are disclosed and reported. These are applied by businesses through their Accounting Policies.

The main financial accounting statements The purpose of financial accounting statements is mainly to show the financial position of a business at a particular point in time and to show how that business has performed over a specific period. The three main financial accounting statements that help achieve this aim are: (1) The profit and loss account for the reporting period (2) A balance sheet for the business at the end of the reporting period (3) A cash flow statement for the reporting period A balance sheet shows at a particular point in time what resources are owned by a business ("assets") and what it owes to other parties ("liabilities"). It also shows how much has been invested in the business and what the sources of that investment finance were. It is often helpful to think of a balance sheet as a "snap-shot" of the business - a picture of the financial position of the business at a specific point. Whilst this is a useful picture to have, every time an accounting transaction takes place, the "snap-shot" picture will have changed.