IN THE SUBJECT
SUBMITTED BY
DIVISIONS: A
M.Com. Part – I in Advance Accountancy
TO
YEAR: 2013-14
SVKM’S
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EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project
student of M.Com. – Part - I (Semester – I) for the academic year 2013-14. This
project is original to the best of our knowledge and has been accepted for
Internal Assessment.
PRINCIPAL
2
DECLARATION BY THE STUDENT
I, student of M.Com. (Part – I) Roll No.:041 hereby declare that the project
further state that this work is original and not submitted anywhere else for
any examination.
Place: MUMBAI.
Date:
(SOUMEET D. SARKAR)
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ACKNOWLEDGEMENT
I would also like to thank the college library and its staff for patiently
listening and guiding me and finally. I would like to thank my family and
friends who supported me in this project.
THANK YOU.
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CONTENT
CHAPTER I – INTRODUCTION
3.1 Categories 20
5.1 Conclusion 37
5.3 Biblography 38
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INTRODUCTION:-
Here, we will study about internal audit and how it helps to control cost.
The scope of internal audit within an organization is broad and may involve topics such
as an organization's governance, risk management and management controls over:-
efficiency/effectiveness of operations (including safeguarding of assets), the reliability of
financial and management reporting and compliance with laws and regulations. Internal
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audit may also involve conducting proactive fraud audits to identify potentially fraudulent
acts; participating in fraud investigations under the direction of fraud investigation
professionals, and conducting post investigation fraud audits to identify control
breakdowns and establish financial loss. Internal audit is an audit conducted by an
internal auditor appointed by the management of the enterprises with a view to
highlighting the weak areas of the organizations. It includes examination and evaluation
of various organizational activities and to produce the helping hand to the management
complete their responsibilities efficiently and effectively. The institute of internal auditor
has defined internal auditing as follows: “ Internal auditing is the independent appraisal
activity within an organization for the review of the accounting, financial and other
operation as a basis for protective and constructive service to the management. It is a
type of control, which functions by measuring and evaluating the effectiveness of other
types of control. It deals primarily with accounting and financial matters but it may also
properly deal with matters of an operating nature.” The internal auditor audits the
accounts and other relevant records daily, regularly or on periodical basis to accomplish
the following requirements:-
2. To check whether the existing internal control system is adequate and effective
and according to the size of the organization.
3. To ensure that all the assets of organization are properly safeguarded, if not, he
reports the management about the drawback with suggestions.
4. To highlight the weak areas of the organization and give suggestion to strengthen
them.
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HISTORY OF INTERNAL AUDIT:-
The Internal Auditing profession evolved steadily with the progress of management
science after World War II. It is conceptually similar in many ways to financial auditing
by public accounting firms, quality assurance and banking compliance activities. While
some of the audit technique underlying internal auditing is derived from management
consulting and public accounting professions, the theory of internal auditing was
conceived primarily by Lawrence Sawyer (1911-2002), often referred to as "the father of
modern internal auditing"; and the current philosophy, theory and practice of modern
internal auditing as defined by the International Professional Practices Framework (IPPF)
of the Institute of Internal Auditors owes much to Sawyer's vision.
With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the
profession's exposure and value was enhanced, as many internal auditors possessed the
skills required to help companies meet the requirements of the law. However, the focus
by internal audit departments of publicly traded companies on SOX related financial
policy and procedures derailed progress made by the profession in the late 20th century
toward Larry Sawyer's vision for internal audit. Beginning in about 2010, the IIA once
again began advocating for the broader role internal auditing should play in the corporate
arena, in keeping with the IPPF's philosophy.
The internal audit supports effective and efficient discharging of the guiding and
monitoring duties of the organization’s management by producing assurance services for
its internal customers relating to governance, control and risk management processes. The
internal audit brings added value and promotes achievement of the set goals by giving
improvement recommendations, producing objective and independent information and by
training supervisors and employees in understanding and application of monitoring
processes and self-assessment of business and other activities within the organization. The
internal audit sets its own objectives and performs its duties so that the values of the
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organization are included in them and that these values also guide the work of the
auditors. The internal auditors function as partners of the other organizational parts and
work as experts in different teams (especially development teams) if they do not
endanger their independence.
The internal audit is one of the management’s control tools who through its operations
assist the entire organization by examining and evaluating the adequacy and efficiency of
internal control, risk management, quality of operations and governance processes. The
internal audit furnishes the organization with analyses, appraisals, recommendations,
counsel and information. The purpose is to ascertain that the internal control system, by
taking into account also the information produced by the external auditors, functions so
that the management can be reasonably sure that the set objectives and goals will be
achieved, the operations are effective, reporting is reliable and safeguarding of assets and
compliance with the laws and regulations is done.
3. To establish that there is a proper authority for every acquisition, retirement and
disposal of assets.
4. To confirm that liabilities have been incurred only for legitimate activities of the
organization.
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6. To review operations or programs for consistency with established management
goals and objectives.
8. To analyze and improve the system of internal check, in particular to see that
it is:-
a) working,
b) sound, and
c) economical.
9. To facilitate the prevention and detection of frauds.
10. To review the operation of the overall internal control system and to bring
material departures and non-compliances to the notice of the appropriate level of
management, to locate unnecessary and weak control system effective and
economical.
2. Objectives:- The objectives of the internal audit function should be made very
clear and unambiguous. The objective should be properly communicated so
that internal audit is not viewed as “ over the shoulder check” by other
departments.
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to investigate from the financial angle, every phase of organizational activity
under any circumstance.
4.
Definition Of Duties:- The internal audit department’s duty is to review
operations as part of the internal control system. It should not be involved in
performance of executive actions.
5. Internal Audit Department:- The size and qualification of staff of the internal
audit department should be commensurate with the size of the business. The
cost of internal audit department should not exceed the benefits expected to be
derived from it.
7. Follow-up and review:- There should be sufficient scope for the follow-up
action on the various points raised in internal audit report. Top management
should take active part in ensuring compliance with action points raised in the
report.
8. Relationship with Statutory Auditor:- The copy of the internal audit report
should be made available to the statutory auditor, who can deal with the same
in the manner as he deems fit.
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2) Examination for Management of Financial and Operating Information:- This
may include review of the means used to identify, measure, classify and report
such information and specific inquiry into individual items including detailed
testing of transactions, balances and procedures.
II. Staffing and Training:- The internal audit unit should be appropriately staffed in
terms of numbers, grades, qualifications and experience, having regard to its
responsibilities and objectives. The internal auditor should be properly trained to
fulfill all his responsibilities. The effectiveness of internal audit depends
substantially on the quality, training and experience of its staff. The aim should be
to appoint staff with the appropriate background, personal qualities and potential.
Thereafter, steps should be taken to provide the necessary experience, training and
continuing professional education.
STAFFING
The internal audit unit should be managed by a head of internal audit who should
be suitably qualified and should possess wide experience in internal audit and its
management. He should plan, direct, control and motivate the resources available
to ensure that the responsibilities of the internal audit unit are met. The full range
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disciplines. The effectiveness of internal audit may be enhanced by the use of
specialist staff, particularly in the internal audit of activities of a technical nature.
The internal audit unit should employ staff with varying types and levels of skills,
qualifications and experience in order to satisfy the requirements of each internal
audit task.
TRAINING
The organization has a responsibility to ensure that the internal auditor receives
the training necessary for the performance of the full range of duties. Training
should be tailored to the needs of the individual. It should include both
theoretical knowledge and its practical application under the supervision of suitably
competent and experienced internal auditors. Account should be taken of:-
III. Relationships:- The internal auditor should seek to foster constructive working
relationship and mutual understanding with management, with external auditors,
with any other review agencies and, where one exist, the audit committee. In order
that the internal auditor may properly perform all his tasks, it is necessary for all
those with whom he has contact to have confidence in him. Constructive working
relationships make it more likely that internal audit work will be accepted and
acted upon, but the internal auditor should not allow his objectivity to be
impaired.
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Organizational Relationships
The head of internal audit should prepare the internal audit plan in consultation
with senior management. The internal auditor should arrange the timing of internal
audit assignments in consultation with the management concerned, except on those
rare occasions where an unannounced visit is a necessary part of the audit
approach. Consultation can lead to the identification of areas of concern or of
other interest to management. Matters which arise in the course of the audit are
confidential and discussion should be restricted to management directly responsible
for the area being audited unless they have given express agreement to broaden
the discussion. Discussions with management are necessary when preparing the
audit report. This is an essential feature of the good relationship between the
auditor and the management.
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relationship (Institute's International Auditing Guideline No: 10 on "Using the work
of an Internal Auditor"). Regular meetings should be held between internal and
external auditors at which joint audit planning, priorities, scope and audit findings
are discussed and information exchanged. The benefits of joint training
programmes and joint audit work should also be considered.
IV. Due Care:- The internal auditor should exercise due care in fulfilling his
responsibilities. The internal auditor cannot be expected to give total assurance that
control weaknesses or irregularities do not exist. In order to demonstrate that due
care has been exercised the internal auditor should be able to show that his work has
been performed in a way which is consistent with this guideline. The internal auditor should
possess a thorough knowledge of the aims of the organization and the internal
control system. He should also be aware of the relevant laws and the requirements
of relevant professional and regulatory bodies. The internal auditor must be
impartial in discharging all responsibilities; bias, prejudice or undue influence must
not be allowed to limit or over-ride objectivity. At all times, the integrity and
conduct of the internal auditor must be above reproach. He should not place
himself in a position where responsibilities and private interests conflict and any
personal interests should be declared. The internal auditor should not improperly
disclose any information obtained during the course of his work.
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V. Planning, Controlling And Recording:- The internal auditor should adequately plan,
control and record his work. The main purposes of internal audit planning are:-
a) To determine priorities and to establish the most cost-effective means of
achieving audit objectives; b) To
assist in the direction and control of audit work; c) To
help ensure that attention is devoted to critical aspects of audit work; and
d) To help ensure that work is completed in accordance with pre-determined
targets.
Control of the internal audit unit and of individual assignments is needed to
ensure that internal audit objectives are achieved and work is performed
effectively. The most important elements of control are the direction and
supervision of the internal audit staff and review of their work. This will be
assisted by an established audit approach and standard documentation. The degree
of control and supervision required depends on the complexity of assignments and
the experience and proficiency of the internal audit staff.
Internal audit work should be properly recorded because:-
a) The head of internal audit needs to be able to ensure that work delegated to
staff has been properly performed. He can generally do this only by reference
to detailed working papers prepared by the internal audit staff who performed
the work; b) Working papers
provide, for future reference, evidence of work performed, details of problems
encountered and conclusions drawn; and c) The preparation of
working papers encourages each internal auditor to adopt a methodical
approach to his work.
VI. Evaluation of the Internal Control System:- The internal auditor should identify
and evaluate the organization's internal control system as a basis for reporting upon its
adequacy and effectiveness. VII.
Evidence:- The internal auditor should obtain sufficient, relevant and reliable
evidence on which to base reasonable conclusions and recommendations. Internal audit
evidence is information obtained by an internal auditor which enables
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conclusions to be formed on which recommendations can be based. The internal
auditor should determine what evidence will be necessary by exercising judgement in the
light of the objectives of the internal audit assignment. This judgement will be influenced
by the scope of the assignment, the significance of the matters under review, the relevance
and the reliability of available evidence and the cost and time involved in obtaining
it. The collection and assessment of internal audit evidence should be recorded and
reviewed to provide reasonable assurance that conclusions are soundly based and internal
audit objectives achieved. VIII. Reporting and Follow-Up:- The
internal auditor should ensure that findings, conclusions and recommendations arising
from each internal audit assignment are communicated promptly to the appropriate level
of management and he should actively seek a response. He should ensure that
arrangements are made to follow up audit recommendations to monitor what action has
been taken on them. Internal audit reports provide a formal means of communicating to
management the results arising from audits undertaken. Such reports should include
audit findings, recommendations and conclusions relating to the adequacy of and
compliance with the system of internal control and the efficiency, effectiveness and
economy of operations in the area covered by the audit. From the point of
view of completeness, management response to the audit findings should preferably also
be included in the report. The aim of every internal audit report should be:-
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DIFFERENT ROLES of INTERNAL AUDIT:-
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initiatives. This places the CAE in the position to report on many of the major
risks the organization faces to the Audit Committee, or ensure management's
reporting is effective for that purpose. Internal auditors may help companies
establish and maintain Enterprise Risk Management processes.
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CATEGORIES of INTERNAL AUDIT:-
4. Compliance Audit:- It evaluates the how well the organization conforms and
adherences with relevant policies, plans, procedures, laws, regulations, and
contracts. Usually all audits include the compliance element, because the auditor
uses the laws, policies and regulations as a yardstick to measure the performance
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of the organization. Therefore these guidelines do not contain separate section for
compliance audit, but the aspect is included in all audit instructions later in these
guidelines.
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3. Standard on Internal Audit 3 - Documentation
a) Internal audit documentation should be designed and properly organized to
meet the requirements and circumstances of each audit. To formulate
policies for standardization of internal audit documentation.
b) It should be sufficiently complete and detailed for an internal auditor to
obtain an overall understanding of the audit.
c) It should cover all the important aspects of an engagement viz.,
engagement acceptance, engagement planning, risk assessment and
assessment of internal controls, evidence obtained and examination /
evaluation carried out, review of the findings, communication and reporting
and follow up.
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5. Standard on Internal Audit 5 - Sampling
a) Design and select an audit sample, perform audit procedures thereon, and
evaluate sample results so as to provide sufficient appropriate audit
evidence to meet the objectives of internal audit engagement unless
otherwise specified by the client.
b) When designing an audit sample, internal auditor should consider specific
audit objectives, the population from which internal auditor wishes to
sample, and the sample size.
c) When determining the sample size, internal auditor should consider
sampling risk, tolerable error and the expected error.
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appropriate in the circumstance. In order to ensure compliance with the
professional standards, regulatory and legal requirements, and to achieve the
desired objective of internal audit, a person within the organization should
be entrusted with the responsibility for the quality in the internal audit,
whether done in–house or by an external agency.
b) In case of in–house internal audit or a firm carrying out internal audit, the
person entrusted with the responsibility for the quality in internal audit
should ensure that the system of quality assurance includes policies and
procedures addressing leadership responsibilities for quality in internal audit,
ethical requirements, acceptance and continuance of client relationship and
specific engagement, as may be applicable, human resources, engagement
performance, monitoring. The quality assurance framework should cover all
the elements of internal audit activity.
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9. Standard on Internal Audit 9 - Communication with Management
a) Internal auditor while performing audit should communicate clearly the
responsibilities of internal auditor and an overview of the planned scope
and timing of audit with the management.
b) Communication regarding the planned scope and timing of internal audit
may assist the management to understand better the objectives of internal
auditor’s work, to discuss issues of risk and materiality with internal
auditor and to identify any areas in which they may request the internal
auditor to undertake additional procedures, assist the internal auditor to
understand the entity and its environment better.
c) Different stages of communication and discussion should be:- discussion of
draft; exit meeting; formal draft; and final report.
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opportunities for frauds in an entity and exercise reasonable care and
professional skepticism while carrying out internal audit.
b) A system of internal control comprise of following five elements namely
control environment, entity’s risk assessment process, information system
and communication, control activities and monitoring of controls. It is
essential for internal auditor to gain an understanding of the components of
system of internal control.
c) The primary responsibility for prevention and detection of frauds is that of
the management of the entity. The internal auditor should, however, help
the management fulfill its responsibilities relating to fraud prevention and
detection.
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13. Standard on Internal Audit 13 - Enterprise Risk Management
a) Risk is an event which can prevent, hinder, fail to further or otherwise
obstruct the enterprise in achieving its objectives. Risk may be broadly
classified into Strategic, Operational, Financial and Knowledge.
b) ERM is a structured, consistent and continuous process of measuring or
assessing risk and developing strategies to manage risk within the risk
appetite. It involves identification, assessment, mitigation, planning and
implementation of risk and developing an appropriate risk response policy.
Management is responsible for establishing and operating the risk
management framework.
c) ERM process consists of Risk identification, prioritization and reporting,
Risk mitigation, Risk monitoring and assurance. The corporate risk function
establishes the policies and procedures, and the assurance phase is
accomplished by internal audit. The role of internal auditor is to provide
assurance to management on the effectiveness of risk management.
continuity systems.
b) To consider the effect of an IT environment on internal audit engagement,
inter alia the extent to which IT environment is used to record, compile,
process and analyse information and the system of internal control in
existence in the entity with regard to flow of authorised, correct and
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complete data to the processing centre, the processing, analysis and
reporting tasks undertaken in the installation and the impact of computer–
based accounting system on the audit trail that could otherwise be expected
to exist in an entirely manual system.
c) To have sufficient knowledge of information technology systems to plan,
direct, supervise, control and review the work performed. The sufficiency of
knowledge would depend on the nature and extent of the IT environment.
15. Standard on Internal Audit 15 - Knowledge of the Entity and its Environment
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of internal audit engagement, especially in cases where the outside expert
is engaged by senior management or those charged with governance.
c) When determining whether to use the work of an expert or not, internal
auditor should consider the materiality of the item being examined, the
nature and complexity of the item including the risk of error therein, the
other internal audit evidence available with respect to the item.
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COST CONTROL:-
Cost control and reduction refers to the efforts business managers make to monitor,
evaluate, and trim expenditures. These efforts might be part of a formal, company-wide
program or might be informal in nature and limited to a single individual or department.
In either case, however, cost control is a particularly important area of focus for small
businesses, which often have limited amounts of time and money. In a small business
the focus is often on selling and servicing the customer. This leaves the task of
purchasing slightly sidetracked. Even seemingly insignificant expenditures - for items like
office supplies, telephone bills, or overnight delivery services - can add up for small
businesses. On the plus side, these minor expenditures can often provide sources of cost
savings.
Cost control refers to management's effort to influence the actions of individuals who are
responsible for performing tasks, incurring costs, and generating revenues. First managers
plan the way they want people to perform, then they implement procedures to determine
whether actual performance complies with these plans. Cost control is a continuous
process that begins with the annual budget. As the fiscal year progresses, management
compares actual results to those projected in the budget and incorporates into the new
plan the lessons learned from its evaluation of current operations. Through the budget
process and accounting controls, management establishes overall company objectives,
defines the centers of responsibility, and determines specific objectives for each
responsibility center, and designs procedures and standards for reporting and evaluation.
Cost control is the practice of managing and/or reducing business expenses. Cost controls
starts by the businesses identifying what their costs are and evaluate whether those costs
are reasonable and affordable. Then, if necessary, they can look for ways to cut costs
through methods such as cutting back, moving to a less expensive plan or changing
service providers. The cost control process seeks to manage expenses ranging from
phone, internet and utility bills to employee payroll and outside professional services. To
be profitable, companies must not only earn revenues, but also control costs. If costs are
too high, profit margins will be too low, making it difficult for a company to succeed
against its competitors. In the case of a public company, if costs are too high, the
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company's may find that its share price is depressed and that it is difficult to attract
investors. The following are some simple successful cost control methods:-
2. Daily Updates:- One of the best ways to start controlling costs it to have daily
updates of production, all possible long and short term expenditures. Divide all
these expenditures, even the ones such cost of machinery or insurance, and sales,
by the number of working days. This will give you a concrete figure of the total
amount that has been spent. Similarly after sales of your goods or services, you
may also divide the total amount of sales by the number of working days. This
will give you a micro figure about the daily expenditure and sales. It will
definitely help you to zero down on all possible cost problems that you incur.
3. Uniformity:- Cost control management is all about deriving the best outputs in a
least cost. Hence, set up a highly efficient and specialized stores department which
will oversee all purchases. You may also take a risk and make long term
agreements regarding the quality and quantity of materials that are being supplied
to your manufacturing process. This uniformity will ensure a timely, cheap and
assured supply of raw materials.
4. Time Planning:- Time is money! Well divide the amount of wages that you give
out with the number of work hours per month. Explain to the employees per
hour expenditures that you incur, and hence the necessity for time management.
You may also install good cost control systems, in order to help your employees
to manage their work hours well. A cost control software will also work wonders
in the finance and accounting department.
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5. Renegotiate all Contracts Annually:- For whatever reason, businesses presume
that multiple year contracts will result in lower costs. Maybe sometimes, but not
always. A smart company policy is not to have the life of a contract exceed one
year. This forces annual bidding or at least renewal discussions with the current
suppliers. Almost always these discussions will result in lower cost of goods. A
multi-year contract will usually favor the vendor. Of course this is a lot of work,
but it sure pays out.
6. Ask your Customers:- Annual planning sessions with customers have many
benefits. Naturally these discussions primarily should focus on ways to grow the
business. But too often these discussions fail to address costs. By discussing costs
holistically up and down the combined supply chains, customers often can
recommend ways to reduce costs. For example, how to take wasted steps out of
the process, or how to plan jointly to smooth production, or maybe even how to
change the product mix to get rid of costly items and replace them with some
that are more profitable. Talking to the customer is never a bad thing. But talking
about how to jointly improve business deepens the relationship, shows them you
care, and helps reduce costs for both parties.
7. Match terms with turns:- Each item in your inventory moves at a different rate,
and yet suppliers normally apply a one size fits all approach to payment terms.
You can reduce your working capital to zero if payment terms were matched with
the inventory turns of each item. By negotiating this into your contracts it incents
the suppliers only to sell the best moving items and to work with you to improve
inventory productivity. The results will free up cash that can be deployed
elsewhere in the business and improve profits.
8. Ask Vendors to own their Inventory:- Better even than matching terms with
turns is to have the vendors keep title to their inventory until sold. Normally
inventory acquired from a vendor is held in your warehouse for use in
manufacturing conversion or resale to your customers. But why think of it as
your inventory, it hasn’t been used yet so why isn’t it their inventory. Best
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necessary for your own customers. But again, why are you paying them and then
sitting on their inventory. They need to own the inventory until time of sale. This
is commonly referred to as “scan based trading” or “just-in-time trading.”
Many organizations focus their cost reduction efforts around the numbers. This is the
reason why cost reduction initiatives are regarded as the sole domain of the financial
community. Cost cutting is often no more than a review of the budget, the introduction
of a saving against each line item, and then monitoring actual versus planned spend.
There is no problem with this approach if it is short-term cuts that are wanted. It is
easy to reduce costs by a small amount on each line item by delaying expenditure into
a future period. However, these are not real savings and the organization loses the
opportunity to review underlying business practices during difficult economic periods that
have the potential to create sustainable cost savings. Once the pressure is off, these “so
called” cost savings quickly come back into the budgets and management are none the
wiser. This is the tactical response to cost cutting. It can be done and it does have
benefits but these are mainly short term in nature. On the other hand, organizations that
approach their cost reduction efforts in a strategic manner have the opportunity to
significantly strengthen their competitive position from a cost perspective rather than just
survive the current economic downturn. Activity-based cost reduction is a strategic
response to cost cutting that provides sustainable benefits. This means the focus shifts
from the individual line items on the income statement or balance sheet toward the
underlying activities that drive the expenditure. Once these underlying activities are
understood, it is relatively easy to identify and prioritize improvements that will have a
larger and longer-term impact on the business.
The biggest risk for any major initiative is the ability of the organization to sustain the
benefits. In a survey of 115 multinationals taken from the Financial Times Stock
Exchange’s top 350 companies, it was found that 70% could not sustain the benefits of
their cost reduction efforts beyond two years. Often this is due to the fact that the
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changes introduced are not continuously re-enforced through regular, visible reporting of
the key measures that determined success in the beginning. The organization loses sight
of those aspects that were considered essential when the program was first introduced.
This is where the internal audit function can play a significant role.
The internal audit function should be an integral part of any strategic cost reduction
program because it can ensure the redesigned business processes, activities and structures
(if any) remain responsive to the risks, and are embedded in the business methods and
practices.
The value that can be achieved by the inclusion of the internal audit function is
immense, as it can support a number of strategic objectives, including the following:
9. Providing an objective view point on the proposed initiatives prior to, during and
after the introduction of the cost cutting program.
10. Reporting on the benefits realized by the program.
As an example, overtime cost was considered to be excessive in one very large
organization. Certain employees were actually earning more by way of overtime pay than
from their regular salaries. Management decided to cut this cost, especially as difficult
economic circumstances were resulting in lower business activity levels. As a result of
the increased focus on overtime pay together with more regular reporting, the cost began
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to show a reducing trend. However, as often happens, the moment the emphasis changed
to other significant areas and the level of scrutiny reduced, the cost of overtime began
to increase. This example highlights the need for much more effort in understanding and
changing the underlying reasons for a particular cost rather than simply focusing on the
cost itself. For example, travel expenditure may be under review and the finance
manager might request a saving of 20% in the following year’s budget. One approach
would simply be to cut the number of trips by an average of 20%, and the target would
be achieved with no difficulty. Except during the following year, when the pressure is
off, the costs will creep back into the system and the benefits of the saving will be
short lived. An alternative approach, in addition to the above action (which is a very
good starting point), would be to review and redesign the underlying activities that drive
travel expenditure in order to change the way the organization operates. This would have
the effect of sustaining the saving over a much longer term and ultimately gain the
organization competitive advantage.
9. How will the performance of the activities be reported to ensure that the costs
don’t creep back into the system ?
10. Who will sponsor the change program ?
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This simple example demonstrates how cost cutting is much more than just the
elimination of expenses from a budget. It is a strategic adjustment that may well have a
material impact on how an organization does business. Working through this approach in
a meticulous way, organizations are more likely to achieve substantial benefits over the
longer term by identifying significant improvement areas. After an exercise similar to
that described is performed, it is possible to prepare a much more informed budget for
the next period, which will recognize the embedded savings derived. All too often
budgets are simply a derivative of the previous period plus an adjustment for perceived
economic and market changes. In fact, it is recommended that three year rolling budgets
be introduced, showing the expenditure trends and the benefits derived from any cost
saving initiatives over a longer term. Unfortunately, many organizations leave the cost
reduction program in the hands of the financial community which also has many other
priorities. This results in a number of quick wins and short-term benefits but often fails
to achieve the longer-term sustainable impact that could make a strategic difference to
the entity. Organizations that view cost reduction initiatives as a strategic imperative that
could potentially result in a competitive advantage, and that approach the overall effort
in an inclusive and methodical manner, will be much stronger when the economic cycle
turns. No one yet knows who will survive, who will thrive, and who will disappear
during the current downturn - only time will tell. Nonetheless, those organizations that
approach cost reduction with the right mindset have a better chance of success than
those which simply tamper on the periphery.
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CONCLUSION:-
The internal auditor should check whether proper operating standards and norms have
been established for cost control and reduction. They should be detailed enough to be
identifiable with specific operating responsibilities and should be capable of being used
by operating personnel for monitoring and evaluating their performance. The internal
auditor should review the methods of establishing the operating standards and norms. He
should carefully examine the assumptions made while setting the standards to ensure that
they are appropriate and necessary. The variances should be examined to evaluate
whether or not the standards and norms are practical. Where there is a wide divergence
between actual performance and the corresponding standards, reasons may be looked into.
The system of identification and analysis of deviations from standards should be
examined. The internal auditor should examine whether analysis of variances is
communicated to those concerned in time. He should also examine whether in
communicating the variances serious matters are highlighted and whether exceptional
variances are communicated more expeditiously than is done in the normal course. As a
part of evaluating resources utilization, identifying the facilities which are under-utilized
is an important function of the internal auditor. Such instances may consist of under-
utilized machines, unoccupied storage space, huge cash or bank balances, idle man power
etc. The internal auditor may also identify understaffing and overstaffing in various areas
as these prevent optimum use of resources.
While commenting on staffing, the internal auditor should pay special attention to non-
productive work being performed. This would require an enquiry into the job descriptions
of employees combined with an intelligent observation of the work being done. Finally
the internal auditor should review all procedures with reference to their costs and
benefits. One of the factors resulting in inefficiency is that in many cases procedures
become hindrance to operations.
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BIBLOGRAPHY:-
3) www.wikipedia.com
4) www.ey.com
5) www.deloitte.com
6) www.icai.org
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