MCS (Management Control System) Date: 04/01/2011

Topic: Cash & Working Capital

Submitted To Submitted By Mr. Praan kaul Mukesh Choudhary -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- --- -- -- -- -- -- -- --

Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins. In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or nearimmediately (as in the case of money market accounts). Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets. Contents

1 Etymology 2 History 3 See also 4 References 5 Further reading

Etymology The word is variously attributed. Some claim that the word "cash" comes from the modern French word caisse, which means (money) box, from the Provencal word caissa, from the Italian cassa, from the Latin capsa all meaning box. In the 18th century, the word passed to refer to the money instead of the actual box containing it. It might be derived from Malayalam word Kaash - which means Cash. Another claim is that it was derived from Tamil word kasu - meaning a coin by East India Company. "Cash" used as a verb means "to convert to cash"; for example in the expression "to cash a check". History In Western Europe, after the Collapse of the Western Roman Empire, coins, silver jewelry and hacksilver (silver objects hacked into pieces) were for centuries the only form of money, until Venetian merchants started using silver bars for large transactions in the early Middle Ages. In a separate development, Venetian merchants started using paper bills, instructing their banker to make payments. Similar marked silver bars were in use in lands where the Venetian merchants had established representative offices. The Byzantine empire and several states in the Balkan area and Russia also used marked silver bars for large payments. As the world economy developed and silver supplies increased, in particular after the colonization of South America, coins became larger and a standard coin for international payment developed from the 15th century: the Spanish and Spanish colonial coin of 8 reales. Its counterpart in gold was the Venetian ducat. Coin types would compete for markets. By conquering foreign markets, the issuing rulers would enjoy extra income from seigniorage (the difference between the value of the coin and the value of the metal the coin was made of). Successful coin types of high nobility would be copied by lower nobility for seigniorage. Imitations were usually of a lower weight, undermining the

popularity of the original. As feudal states coalesced into kingdoms, imitation of silver types abated, but gold coins, in particular the gold ducat and the gold florin were still issued as trade coins: coins without a fixed value, going by weight. Colonial powers also sought to take away market share from Spain by issuing trade coin equivalents of silver Spanish coins, without much success. Initially East India Company coins were minted in England and shipped to the East. In England over time the word Cash was adopted from the Tamil word Kasu, meaning a coin. East India Company coinage had both Urdu and English writing on it, to facilitate its use within trade. In 1671 the directors of The East India Company ordered a mint to be established at Bombay, known as Bombain. In 1677 this was sanctioned by the Crown, the coins, having received royal sanction were struck as silver Rupees; the inscription runs The Rupee of Bombaim, by authority of Charles II. At about this time coins were also being produced for The East India Company at the Madras mint. The currency at The Companys Bombay and Bengal administrative regions was The Rupee. At Madras, however, the Company's accounts were reckoned in pagodas, fractions, fanams, faluce and cash. This system was maintained until 1818 when the rupee was adopted as the unit of currency for the Company's operations, the relation between the two systems being 1 pagoda = 3-91 rupees and 1 rupee = 12 fanams. Meanwhile, paper money had been developed. At first, it was thought of for emergency issues, hence were most popular in the colonies of European powers. In the 18th century, important paper issues were made in colonies such as Ceylon and the bordering colonies of Essequibo, Demerara and Berbice. John Law did pioneering work on banknotes with the Banque Royale. However, the relation between money supply and inflation was still imperfectly understood and the bank went under, while its notes became worthless when they were over-issued. The lessons learned were applied to the Bank of England, which played a crucial role in financing Wellington's Peninsular war, against French troops, hamstrung by a metallic Franc de Germinal. The ability to create paper money made nation-states responsible for the management of inflation, through control of the money supply. It also made a direct relation between the metal of the coin and its denomination

superfluous. From 1816, coins generally became token money, though some large silver and gold coins remained standard coins until 1927. The first world war saw standard coins disappear to a very large extent. Afterwards, standard gold coins, mainly British sovereigns, would still be used in colonies and less developed economies and silver Maria Theresa thalers dated 1780 would be struck as trade coins for countries in East Asia until 1946 and possibly later locally. Cash has now become a very small part of the money supply. Its remaining role is to provide a form of currency storage and payment for those who do not wish to take part in other systems, and make small payments conveniently and promptly, though this latter role is being replaced more and more frequently by electronic payment systems.

MCS (Management Control System) Date: 04/01/2011

Topic: Inventory
Submitted To Submitted By Mr. Praan kaul Mukesh Choudhary -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- --- -- -- -- -- -- -- --

INVENTORY

Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English.

In the USA and Canada the term has developed from a list of goods and materials to the goods and materials themselves, especially those held available in stock by a business; and this has become the primary meaning of the term in North American English, equivalent to the term "stock" in British English. In accounting, inventory or stock is considered an asset. Contents

1 Inventory management 2 Business inventory

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2.1 The reasons for keeping stock 2.2 Special terms used in dealing with inventory 2.3 Typology 2.4 Inventory examples

2.4.1 Manufacturing

3 Principle of inventory proportionality

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3.1 Purpose 3.2 Applications 3.3 Roots

4 High-level inventory management 5 Accounting for inventory

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5.1 Financial accounting 5.2 Role of inventory accounting 5.3 FIFO vs. LIFO accounting 5.4 Standard cost accounting 5.5 Theory of constraints cost accounting

6 National accounts 7 Distressed inventory 8 Inventory credit 9 See also 10 References

11 Further reading

Inventory management Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs. See inventory proportionality. Business inventory The reasons for keeping stock There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product stage.

Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. This stock is then used while that changeover is happening. This stock can be eliminated by tools like SMED.

These classifications apply along the whole Supply chain, not just within a facility or plant. Where these stocks contain the same or similar items, it is often the work practice to hold all these stocks mixed together before or after the subprocess to which they relate. This 'reduces' costs. Because they are mixed up together there is no visual reminder to operators of the adjacent subprocesses or line management of the stock, which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across subprocesses, which makes the situation even more acute. Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Stock out means running out of the inventory of an SKU. [2] "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.

Typology 1. Buffer/safety stock 2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock) 3. De-coupling (Buffer stock that is held by both the supplier and the user) 4. Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer) 5. Pipeline stock (Goods still in transit or in the process of distribution have left the factory but not arrived at the customer yet) Inventory examples While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:

Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable.

For example: Manufacturing A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor

until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its perameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation. Typical Inventory Management techniques include Pareto Curve ABC Classification[3] and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to create The K Curve Methodology. [4] A case study of kcurve[5] benefits to one company shows a successful implementation. Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean. [6] Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications.

Definitions (2) 1. A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily. There are various means of valuing these assets, but to be conservative the lowest value is usually used in financial statements. 2. The securities bought by a broker or dealer in order to resell them. For the period that the broker or dealer holds the securities in inventory, he/she is bearing the risk related to the securities, which may change in price.

MCS (Management Control System) Date: 04/01/2011

Topic: Working Capital

Submitted To Submitted By Mr. Praan kaul Mukesh Choudhary -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- --- -- -- -- -- -- -- --

WORKING CAPITAL
Definition Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations.

Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital.

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Working Capital = Current Assets Net Working Capital = Current Assets Current Liabilities A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. Definition Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital.

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques

such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Working Capital = Current Assets Net Working Capital = Current Assets Current Liabilities A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. Contents

1 Calculation 2 Working capital management

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2.1 Decision criteria 2.2 Management of working capital

3 See also

Calculation Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact: accounts receivable (current asset) inventory (current assets), and

accounts payable (current liability)

The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit. An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to: Current Assets Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances. Cash balance items often attract a one-for-one purchase price adjustment

Receivables Receivables may refer to the amount due from individuals and companies. Receivables are claims that are expected to be collected in cash. These are frequently classified as:

Accounts receivable, one of a series of accounting transactions dealing with the billing of a customer for goods and services they have ordered Notes receivable, represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note. The credit instrument normally requires the debtor to pay interest and extends for time periods of 6090 days or longer

Receivables may also refer to:

The Receivables Exchange, an online marketplace where businesses buy and sell their accounts receivable, through real-time auctions

Receivables turnover ratio, one of the accounting activity ratios, a financial ratio.

MCS (Management Control System) Date: 04/01/2011

Topic: Internal audit

Submitted To Submitted By Mr. Praan kaul Mukesh Choudhary

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INTERNAL AUDIT
Accountancy: Key Concepts Accountant Bookkeeping Cash and accrual basis Constant Item Purchasing Power Accounting Cost of goods sold Debits and credits Double-entry system Fair value accounting FIFO & LIFO GAAP / International Financial Reporting Standards General ledger Historical cost Matching principle Revenue recognition Trial balance Fields of Accounting Cost, Financial, Forensic, Fund, Management, Tax. Financial Statements: Statement of Financial Position Statement of cash flows Statement of changes in equity Statement of comprehensive income Notes MD&A Auditing: Auditor's report Financial audit GAAS / ISA Internal audit SarbanesOxley Act Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The scope of internal auditing within an organization is broad and may involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations. Internal auditing frequently involves measuring compliance with the entity's policies and procedures. However, Internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds.

Publicly-traded corporations typically have an internal auditing department, led by a Chief Audit Executive ("CAE") who generally reports to the Audit Committee of the Board of Directors, with administrative reporting to the Chief Executive Officer. The profession is unregulated, though there are a number of international standard setting bodies, an example of which is the Institute of Internal Auditors ("IIA"). The IIA has established Standards for the Professional Practice of Internal Auditing and has over 150,000 members representing 165 countries, including approximately 65,000 Certified Internal Auditors.

Contents

1. History introduction of internal auditing 2. Organizational independence 3. Role in internal control 4. Role in risk management 5. Role in corporate governance 6. Nature of the internal audit activity 7. Internal audit reports 8. Developing the plan of engagements 9. Best Practices in Internal Auditing
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9.1 Measuring the internal audit function 9.2 Developing and retaining staff 9.3 Reporting of critical findings

10. References

History / Introduction of internal auditing 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. Much of the theory underlying internal auditing is derived from management consulting and public accounting professions. With the implementation in the United States of the SarbanesOxley Act of 2002, the profession's growth accelerated, as many internal auditors possess the skills required to help companies meet the requirements of the law. What is Internal Auditing? Performed by professionals with an in-depth understanding of the business culture, systems, and processes, the internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met. The Institute of Internal Auditors (IIA) has developed the globally accepted definition of internal auditing, as follows: Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Independence is established by the organizational and reporting structure. Objectivity is achieved by an appropriate mind-set. The internal audit activity evaluates risk exposures relating to the organization's governance, operations and information systems, in relation to: Effectiveness and efficiency of operations. Reliability and integrity of financial and operational information.

Safeguarding of assets. Compliance with laws, regulations, and contracts.

Based on the results of the risk assessment, the internal auditors evaluate the adequacy and effectiveness of how risks are identified and managed in the above areas. They also assess other aspects such as ethics and values within the organization, performance management, communication of risk and control information within the organization in order to facilitate a good governance process. The internal auditors are expected to provide recommendations for improvement in those areas where opportunities or deficiencies are identified. While management is responsible for internal controls, the internal audit activity provides assurance to management and the audit committee that internal controls are effective and working as intended. The internal audit activity is led by the chief audit executive (CAE). The CAE delineates the scope of activities, authority, and independence for internal auditing in a written charter that is approved by the audit committee. An effective internal audit activity is a valuable resource for management and the board or its equivalent, and the audit committee due to its understanding of the organization and its culture, operations, and risk profile. The objectivity, skills, and knowledge of competent internal auditors can significantly add value to an organization's internal control, risk management, and governance processes. Similarly an effective internal audit activity can provide assurance to other stakeholders such as regulators, employees, providers of finance, and shareholders.

Organizational independence To perform their role effectively, internal auditors require organizational independence from management, to enable unrestricted evaluation of management activities and personnel. Although internal auditors are part of company management and paid by the company, the primary customer of internal audit activity is the entity charged with oversight of management's activities. This is typically the Audit Committee, a subcommittee of the Board of Directors. To provide independence, most Chief Audit Executives report to the Chairperson of the Audit Committee and can only be replaced with the concurrence of that individual.

According to the Institute of Internal Auditors, the Internal Auditor's obligation of Independence refers to:

1) The reporting line or status of the CAE The Chief Audit Executive must report to a level within the organization that allows the internal audit activity to fulfill its responsibilities. The chief audit executive must confirm to the board, at least annually, the organizational independence of the internal audit activity. 2) Attitude of auditors, procedures of the internal audit department. The internal audit activity must be free from interference in determining the scope of internal auditing, performing work, and communicating results. 3) Communication right. The chief audit executive must communicate and interact directly with the Board of Directors.

Role in internal control Internal auditing activity is primarily directed at improving internal control. Under the COSO Framework, internal control is broadly defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following internal control categories:

Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with laws and regulations.

Management is responsible for internal control. Managers establish policies and processes to help the organization achieve specific objectives in each of these categories. Internal auditors perform audits to evaluate whether the policies and processes are designed and operating effectively and provide recommendations for improvement. In the United States, internal auditors may assist management with compliance with the Sarbanes-Oxley Act (SOX).

Role in risk management Internal auditing professional standards require the function to monitor and evaluate the effectiveness of the organization's Risk management processes. Risk management relates to how an organization sets objectives, then identifies, analyzes, and responds to those risks that could potentially impact its ability to realize its objectives. Under the COSO enterprise risk management (ERM) Framework, risks fall under strategic, operational, financial reporting, and legal/regulatory categories. Management performs risk assessment activities as part of the ordinary course of business in each of these categories. Examples include: strategic planning, marketing planning, capital planning, budgeting, hedging, incentive payout structure, and credit/lending practices. Sarbanes-

Oxley regulations also require extensive risk assessment of financial reporting processes. Corporate legal counsel often prepares comprehensive assessments of the current and potential litigation a company faces. Internal auditors may evaluate each of these activities, or focus on the processes used by management to report and monitor the risks identified. For example, internal auditors can advise management regarding the reporting of forward-looking operating measures to the Board, to help identify emerging risks. In larger organizations, major strategic initiatives are implemented to achieve objectives and drive changes. As a member of senior management, the Chief Audit Executive (CAE) may participate in status updates on these major 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] Internal auditors also play an important role in helping companies execute a SOX 404 top-down risk assessment. In these latter two areas, internal auditors typically are part of the project team in an advisory role.

Role in corporate governance Internal auditing activity as it relates to corporate governance is generally informal, accomplished primarily through participation in meetings and discussions with members of the Board of Directors. Corporate governance is a combination of processes and organizational structures implemented by the Board of Directors to inform, direct, manage, and monitor the organization's resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the "four pillars" of corporate governance, the other pillars being the Board of Directors, management, and the external auditor. A primary focus area of internal auditing as it relates to corporate governance is helping the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the Committee privately on the capabilities of key managers, suggesting questions or topics for the Audit Committee's meeting agendas, and coordinating carefully with the external auditor and management to ensure the Committee receives effective information.

Nature of the internal audit activity Based on a risk assessment of the organization, internal auditors, management and oversight Boards determine where to focus internal auditing efforts. Internal auditing activity is generally conducted as one or more discrete projects. A typical internal audit project involves the following steps: 1. Establish and communicate the scope and objectives for the audit to appropriate management. 2. Develop an understanding of the business area under review. This includes objectives, measurements, and key transaction types. This involves review of documents and interviews. Flowcharts and narratives may be created if necessary.

3. Describe the key risks facing the business activities within the scope of the audit. 4. Identify control procedures used to ensure each key risk and transaction type is properly controlled and monitored. 5. Develop and execute a risk-based sampling and testing approach to determine whether the most important controls are operating as intended. 6. Report problems identified and negotiate action plans with management to address the problems. 7. Follow-up on reported findings at appropriate intervals. Internal audit departments maintain a follow-up database for this purpose. Project length varies based on the complexity of the activity being audited and Internal Audit resources available. Many of the above steps are iterative and may not all occur in the sequence indicated. By analyzing and recommending business improvements in critical areas, auditors help the organization meet its objectives. In addition to assessing business processes, specialists called Information Technology (IT) Auditors review information technology controls.

Internal audit reports Internal auditors typically issue reports at the end of each audit that summarize their findings, recommendations, and any responses or action plans from management. An audit report may have an executive summary; a body that includes the specific issues or findings identified and related recommendations or action plans; and appendix information such as detailed graphs and charts or process information. Each audit finding within the body of the report may contain five elements, sometimes called the "5 C's": 1. Condition: What is the particular problem identified? 2. Criteria: What is the standard that was not met? The standard may be a company policy or other benchmark. 3. Cause: Why did the problem occur? 4. Consequence: What is the risk/negative outcome (or opportunity foregone) because of the finding? 5. Corrective action: What should management do about the finding? What have they agreed to do and by when? The recommendations in an internal audit report are designed to help the organization achieve its goals, which may relate to operations, financial reporting or legal/regulatory compliance. They may relate to effectiveness (i.e., whether goals were met or compliance with standards was achieved) or efficiency (i.e., whether the outputs were generated with minimum inputs). Audit findings and recommendations also relate to particular assertions about transactions, such as whether the transactions audited were valid or authorized,

completely processed, accurately valued, processed in the correct time period, and properly disclosed in financial or operational reporting, among other elements.

Developing the plan of engagements Internal auditing standards require the development of a plan of audit engagements (projects) based on a risk assessment, updated at least annually. The input of senior management and the Board is typically included in this process. Many departments update their plan of engagements throughout the year as risks or organizational priorities change. This effort helps ensure the audit activity is aligned with the organizations objectives, by answering two key questions: First, what goals are the organization trying to accomplish in the upcoming period? Second, how can the Internal Audit Department assist the organization in achieving these goals? Internal auditors often conduct a series of interviews of senior management to identify potential engagements. Changes in people, processes, or systems often generate audit project ideas. Various documents are reviewed, such as strategic plans, financial reports, consulting studies, etc. Further, the results of prior audits and resolution of open issues are considered. For example, automated programs such as NEMEA Compliance Center can collect responses, produce and write standardized compliance reports for an organization seeking or issuing compliance rules. Even if a business area is important, prior audit work and the nature and status of open issues may render further audit effort unnecessary. If the organization has a formal enterprise risk management (ERM) program, the risks identified therein help limit the amount of separate risk assessment performed by Internal Audit. The preliminary plan of engagements is documented and prioritized. Audit resources and expertise are then considered and a final plan is presented to senior management and the Audit Committee. The presentations vary based on the needs of the stakeholders and may include the following:

Summary of key goals, risks and corresponding major audits, to illustrate alignment; Analyses of audit effort along a variety of dimensions (e.g., by business segment, COSO objective category, IT, Sarbanes-Oxley, vs. prior year, etc.) along with commentary regarding changes; Brief description of critical projects identified; Projects requested but not planned for execution due to prioritization and resources; Required co-sourcing effort, typically where outside expertise is required or during peak periods; Coordination with other risk functions, such as legal, compliance or insurance, to ensure coverage of key organizational risks; Update on audit staffing levels, experience and certification; and

Appendix materials, such as planning approach, assumptions (e.g., days per auditor and staffing level) and brief descriptions of all planned audits and related prioritization.

Best Practices in Internal Auditing

Measuring the internal audit function

The measurement of the internal audit function can involve a balanced scorecard approach.[9] Internal audit functions are primarily evaluated based on the quality of counsel and information provided to the Audit Committee and top management. However, this is primarily qualitative and therefore difficult to measure. Customer surveys sent to key managers after each audit project or report can be used to measure performance, with an annual survey to the Audit Committee. Scoring on dimensions such as professionalism, quality of counsel, timeliness of work product, utility of meetings, and quality of status updates are typical with such surveys. Understanding the expectations of senior management and the audit committee represent important steps in developing a performance measurement process, as well as how such measures help align the audit function with organizational priorities.[10] Quantitative measures can also be used to measure the functions level of execution and qualifications of its personnel. Key measures include: Plan completion: This is a measure of the degree to which the annual plan of engagements is completed, measured at a point in time. This may be measured using the number of projects completed, weighted by the planned size of each project, with estimates for projects in-progress. Measured throughout the year, it is compared against the percentage of the year elapsed. Report issuance: This is a measure of the time elapsed from completion of testing to issuance of the final audit report, including managements action plans. This can be measured in average days or percentage of reports issued within a certain standard, such as 30 days. Establishing expectations for the timing of managements response to report recommendations is critical. In addition, the scope and degree of change involved in the reports action plans are key variables. For example, a report for a single retail store requiring only the store managers action might take 35 days to issue. However, a report consolidating findings from 20 retail stores, with action plans with national implications determined by top management, may take 3060 days in complex organizations. Issue closure: Reported audit findings are often called issues or deficiencies. Professional standards require audit functions to track reported findings to resolution, which effectively requires the maintenance of an issues follow-up database. The number of days that reported issues remain open, or open after their agreed-upon closure date, are key measures. In addition, reporting database statistics such as the number of issues open (unresolved), closed (resolved), and issues opened/closed during a given period are useful statistics. Staff qualifications: This can be measured through the percentage of staff with professional certifications, graduate degrees, and overall years of experience.

Staff utilization rate: This is measured as the percentage of time spent on projects, as opposed to administrative time such as training or vacation. Many internal audit departments track time by audit project. This is typically captured in a database or spreadsheet. Staffing level: The number of positions filled relative to the authorized staffing level. Due to the challenge of finding qualified staff, departments may have rotational programs to bring in management to complete tours in the function or be "guest" auditors. Audit departments also "co-source," meaning they obtain contract auditors from service providers.

Developing and retaining staff

Developing and retaining quality professionals is a key concern in the profession. [11] Key methods for developing and retaining internal audit staff personnel include:

Providing challenging, varied assignments Ensuring quality supervision Ensuring staff participates in projects from start to finish, to learn all phases of the audit process Providing opportunities to lead (in-charge) projects, starting with more structured projects such as Sarbanes-Oxley work Participating on departmental improvement task forces, such as preparation for quality assurance review Participating in the recruiting and interviewing process for new hires Rotating through various audit teams (in larger departments) or audits of various businesses Providing both outside training (e.g., seminars) and in-house training (e.g., company systems) for two weeks/year Participation in annual risk assessment activities, whether asking key questions or just taking notes

Reporting of critical findings

The Chief Audit Executive (CAE) typically reports the most critical issues to the Audit Committee quarterly, along with management's progress towards resolving them. Critical issues typically have a reasonable likelihood of causing substantial financial or reputational damage to the company. For particularly complex issues, the responsible

manager may participate in the discussion. Such reporting is critical to ensure the function is respected, that the proper "tone at the top" exists in the organization, and to expedite resolution of such issues. It is a matter of considerable judgment to select appropriate issues for the Audit Committee's attention and to describe them in the proper context.

Notes:

STATUTORY VERSUS INTERNAL Following are the main points of difference between internal audit and statutory audit: 1. Appointment The management of the organization makes the appointment of an internal auditor. The statutory auditor is appointed by different authorities. First statutory auditors are appointed by the shareholders in the annual general meeting. 2. Qualification Qualifications of the statutory auditor are prescribed in the companies act, 1956. Essentially a person should be a practicing chartered accountant to be appointed as a statutory auditor. There are no fixed qualification for the position of an internal auditor. 3. Objects The main object of the statutory audit is to form an opinion on the financial statement of the organization auditor has to state that whether the financial statements are showing the true and fair view of the affairs of the organization or not. The main object of the internal audit is to detect and prevent the errors and frauds. 4. Scope The scope of the statutory audit is fixed by the companys act 1956. it can not be changed by mutual consent between the auditor and the management of the audited business unit. The scope of the internal audit is fixed by the mutual consent of the auditor and the management of the unit under audit. 5. Remuneration Remuneration of the statutory auditor is fixed by the appinting authority, I e in case of first auditors, the auditors the directors fix the Remuneration in case of the subsequent auditors the company in its general meeting fixes the remunration. In case of internal auditor the management who appoints him fixes his Remuneration. 6. Report The statutory auditor submits his report to the shareholder of the company in its general meeting. The internal auditor submits his report to the management of the company who is also his appointing authority. 7. Removal The procedure of removal of the statutory auditor is very complex. Only the company in the general meeting can remove the auditor. It also has to take the permission of the central government. The management of the entity can remove internal auditor.