* UNIT 6, CONTROL II CONTROL, ‘© ensures that plans achieve the desired objectives ‘+ requires feedback on the results of organizational activities for the purposes of measurement and correction ‘* requires performance to be measured against a standard and corrected in accordance with the measurement SEQUENCE OF CONTROL FUNCTIONS 1. select control points 2. observe 3. accumulate, classify and record info 4. report deviations 5. determine performance 6. compare with standards 7. make follow-up 8, review and revise standards Classification of controls (PA 2100-1) A. FEEDBACK CONTROLS - obtain information about completed activities; petmit improvement in the future performance learning from past mistakes ¢7*"*«""~ B. CONCURRENT CONTROLS - adjust on- ging process; monitor activities in the present to prevent them from deviating too far from standards C. FEEDFORWARD CONTROLS = anticipate and prevent problems; require long term perspective Classification of Controls (Sawyer) ‘A. FINANCIAL CONTROLS - based on relevant established accounting principles; objectives includes: 1. proper authorization 2. appropriate accounting 3. safeguarding of assets 4, compliance with laws, regulations, contracts B. OPERATING (non-financial)- applicable to production and support activities that may lack established criteria or standards Characteristics of Effective Control a, TIMELY ~ detection should permit early corrections of deviations b. ECONOMICAL - should give reasonable assurance of obtaining expected results within the cost-benefit constraint c, WELL-PLACED ~ control points should be those where measurement is most likely to Identify critical deviations from organizational objectives d. FLEXIBLE ~ should allow operational changes e. APPROPRIATE - should satisfy the needs of management and fit within the organizational structure f, ACCOUNTABILITY - should establish responsibility for actions g. IDENTIFY CAUSE - rapid correction is more likely if responses have been planned for deviations resulting from potential causes Characteristics of Control Standards a. Assist in implementing plans and be applied at points that significantly influence subsequent process b, must be accepted by those who work will be measured ¢. should be flexible and reviewed periodically d. should be tight in the essence of creating positive behavioral implications CONTROL MODELS/FRAMEWORKS I. COSO MODEL (Committee of Sponsoring Organizations) 4S + > includes the IIA aid the AICPA >will serve as a basis for control frameworks developed by organizations > > treats internal control as a process-effected by an entity’s board of directorép management and other personnel-designed to provide reasonable assurance regarding the achievement of objectives related to (REEC) a b. effectiveness and efficiency of operations c. compliance with applicable laws and regulations COMPONENTS OF INTERNAL CONTROL A. CONTROL ENVIRONMENT: reflects the attitude of the board and management regarding the significance of control within the organization. It sets the organization tone and influences the control consciousness of its personnel. ELEMENTS: © integrity and ethical values (standards should effectively communicated) © commitment to competence (management must consider competence levels) + board of directors or audit committee participation * management philosophy and operating style (approach to taking risks; attitude toward financial reporting) © organizational structure (appropriate lines of reporting should be considered) ‘+ assignment of authority and responsibility a S UNIT VI. CONTROL II Page 1 of 5 reliability of financial reporemg ~~ —+ human resource policies and practices | (hiring, orientation, training, counseling, | promoting) B. RISK ASSESSMENT - based on a set of complementary operational, financial, reporting and compliance objectives linked across all levels| of the organization; identifies and analyzes externat or internat risks affecting achievement of objectives at the activity and/entity level FACTORS: { * changes in the operating envirdhment new personnel new or revamped information systems rapid growth new technology new business lines, products or activities * corporate restructurings * expanded fdreigri operations €. CONTROL ACTIVITIES - policies and procedures applied to ensure that management directives are executed and actions are taken'to address risks affecting achievement of objectives. whether automated or manual, they are applied at all levels and functians of the organizations + performance reviews by top managers _ performance reviews at the functional or activity level + “Sdhalysis of performance indicators 9% 'Sfiformation|processing “@¥Ghysical controls ‘#“ Segregation of duties ' D| INFORMATION AND COMMUNICATION ~ relevant internat and éxternal Information should be identified, captured, and | communicated in a timely manner and in appropriate form ‘© information system may be formal or informal communication of information may be ‘two-way, both vertically and | horizontally, | E, MONITORING ~ a process that assesses the quality of the system's performance over time l '* consists of ongoing activities built into normal operations * involves separate evaluations (control self-assessivient or deficiencies) 1. CONTROL II Inherent Limitations of Control: 1. human judgment ig faulty 2. manual or automated controls can be circumvented by collusion 3. management may (nappropriately override internal controt 4. custom, culture, corporate governance system and ah effective control ‘environment are rot absolute deterrents to fraud 5. cost should nat exceed benefits of control IE, ERM MODEL (Entdrprise Risk Management) > identify potentiallévents that might affect the entity arid manage within the risk appetite to meet fhe entity's objectives > allows management to optimize stakeholder coping effectively with uncertainty pid the risks and opportunities it OPPORTUNITY- possibil and positively affett th¢ achievement of objectives, supporting preservation tt Four Categories of Objectives a. STRATEGIC ~ aligh with and support the entity's misst b. OPERATIONS ~ address effectiveness and efficiency c. REPORTING + cont a reliability 4. COMPLIANCE rélate to adherence to laws and obligatio Components of eheartt be Resource © Management | 1, Internal environiment ~ sets the tone of the entity i 2. objective setting +’ precedes event Hdentificatio i 3. event identificat#8 + internal and external events affecting the organization 4. risk assessment + considers likelihood of impact as a basis|foPrisk management 5. risk responses | 6. control activities + policies and procedures to ensure effectiveness of risk responses information and communication - identifies, captures and communicates relevant and timely information ‘KN 8. monitoring - ongbing management activities or separate evaluations i Limitations of ERM 1. faulty human judgment 2. cost-benefit considerations. 3. simple error or mistakes 4. collusion 5. management override of ERM decisions Page 2 of SRoles and Responsibilities CEO - ultimate responsibility MANAGERS ~ promote compliance with risk appetite/manage risks INTERNAL AUDITOR - supporting roles ITI, SMALLER PUBLIC COMPANIES > provides guidance to any company on how to apply the COSO framework in designing and implementing cost effective internal control over financial reporting Components 1. Control environment « integrity and ethical values © board of directors * management philosophy and operating style + organizational structure + financial reporting competencies + authority and responsibility * human resources 2. Risk Assessment *¢ financial reporting objectives -®y firiancial reporting risks + ffdud risk Control Activities . * integration with risk assessment * section and development of control activities * policies and procedures + information technology 4. Information and Communication « financial reporting information * internal control information ‘* internal communication * external communication y Monitoring ‘* ongoing and separate evaluations ‘* reporting deficiencies Iv. COCO MODEL > adaptation of the COSO model by the Criteria of Control Board of Canadian Institute of Chartered Accountants ‘Components: a. PURPOSE © objectives policies significant internal and external risks + plans * performance target indicators b. COMMITMENT «shared ethical values + human resource policies and procedures ‘* authority, responsibility, and accountability ‘* mutual trust atmosphere c. CAPABILITY + people should have knowledge, skill and tools communication processes sufficient and relevant information coordinated actions and decisions control activities d, MONITORING AND LEARNING * external and internal reporting environments performance assumptions information follow-up procedures assess the effectiveness and controls MANAGEMENT CONTROL TECHNIQUES Means of Control 1. ORGANIZATION - an approved intentional structuring of roles assigned to people within the entity so that it can achieve its objectives efficiently and economically division of responsibility ‘managerial authority individual responsibility follow up close supervision accounting of responsibilities flexible organization organizational structures organizational charts and manuals BAKKER SSS . POLICIES - any stated principle that requires, guides, or restricts action ¥ follows principle in writing ¥ systematically communicated ¥ conform with laws, regulations, reviewed |. PROCEDURES ~ methods employed to carry ‘out activities in conformity with prescribed policies ¥ should be coordinated ¥ simple and inexpensive to promote maximum effectiveness and efficiency ¥ not overlapping, conflicting or duplicative Y periodically reviewed PERSONNEL - people hired or assigned should have the qualifications to do the jobs assigned to them ¥ honesty and reliability ¥ employees to be given training EEE UNIT VI. CONTROL II Page 3 of 5| ¥ employees be given Information on duties | and responsibilities 1 employees’ performance be periodically reviewed 4 UNTING = indispenbable means of inancial control over activities and resources ¥ fit the needs of managers based on lines of responsibility ¥- permit controllable costs 6. BUDGETTING - statement of expected results expressed in numerical terms V participation and comparison subsidiary budgets should tie to overall budget | \v_ should be measurable |v should set measurable objectives | should sharpen organizational structure 7. REPORTING made in accordance with assigned responsibilit |v performance should show comparisons ¥ should be timely, accurate, economical recipients should be polled periodically Approaches in Manag Controt Processes A| IMPOSED CONTROL -|traditional approach, consisting of medsurirlg performance against standards and then taking corrective action) | 8] SELF-CONTROL + evaluates the entire process of management and the functions performed ie NIZATIONAL STRUCTURES = 1. | EDGAR SCHEIN modet! Elements: coordination of effort * common goal or purpose « division of labor + _ hierarchy or authority | KREFFNER | Classification + businesses | © non-profit service organizations |» mutual benefit organizations * commonwealth organizations | \ Loney Present in an Organization: ‘a. AUTHORITY - right to direct b. RESPONSIBIL — obligation to perform ¢. ACCOUNTABILITY - duty to account |” responsibility id. UNITY OF OB} = contribution of |" individuals toward attainment of objectives | e. EFFICIENCY - accamplishment of objectives with minimum resources EFFECTIVENESS = organization that reaches its objective Elements of Organizational Structure. a. COMPLEXITY > vertical differgntiation - depth of hierarchy > horizontal differentiation - extent to which tasks reqhtire special skills > spatial di jation = geographical separation of operations b. FORMALIZATION + extent to which job performance js standardized ¢. CENTRALIZATION|- concentration of authority in an organization Departmentation + groliping of organizational subsystems * a. BY FUNCTION = most widely used, found in almost every|enterprise at some level b. BY TERRITORY - favored by multinational or national firms ¢. BY PRODUCT - fot multiline , large-scale enterprises d. BY CUSTOMER - permits service to a customer to be managed by a department head fe. BY PROJECT | for|@4perimental or onetime activities f. BY MATRIX + has|horizontal and vertical lines of authority Five Organizational Cdmponents a. OPERATING CORE ~ workers who perform the basic tasks related to production b. STRATEGIC APEX - top managers ¢. MIDDLE LINE ~ ma who connect the core to the apex d. TECHNOSTRUCTURE ~ analysis who achieve a certain standardizat fe. SUPPORT STAFF - indirect support services a. HOURGLASS = (cons}ts of strategic layer, middle managers, and technical specialists b. CLUSTER - a grouplof teams; workers are multiskilled and shjft among teams as needed | ¢. NETWORK = relative independence of various firms in a network VIRTUAL - flexible hetworks of value adding subcontractors who communicate via internet LEADERSHIP > act or process of influencing, inspiring and guiding people so they will strive willingly Page 4 of 5* “toward the achievement the achievement of E group objectives FORMAL ~ pursues organizations objectives INFORMAL ~ may pursue objectives at F variance CLASSICAL - leadership is a characteristics of individual's personality and cannot be 6. subdivided TRAITIST - attempts to identify traits possessed by leaders ‘TRANSFORMATIONAL LEADER - combines initiating structure and consideration with such other behaviors as charisma ‘TRANSACTIONAL LEADER - emphasizes monitoring of employees so that they adhere to standards SERVANT LEADERS - they have instinctive desire to serve others and must therefore consciously decide to become leaders CONFLICT MANAGEMENT Styles of Leadership ‘A. AUTHORITARIAN ~ manager dictates all decisions and communication is downward B. DEMOCRATIC - leader delegates substantial authority C. LAISSEZ FAIRE - employees in a group are given authority and responsibility to make their own decisions D. CONSULTATIVE ~ manager takes the ‘employees’ view into account but still makes the decisions , BUREAUCRATIC - a manager manages “by the book” A. Situational Theories of Leadership ‘A. CONTINGENCY THEORY ~ people become leaders not only because of personality attfibutes but also because of various 8. situational factors and interactions between leaders and the situation ‘SITUATIONAL LEADERSHIP THEORY — appropriate leadership style depends on the c. follower's maturity * SELLING - explains decisions and provides ‘opportunity for clarification * TELLING - provides specific instructions D. and closely supervises performance * PARTICIPATING ~ encourages the sharing of ideas and facilitates decision making * DELEGATING - turns over responsibility for decision and implementation C. PATH-GOAL THEORY - emphasizes motivation; it combines the research on Initiating structure and consideration Types of Leaders ‘A. DIRECTIVE LEADER - lets employees know what is expected, schedules, work to be done, and gives specific guidance on tasks ‘SUPPORTIVE LEADER - friendly and shows concern for employee needs PARTICIPATIVE LEADER ~ consults with employees and uses their suggestions before making a decision D. ACHIEVEMENT-ORIENTED LEADER - a facilitator who sets challenging goals and expects to perform at their highest level G. B. c H. a UNIT VI. CONTROL IL > conflict involves incompatible behaviors; one person interfering disrupting, or in some other way making actions less effective * COOPERATIVE CONFLICT ~ constructive conflict; may result in better decision making, a reduction in complacency, more self-criticism, greater creativity and solutions to problems © COMPETITIVE CONFLICT - destructive conflict; opposite goals are pursued, and neither side trusts or believes the other Ways of Managing Competitive Conflicts: PROBLEM SOLVING ~ means of resolving the conflict by confronting it and removing its causes; emphasis is on facts and solutions, not personalities and assignment of blame SMOOTHING - short term avoidance approach; the parties conflict are asked by management to submerge their differences temporarily. It does not resolve the Conflict. ~ FORCING - occurs when a superior uses his/her formal authority to order a particular outcome. It does not resolve the conflict. Indeed, forcing may intensify it SUBORDINATE GOALS - are the overriding goals of the entity to which subunit and personal goals are subordinate; an appeal to these goals is another short term solution that does not resolve the conflict COMPROMISE - entails negotiation by the parties in conflict. The conflict is resolved through a process by which each side makes concessions. Thus, the parties both gain and lose. : EXPANDING RESOURCES - resolves conflicts that result for scarcity AVOIDANCE - is non-action. it withdraws from and suppresses the conflict but does not solve the underlying problem ACCOMODATION - willingness of one party to the conflict to place another's needs and concerns above his/her own Page 5 of 5esnid AIA 4 poiterebianos oo asiAa S322i4 ip aay adeeb reited 0 siqenoa nt Hest 19) ved bayiee sve ssh 2924 1oneqi!” Sin} ralusingg 5 7910 0 Aino srt) svloz 4i Wien pebngvo sn a1 PS THOS Gir eneqst sivap air ne sinudue 1 jez0l9 bas. 999 67 bins 26991 1o - ourTADaIz¢ ne Ndiginab 08 edd y1 puLe dog: beviees1 et tailinoo abiz rosa dipirty Ere eee een atte aniffasa 25vioz yt A os we silloe ton, zach tud 71 of yiisq ono to 2zane bn 2basn ensiifd 1 OATHOD THAD. soe