Topic 5_The Internal Audit PDF

TOPIC 5: THE INTERNAL AUDIT BSOA-4-3D Date: November 29, 2024 Presenters: Cabillo, Cristine Joy Canalda, Aileen Canete, Kirzten Lyn THE NATURE OF AN INTERNAL AUDIT WHAT IS AN INTERNAL AUDIT? DEFINITION: An internal audit is a systematic evaluation of an o...

TOPIC 5: THE INTERNAL AUDIT BSOA-4-3D Date: November 29, 2024 Presenters: Cabillo, Cristine Joy Canalda, Aileen Canete, Kirzten Lyn THE NATURE OF AN INTERNAL AUDIT WHAT IS AN INTERNAL AUDIT? DEFINITION: An internal audit is a systematic evaluation of an organization’s internal environment, focusing on its strengths and weaknesses across various business functions. PURPOSE OF AN INTERNAL AUDIT To assess organization performance. To guide strategic decision-making To identify areas for improvement and leverage existing strength EXAMPLES OF STRENGTH Maytag Strength in Production and Product Design Procter & Gamble Strength in Marketing and Branding IMPORTANCE OF FUNCTIONAL AREAS KEY BUSINESS FUNCTIONS: MARKETING PRODUCTION AND OPERATIONS FINANCE RESEARCH & ACCOUNTING DEVELOPMENT (R&D) MANAGEMENT INFORMATION SYSTEM (MIS) THE PROCESS OF PERFORMING AN INTERNAL AUDIT THE INTERNAL AUDIT PROCESS DEFINITION: An internal audit evaluates a company’s internal operations to identify strengths and weaknesses. It parallels the process of an external audit but focuses on internal capabilities. STEPS IN THE PROCESS Involvement Representatives from various departments are involved. Data Gathering Collecting and assimilating information across key functional areas. Prioritization Identifying and ranking the most critical strengths and weaknesses. FUNCTIONAL AREAS OF FOCUS 1. Management 2. Marketing 3. Finance & Accounting 4. Product & Operations 5. Research & Development 6. Management Information Systems (MIS) THE ROLE OF EMPLOYEES IN THE PROCESS Gathering Information Managers and employees from each department provide data and feedback. Identifying Strengths and Weaknesses Collective analysis to spot organizational strengths and weaknesses. Collaboration Cross-functional collaboration to ensure comprehensive input. THE RESOURCE-BASED VIEW DEFINITION: The Resource-Based View (RBV) emphasizes the strategic value of internal capabilities and resources. The internal audit helps identify these resources and capabilities, which provide a stable foundation for strategy, especially in a volatile external environment. KEY CONCEPT INTERNAL RESOURCES & CAPABILITIES Serve as a more stable foundation for strategy than external factors. IMPORTANCE In a constantly changing external environment (e.g., customer preferences, technology), understanding what the firm can do internally becomes crucial. WHY INTERNAL RESOURCES MATTER? KEY INSIGHTS: Durable Basis for Strategy Internal resources provide a more consistent basis for long-term strategic planning. Strategic Identity Knowing what the firm is capable of doing helps define its market positioning and future direction. INTEGRATING STRATEGY AND CULTURE ORGANIZATIONAL CULTURE DEFINITION: The pattern of behavior and shared values that shape how employees in a company interact and make decisions. It learned over time and becomes ingrained as the “correct way” to perceive, think, and feel within the organization. HOW CULTURE IMPACTS STRATEGY EXTERNAL ADAPTATION How the company reacts to market conditions, competitions, and external threats. INTERNAL INTEGRATION How the company manages internal relationships, collaboratio, and communicatio. CULTURE AS A STRENGTH OR WEAKNESS CULTURE AS A CULTURE AS A STRENGTH WEAKNESS Promotes alignment Resistant to necessary across departments. change or adaptation Enhances employee Creates barriers to new engagement and ideas or diversity innovation  ALIGNING STRATEGY WITH CULTURE WHY ALIGNMENT MATTERS? Internal & External Culture Shapes Execution: Integration: Successful Without cultural alignment, strategies require alignment even the best strategy can between organizational fail due to lack of employee culture (internal) and the buy-in, resistance, or external market demands. miscommunication.  ALIGNING STRATEGY WITH CULTURE HOW TO INTEGRATE CULTURE AND STRATEGY Assess Cultural Strengths & Cultural Adaptation: Make sure the Weaknesses: Understand the culture supports the strategic existing culture before formulating direction, or adjust the culture to strategy. meet strategic goals. Continuous Alignment: Regularly revisit and align strategy with cultural changes to maintain organizational coherence. EXAMPLES OF CULTURAL PRODUCTS DEFINED MANAGEMENT THE FUNCTIONS OF MANAGEMENT Management involves five key functions that guide organizational operations and decision- making. These functions are essential for ensuring that the organization capitalizes on its strengths and addresses weaknesses effectively. THE FIVE FUNCTIONS OF MANAGEMENT Planning Planning is the process of defining the organization’s goals, determining the best course of action to achieve them, and deciding on the necessary steps to address future challenges.  THE FIVE FUNCTIONS OF MANAGEMENT Organization Organizing is the process of arranging resources, tasks, and activities in a way that ensures the organization can achieve its objectives effectively. THE FIVE FUNCTIONS OF MANAGEMENT Motivating Motivating involves inspiring and encouraging employees to perform their best and achieve organizational goals. It focuses on enhancing employee engagement, satisfaction, and productivity. THE FIVE FUNCTIONS OF MANAGEMENT Staffing Staffing involves recruiting, selecting, training, and retaining the right people for the organization. It ensures that the organization has the right mix of skills, experience, and talent to achieve its goals. THE FIVE FUNCTIONS OF MANAGEMENT Controlling Controlling is the process of monitoring and evaluating progress toward organizational goals. It involves setting performance standards, measuring actual performance, comparing results, and taking corrective actions when necessary. FOUR BASIC STEPS IN THE CONTROLLING PROCESS: 1. Establishing performance standards 2. Measuring individual and organizational performance 3. Comparing actual performance to planned performance standards 4. Taking corrective actions  MANAGEMENT AUDIT CHECKLIST OF QUESTIONS 1. Does the firm use strategic-management concepts? 2. Are company objectives and goals measurable and well communicated? 3. Do managers at all hierarchical levels plan effectively? 4. Do managers delegate authority well? 5. Is the organization’s structure appropriate? 6. Are job descriptions and job specifications clear? 7. Is employee morale high? 8. Are employee turnover and absenteeism low? 9. Are organizational reward and control mechanisms effective? MARKETING Definition Marketing is the process of getting people interested in your company's product or service. It pertains to all aspects of a business, including product development, distribution methods, sales, and advertising.  BASIC MARKETING FUNCTIONS Selling Products and Pricing Service Influenced by consumers, Involves advertising, sales governments, suppliers, promotions, publicity, distributors, and competitors. personal selling, and customer relations. Customer Analysis Product and Service Examines consumer Planning needs, desires, and Key for companies pursuing wants product development or diversification.  BASIC MARKETING FUNCTIONS Distribution Cost Benefit Analysis Involves warehousing, It is a data-driven method for distribution channels, evaluating the costs and retail site selection. benefits of a project or decision Marketing Research the process of gathering, analyzing, and interpreting information about a market, product, or service MARKETING RESEARCH Definition Purpose the systematic gathering, Identify strengths and recording, and analyzing of data weaknesses related to about problems relating to the marketing. marketing of goods and services. Techniques Used Outcome Scales, instruments, Provides insights that guide procedures, concepts, and strategic marketing data-gathering techniques. decisions. COST-BENEFIT Step 1 ANALYSIS Compute total costs related to a decision. It is the process of comparing the Step 2 projected or estimated costs and Estimate total benefits from the decision. benefits (or opportunities) associated with a project decision Step 3 to determine whether it makes Compare total costs with total benefits. sense from a business perspective. Benefits > Costs → Approve Project Costs > Benefits → Reject Project  KEY COST/BENEFIT INDICATORS (Used by Government Agencies) INDICATORS FORMULA USAGE PVB represents the total worth of future benefits from a project, discounted back to their present Present Value of Benefits value using a specific discount rate. (PVB) This helps in understanding how much future benefits are worth today. PVC calculates the current worth of all future costs associated with a project, also discounted back to Present Value of Cost (PVC) present value. This includes initial investments and ongoing operational costs.  KEY COST/BENEFIT INDICATORS (Used by Government Agencies) INDICATORS FORMULA USAGE Net Present Value (NPV) measures the difference between the present value of benefits (PVB) and costs Net Present Value (NPV) (PVC). It's used to assess project profitability; a positive NPV indicates a worthwhile investment BCR is calculated by dividing PVB by PVC (BCR = PVB/PVC). It provides a Benefit - Cost Ratio (BCR) straightforward comparison of benefits relative to costs. A BCR over 1 suggests benefits exceed costs.  KEY COST/BENEFIT INDICATORS (Used by Government Agencies) INDICATORS FORMULA USAGE the overall positive gain that results from considering both the advantages and disadvantages of Net Benefit something. It is calculated by subtracting the total costs from the total benefit The NPV divided by the level of funds available (k). It helps prioritize NPV/k projects when resources are limited by determining the efficiency of funds used. SAMPLE SCENARIO Community Park Maintenance Program Assumptions: Discount rate: 5% Timeframe: 3 years A local government is considering the Expected annual implementation of a community park benefits: PHP 5,000,000 maintenance Product Innovationprogram. The objective is to Expected annual costs: maintain an existing park, ensuring it remains a PHP 3,000,000 safe and enjoyable space for residents. The Available funds (k): program will have stable annual costs and PHP 10,000,000 benefits over a three-year period. Present Value of Benefits Computation 1. Plugging in the values into the formula 2. Compute the PVB per year Expected Annual Year Discount Factor Present Value of Benefits Benefits (B) 1 PHP 5,000,000 1. 05 ¹ = 1. 05 5,000,000/1.05 = 4,761,904.76 2 PHP 5,000,000 1. 05 ² = 1. 1025 5,000,000/1.1025 = 4,535,147.39 3 PHP 5,000,000 1. 05 ³ = 1. 157625 5,000,000/1.157625 = 4,319,187.99 3. sum the present values for all three years to find the total PVB: PVB = 4,761,904.76 + 4,535,147.39 + 4,319,187.99 PVB = 13, 616, 240.14 Present Value of Cost Computation 1. Plugging in the values into the formula 2. Compute the PVC per year Expected Annual Year Discount Factor Present Value of Costs Cost (C) 1 PHP 3,000,000 1. 05 ¹ = 1. 05 3,000,000/1.05 = 2,857,142.86 2 PHP 3,000,000 1. 05 ² = 1. 1025 3,000,000/1.1025 = 2,721,088.44 3 PHP 3,000,000 1. 05 ³ = 1. 157625 3,000,000/1.157625 = 2,591,512.80 3. sum the present values for all three years to find the total PVC: PVC = 2,857,142.86 + 2,721,088.44 + 2,591,512.80 PVC = 8,169,744.10  Given: PV Benefits = 13, 616, 240.14 PV Cost = 8,169,744.10 Available funds (K)= 10,000,000 Indicators Formula Computations Answers NPV NPV = PVB - PVC 13, 616, 240.14 - 8,169,744.10 5,446,496.04 BCR BCR = PVB/PVC 13, 616, 240.14/8,169,744.10 1.67 Net Benefit = PVB - PVC 13, 616, 240.14 - 8,169,744.10 5,446,496.04 NPV/K NPV/K 5,446,496.04/10,000,000 0.5446496 MARKETING AUDIT Included Areas Objective CHECKLIST Marketing Mix (4Ps): Product, Definition Price, Place & Promotion a tool that helps businesses assess SWOT their marketing strategies and Marketing identify areas for improvement. Questions Marketing Plans SAMPLE MARKETING AUDIT CHECKLIST  FINANCE & ACCOUNTING FINANCE ACCOUNTING Finance is primarily concerned Accounting provides a with the management of systematic way of tracking the money and investments. It financial performance and involves activities related to health of an organization. It raising, investing, managing, focused on the recording, and allocating funds for classification, and reporting of businesses, governments, and financial transactions. individuals.  Key Financial FINANCIAL Factors CONDITION Liquidity Leverage Definition Working Capital Financial condition refers to the Profitability overall health of a company, based Asset Utilization Cash Flow on its financial data (e.g., income, Equity assets, liabilities).  3 KEY FINANCIAL/ACCOUNTING DECISIONS (According to James Van Horne) Investment Financing Dividend Decision Decision Decision This involves decisions This focuses on This pertains to how about how to allocate determining the best the company resources to generate sources of funds to distributes profits future returns. It finance the company’s to shareholders includes evaluating investments. versus retaining potential projects, Companies can raise them for capital expenditures, funds through equity reinvestment. and investments. (selling shares) or debt (loans and bonds).  1. Historical Trends Analyzing ratios over time helps to identify trends, whether positive or negative. This is UNDERSTANDING referred to as trend analysis. FINANCIAL RATIOS 2. Industry Norms Comparing ratios to industry standards key metrics derived from a or norms is essential because every company's financial industry operates differently. What might be a strong ratio in one industry could be statements, used to assess its weak in another. performance, profitability, and financial health. 3. Comparisons with Key Competitors Comparing financial ratios with key competitors provides insight into how the company stacks up against its closest rivals. This is particularly important in industries where competition is intense.  SUMMARY OF KEY FINANCIAL RATIOS LIQUIDITY RATIOS: These measure a company's ability to meet short-term obligations. Ratio How Calculated What it measures Indicates whether the company has enough assets to cover its short-term Current Ratio liabilities. Higher ratio = better short-term financial health. The extent to which a firm can meet its Quick Ratio short-term obligations without relying on the sale of its inventories  SUMMARY OF KEY FINANCIAL RATIOS II. LEVERAGE RATIOS: These assess the company’s use of debt and its ability to meet financial obligations. Ratio How Calculated What it measures The percentage of total funds provided Debt-to-Total-Assets by creditors. Ratio Less ratio = Less reliance on debt The percentage of total funds provided Debt-to-Equity Ratio by creditors versus by owners  SUMMARY OF KEY FINANCIAL RATIOS II. LEVERAGE RATIOS: These assess the company’s use of debt and its ability to meet financial obligations. Ratio How Calculated What it measures Long-Term Debt- The balance between debt and equity to-Equity Ratio in a firms long-term capital structure Indicates how many times the Times-Interest- company’s earnings can cover its Earned Ratio interest obligations.  SUMMARY OF KEY FINANCIAL RATIOS III. ACTIVITY RATIOS: These measure the efficiency of asset utilization Ratio How Calculated What it measures Measures how frequently inventory is Inventory Turnover sold and replaced in a period. Fixed Assets Indicates the efficiency of using all Turnover assets to generate revenue. Whether a firm is generating a Total Assets sufficient volume of business for the Turnover size of its asset investment  SUMMARY OF KEY FINANCIAL RATIOS IV. PROFITABILITY RATIOS : These assess a company’s ability to generate profits Ratio How Calculated What it measures The total margin available to cover Gross Profit Margin operating expenses and yield a profit. Operating Profit Profitability without concern for taxes Margin and interest  SUMMARY OF KEY FINANCIAL RATIOS IV. PROFITABILITY RATIOS : These assess a company’s ability to generate profits Ratio How Calculated What it measures Measures the percentage of profit Net Profit Margin from total revenue After-tax profits per dollar of assets; Return on Total this ratio is also called return on Assets (ROA) investment (ROI) Return on After-tax profits per dollar of Stockholders' stockholders investment in the firm Equity (ROE)  SUMMARY OF KEY FINANCIAL RATIOS IV. PROFITABILITY RATIOS : These assess a company’s ability to generate profits Ratio How Calculated What it measures Earnings Per Share Shows profit earned per share (EPS) Price-Earnings Indicates the market’s expectations for Ratio a company’s earnings growth  SUMMARY OF KEY FINANCIAL RATIOS V. GROWTH RATIOS: These ratios measure the rate at which the company is growing Ratio Formula What it measures Measures the percentage increase in Sales Growth sales over a period. Tracks the growth in the company’s Net Income Growth profit after all expenses, taxes, and interest. Measures the increase in earnings EPS Growth allocated to each share of common stock. Dividends Per Shows how the dividends paid to Share Growth shareholders have increased over time. BREAKEVEN ANALYSIS Definition It is a financial calculation that determines when a business will have sold enough units to cover all of its costs and begin to make a profit. The point at which this happens is known as the Breakeven Point KEY VARIABLES TR (Total Revenue): The total amount of money earned by the firm from selling its goods or services. TC (Total Costs): The total expense incurred by the firm to produce and sell its goods or services TFC (Total Fixed Costs): Costs that remain constant regardless of the production volume (e.g., rent, salaries, insurance) TVC (Total Variable Costs): Costs that vary directly with the level of production or sales (e.g., raw materials, wages of hourly workers) VC (Variable Costs per Unit): The cost associated with producing one additional unit of the product. Q (Quantity): The number of units produced or sold by the firm BE Point (Breakeven Point): The quantity of units sold where TR = TC, meaning there is no profit or loss. Before: The TR line intersects the TC line at a lower quantity (BE point). Impact: As price decrease, breakeven After: Lowering prices makes the TR point increases. line rotate downwards, requiring a higher quantity (Q) to break even. Before: The TC line starts at a lower point and intersects TR earlier on the Q axis (lower BE point). Impact: Adding fixed After: An increase in fixed costs shifts the TC line costs raises the upward. Consequently, the breakeven point moves breakeven quantity farther right, requiring more units to be sold. This figure demonstrates the "double whammy" Impact: The breakeven point scenario, where both price reductions and shifts significantly rightward, increased fixed costs occur simultaneously. The TR requiring an even greater line rotates downwards (due to lower prices). The quantity of sales to break TC line shifts upwards (due to higher fixed costs). even. PRODUCTION/OPERATIONS refers to the activities in a business that convert inputs, such as raw materials, labor, and equipment, into finished goods or services. This function is crucial because it ensures that the business delivers what customers need efficiently and effectively. CAPACITY UTILIZATION It refers to how much of a business's potential output is actually being used. It’s like checking if a factory is working at its full ability.  THE BASIC FUNCTIONS (DECISIONS) WITHIN PRODUCTION/OPERATIONS involve managing the level of raw include forecasting, facilities PROCESS planning, aggregate planning, INVENTORY materials, work in process, and finished goods, especially considering QUALITY scheduling, capacity planning, what to order, when to order, how and queuing analysis. much to order, and materials handling. 3. 1. 5. 4. 2. involve managing the level of raw include choice of technology, materials, work in process, and facility layout, process flow finished goods, especially are aimed at ensuring that WORKFORCE analysis, facility location, line considering what to order, when to high-quality goods and services balancing, process control, and CAPACITY order, how much to order, and are produced by caring for quality control, sampling, transportation analysis. materials handling. testing, quality assurance, and cost control.  Are supplies of raw materials, parts, and subassemblies reliable and reasonable? AUDIT Are facilities, equipment, machinery, and offices in good condition? CHECKLIST Are inventory-control policies and procedures PRODUCTION/OPERATIONS effective? Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? RESEARCH & DEVELOPMENT refers to a wide range of business, governmental, and academic activities designed to gather new knowledge. The fifth major area of internal operations that should be examined for specific strengths and weaknesses as input into formulating strategies.  TYPES OF R & D PURE RESEARCH APPLIED RESEARCH DEVELOPMENT also knwon as Basic It uses the knowledge ACTIVITIES Research. It is directed at gained from pure are typically centered understanding what research to develop new around improving existing something is or how it products, processes, or products and processes works. services. rather than creating new ones. FIRST MOVER is a company that invests heavily in R&D to be the first to introduce a new product or technology. TWO MAIN OPTIONS LATE FOLLOWER choose to spend less on R&D and wait for a competitor to develop a product, then improve or copy it to enter the market.  INTERNAL & EXTERNAL RESEARCH DEVELOPMENT 1. INTERNAL RESEARCH & DEVELOPMENT refers to the process where a company invests time, money, and resources into developing new products, improving existing ones, or finding better ways to do things within the company. 2. EXTERNAL RESEARCH & DEVELOPMENT refers to when a company seeks help from outside sources, like other companies, universities, or research institutions, to develop new products, improve existing ones, or find solutions to problems.  FOUR COMMON APPROACHES TO R&D ALLOCATION Financing as many Budgeting about the project proposals as same amount that possible competitors spend for R&D Budgeting about the Using a percentage- same amount that of-sales method competitors spend for R&D Management Information System is a system that collects, organizes, and analyzes information from different parts of a business. This system helps managers make smart decisions and keeps the entire company running efficiently.  GROUP 5 TWO MAIN SOURCES: 01 INTERNAL DATA 02 EXTERNAL DATA such as sales reports, employee like customer preferences, market performance, or stock levels. trends, or competitor strategies. www.pup.edu.ph  Do all managers in the firm use the information system to make decisions? AUDIT Is there a chief information officer or director of information systems position in the firm? QUESTIONS Are data in the information system updated MANAGEMENT INFORMATION SYSTEM regularly? Do managers all functional areas of the firm contribute input to the information system? Are there effective passwords for entry into the firm’s information system?  Are strategists of the firm familiar with the information systems of rival firms? AUDIT Is the information system user-friendly? QUESTIONS Do all users of the information system understand the competitive advantages that information can provide MANAGEMENT INFORMATION SYSTEM firms? Are computer training workshops provided for users of the information system? Is the firm’s information system continually being improved in content and user-friendliness? VALUE CHAIN ANALYSIS refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing product(s) to marketing those products PRIMARY ACTIVITIES VALUE CHAIN ANALYSIS  PRIMARY ACTIVITIES OPERATIONS INBOUND 02 MARKETING LOGISTICS AND SALES 01 04 OUTBOUND SERVICES LOGISTICS 05 03  GROUP 5 SUPPORT ACTIVITIES VALUE CHAIN ANALYSIS  SUPPORT ACTIVITIES HUMAN RESOURCE MANAGEMENT FIRM 02 PROCUREMENT INFRASTRUCTURE 01 04 TECHNOLOGY DEVELOPMENT 03  FOUR STEPS TO STAY CONSISTENT CLASSIFY AND BENCHMARK YOUR UNDERSTAND YOUR VALUE VALUE CHAIN AGAINST CHAIN ACTIVITIESG YOUR COMPETITORS’ DEFINE THE VALUE AND IDENTIFY YOUR COST DRIVERS OF EACH OPPORTUNITIES TO GAIN A ACTIVITY COMPETITIVE ADVANTAGE  SUPPLY CHAIN A supply chain is the process that connects all the steps needed to create a product and deliver it to customers. It begins with the collection of raw materials  ASPECT SUPPLY CHAIN VALUE CHAIN SUPPLY CHAIN VS. VALUE CHAIN The process of moving a product from The series of activities that add value to the Definition raw materials to customers. product. Focuses on logistics, procurement, and Focuses on creating value for customers at Focus delivery. every step. Ensures efficiency in the production and Ensures the product satisfies customer needs Purpose delivery process. and adds value. Includes raw materials, suppliers, Includes resource acquisition, Stages manufacturing, distribution, and manufacturing, transportation, and customers consumer satisfaction. Customer Customers are the focus throughout the Customers are at the end of the process. Involvement process. Transporting raw wood to make furniture Improving the design and quality of furniture EXAMPLE and delivering it to stores. to make it more appealing to buyers. INTERNAL FACTOR EVALUATION MATRIX is a tool used to evaluate a business's strengths and weaknesses. It helps identify relationships between different parts of the organization to improve decision-making.  FIVE STEPS TO DEVELOPED IFE MATRIX STEP 1: LIST KEY INTERNAL FACTORS Identrify the factors (strenghts & weaknesses). Be specific, detailed, and actionable. Use divisional data for better insights. STEP 2: ASSIGN WEIGHT Assign a weight to each factor (0.0 to 1.0). Weight shows importance to industry success. Total weights must equal 1.0. STEP 3: ASSIGN RATING Rate factors: Major Weakness = 1 Minor Weakness = 2 Minor Strength = 3 Major Strength = 4. Ratings are based on the company’s situation. FIVE STEPS TO DEVELOPED IFE MATRIX STEP 4: CALCULATE WEIGHTED SCORE Multiply the weight by the rating. Result is the weighted score for each factor. STEP 5: SUM SCORES Add all weighted scores. Total score indicates internal position: Above 2.5 = more strengths. Below 2.5 = more weaknesses. THANK YOU! PRESENTERS: Cabillo, Cristine Joy Canalda, Aileen Canete, Kirzten Lyn