Basic structure

Definition Kootnz & ODonnelManagement control implies the measurement of accomplishments against the standards and the correlation of deviation to assure attainment of objectives according to the plans.Anthony-The process by which managers assure that resources are obtained and used effectively & efficiently in the accomplishment of the organizations objectives.

It is a systematic effort by business management to compare performance to pre-determined standards, plans or objectives in order to determine whether actual performance is in line with these standards and presumably in order to take any remedial action required to see that human & other corporate resources are being used in achieving their goals.

It is a process of evaluating, monitoring & controlling the various sub-units of the organization so that there is effective & efficient allocation and utilization of resources in achieving the pre determined goals.

It is a process consisting of certain inter-related and sequential steps.It aims at effectiveness and efficiency in the acquisition and utilization of resources.It is designed to achieve further the objectives of the organization.

MCS is made effective through:Management control structure Management control process.It refers to a framework/set-up by which manager can ensure control over the actions of the sub-ordinates as well as control over the whole operations in an organization. It is a whole network by which a manager ensures that the targets will be achieved

Characteristics of MCS:Ongoing processGoal CongruenceUniversalityTotal SystemCo-coordinating AgencyFinancial StructureFlexibility

Pre-RequisitesControl requires plansClear-cut organizational structure.Top management involvement.Employee motivation.Effective communication.Supporting accounting and information system.

Arthur Mills: MCS is handling of people employees within the administration and clients, suppliers, government officials, bankers-outside it-to get decisions made and carried out in ways that will achieve the firms objectives.

Management control is the process by which managers influence the other members of the organization to implement the organizations strategies.It involves: Planning what an organization should do.Coordinating the activities of several parts of the organization

Communicating information.Evaluating performance.Deciding what is any action should be taken.Influencing people to change their behavior.

The purpose of MCS is to ensure that strategies are carried out so that the organizations objectives are attained.If a manager discovers a better way of operating, to achieve the goals of the organization than the actions stated in the plan, then he should be free to operate in that fashion.

In some circumstances the manager will be required to take approval for these actions.Conforming to a budget is not necessarily good, and departure from a budget is not necessarily bad.

The process of MCS is not mechanical.The process involves interactions among individuals; there is no mechanical way of describing these interactions.

Managers have personal goals. and the central control problem is to induce them to act so that when they seek their personal goals, they help to attain the organizational goals.This is called GOAL CONGRUENCE, which means that the goals of individual members should be as far as feasible, consistent with the goals of the organization.

MCS focuses primarily on strategy execution.Management controls are only one of the tools managers use in implementing desired strategies.Strategies get implemented through management controls, organization structure, human resource management and culture.

Management control systems encompass both financial and non financial performance measures.In industries that are subject to very rapid environmental changes management control information can also provide the basis for thinking about new strategies.Todays controls= tomorrows strategies.

Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals.Goals are timeless: they exist until they are changed, and they are changed rarely.

In the strategy formulation process, the goals of the organization are usually taken as a given, but occasionally strategic thinking focuses on the goals themselves. An organization may select any of innumerable ways to attain its goals.Strategies are important plans of the organization.

Strategies state in a general way the direction in which senior management wants the organization to be heading.The strategy formulation process involves reexamining some of these strategies, perhaps changing them or perhaps adopting new strategies. This process is more often accurately described as strategy revision.

Strategy formulation is the process of deciding on new strategies; management control is the process of deciding how to implement strategies.Strategy formulation is essentially unsystematic.Whenever a threat is perceived or when a new idea surfaces, strategy formulation takes place.

Task Control: is the process of assuring that specified tasks are carried out efficiently and effectively.Task control is transaction oriented- that is it involves the control of individual tasks. Rules required to be followed for this are a part of the control process.Many task control activities are scientific in nature.

Distinction between Task and Management control:Task controls can be scientific but management controls can never be reduced to a science as it involves human beings and their behavior.

Interests of the shareholders or members who are unable to take part in the day-to-day business operations of a company are properly safeguarded.Audited financial statements are the base for the tax authorities to evaluate the tax liability of a taxpayer.

For the purpose of evaluating the financial status of a prospective borrower of funds, audited financial statements are insisted upon by the banks or the financial institutions.Audited financial statements may be the basis for negotiations with the employees in respect of their various demands.

Audited financial statements may be the basis for valuation of shares and goodwill in case of the take over bids.Audited financial statements prepared on uniform basis are the best tool available to the management to evaluate its own performance on year to year basis and to take the corrective actions wherever necessary.

The weaknesses and drawbacks located during the course of audit may provide the basis to the management for evolving proper management information and control systems.The knowledge of the fact that the records and documents are subjected to audit may prove to be a tool to control the errors and frauds committed by the management.

Errors and frauds can be detected at an early date and if the financial statements are subjected to regular audit, occurrence of such frauds and errors can be restricted. In case of the partnership firms, audited financial statements may help the settlement of the share of deceased or retiring partner.

An audit carried out in a well-planned manner enhances the quality of audit work. A properly planned audit work ensures that there are no slips and omissions in the checking.

Financial Audit is compulsory as per the provisions of Companies Act, 1956 for all types of companies. Cost Audit is applicable in case of the companies falling under certain specific categories of industries and for those companies who have been asked by the Central Government to maintain the cost accounting records and get these cost accounting records audited as per the provisions of Section 233B of the Companies Act, 1956.

The objective of financial audit is to ensure that the financial statements of an organization give true and fair view about the financial status and financial performance of the organization. The objectives of cost audit can be enumerated as below

During the course of his audit, Financial Auditor does not go into the details of the cost accounting records maintained by the company. Cost Auditor does go into the details of cost accounting records maintained by the company with the intention to locate errors and manipulations in the cost accounting records.

The appointment of the financial auditor is done by the shareholders or members in the Annual General Meeting. Similarly, he sends his report to the members of the company. Cost Auditor is appointed by the Board of Directors with the prior approval of the Central Government. Similarly, he sends his report to the Central Government and also to the company.

Financial Audit is concerned with the financial aspects of a company, while the Cost Audit is concerned with the cost aspects of the company.Financial Audit primarily protects the interests of the shareholders, while the Cost Audit primarily protects the interests of the management. The scope of cost Audit is much wider than the scope of the Financial Audit.

The Statutory Auditor is appointed by the shareholders or members in the Annual General Meeting, except under certain circumstances which are already discussed where the statutory auditor can be appointed by the Board of Directors of the Central Government. The Internal Auditor is appointed by the management.

Appointment of Statutory Auditor is obligatory as per the provisions of Companies Act, 1956 and the same is independent of nature of operations and size of operations of the company. Appointment of Internal Auditor is not obligatory as per the Law. In this connection, it should be noted that as per the provisions of Manufacturing and Other Companies (Auditors Report) Order, 1988, the statutory auditor is supposed to comment in his report whether the company is having internal audit system commensurate the nature and size of operations of the company if the paid up share capital is more than Rs. 50 Lakhs or if the average turnover of the company during the three preceding financial years is greater than Rs. 2 Crores

The Statutory Auditor is required to comply with the requirements of Section 226 of the Companies Act, 1956 in respect of the qualifications. The said section does not apply to the Internal Auditor. As a result, the Internal Auditor need not be a Chartered Accountant.Statutory Auditor is not the employee of the company. He is supposed to be an independent professional. Internal Auditor is the employee of the company.

The scope of work, rights and duties of the Statutory Auditor are determined as per the provisions of Companies Act, 1956. The scope of works, rights and duties of the Internal Auditor are determined by the management.The Statutory Auditor is supposed to submit his report to the shareholders or members of the company. The Internal Auditor is supposed to submit his report to the management.

The remuneration of the Statutory Auditor is fixed by the shareholders or members in the Annual General Meeting, though in practical circumstances the same duty is delegated to the Board of Directors of the company. Remuneration of the Internal Auditor is decided by the management.Statutory Auditor can be removed only by the shareholders or members I the Annual General Meeting. Internal Auditor can be removed by the management.

The basic objective of the Statutory Auditor is to decide whether the financial statements of the company are properly drawn up as required by the law and whether the same disclose true and fair view about the financial status of the company and the profitability of the company. Detection of errors and frauds is the secondary objective of the statutory audit. The basic objective of the Internal Audit is to make the suggestions to the management to facilitate the efficient conduct of the business so as to maximize the profitability. Detection of errors and frauds is the primary duty of the Internal Auditor.

Considering the nature of statutory audit, it is very customary to find in the practical circumstances that the statutory audit is not able to carry out the verification of records and documents to the extent of 100%. The statutory auditor usually applies test check during the course of his checking. Internal Auditor is more detailed in nature.The conduct of statutory audit is usually periodical, usually quarterly or annual. The conduct of Internal Audit is continuous in nature.Statutory Auditor has the right to attend the meetings of the shareholders. Internal Auditor does not have such a right.

Management Audit is a complex task closely related with the process of management. It is highly result oriented. It requires inter/multi-disciplinary approach as it involves examination, review and appraisal of various policies and actions of management on the basis of certain norms/standards.It undertakes comprehensive and critical review of all organizational activities with wider perspective.It goes beyond conventional audit & audits the efficacy of the management itself.

Definitions:Its a comprehensive and constructive examination of an organization, the structure of a company, institution or branch of government or of any components thereof, such as division or department and its plans, objectives, its means of operations and its use of human and physical facilities.William P. Leonard.

Its an investigation of a business from the higher level downwards in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient and smooth running internally.Leslie Howard.

It is an audit performed with the object of examining the efficacy of the institution/control systems, management procedures towards the achievement of enterprise goals.CHURCHILL & CYERT.

It is an objective & independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives & policies. Its aim is to identify existing & potential management weaknesses within an organization & to recommend ways to rectify these weaknesses.Chartered Institute of Management Accountants London.

To ascertain the provision of proper control at different levels, their effectiveness in accomplishing management goals.Ascertain objectives of the organization are properly communicated and understood at all levels.To revel defects or irregularities in any of the elements examined and to indicate what improvements are possible to obtain the best results of the operations of the company.

To assist the management to achieve the most efficient administration of its operations.To suggest to the management the ways and means to achieve the objectives if the management of the organization itself lacks the knowledge of efficient management.It aims to achieve the efficiency of management and assess the strength and weaknesses of the organization structure, its management team and its corporate culture.

To ascertain the provision of proper control at different levels, their effectiveness in accomplishing management goals.Ascertain objectives of the organization are properly communicated and understood at all levels.To revel defects or irregularities in any of the elements examined and to indicate what improvements are possible to obtain the best results of the operations of the company.

It aims to achieve the efficiency of management and assess the strength and weaknesses of the organization structure, its management team and its corporate culture.To help the management at all levels in the effective and efficient discharge of their duties and responsibilities. It aims to achieve the efficiency of management and assess the strength and weaknesses of the organization structure, its management team and its corporate culture.To help the management at all levels in the effective and efficient discharge of their duties and responsibilities.

Appraisal of objectives:Does the organization have a statement defining its objectives clearly and in specific terms?If there is no written statement of objectives, can the objectives be identified by looking through the various policy guidelines issued by the top management? If so, what are the objectives?

Are the objectives revised periodically in the light of changes in the internal and external environment?Are their clear-cut guidelines in terms of policies in various areas of management?

Does the organization have a system of long range and short range planning? Is the system formalised?Is planning viewed as the starting point of management function? Is planning related to the objectives of the organization?How are the budgets framed? Is budgeting a coordinated activity?Are the budget estimates reviewed in depth by a high level committee?

How far is the functional manager committed to the target set up in the budgets?

Does the company have a well-defined organizational structure? Has a formal organizational chart been drawn?Are the principles of formal organization being followed?What is the usual span of supervision?

What is the nature of superior subordinate relationship in general? Are the authority patterns fraternal in nature?How do the various managers view people at work? Are the employees subjected to close supervision?Does the work distribution take in account the modern theories of organization?

What is the philosophy of control? Are the controls close, detailed and frequent or are they broad and periodic?Are the controls related to plans?What are the main parameters of control? Are these defined precisely for the each responsibility area?Do the controls highlight the variances between the actual performances and the targets?

Are the controls acceptable to the various levels of management?Is there a system of rewards and punishments linked with the control?Has the cost of each control been worked out?Are the controls reviewed periodically?

Who is responsible for designing the systems?Are there proper descriptions, flow charts and manuals showing various systems?Are the systems related to the changing technology and environment of the business?

Is there a periodic review of the costs and the related benefits of a particular system?What steps are taken to reduce the paper work?

Comment on ROI.Comparison of ROI in consecutive years.Comparison of operative costs of the organization in the same field.Suitability of plant and machinery to get maximum production.Relationship between management, staff and workers. ( I R)

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