Chapter 5 - Internal Control Systems Flashcards
1
Q
What is internal control?
A
- Process designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance
- affected by board of directors, management and other personnel
- Process rather than an end in itself
- Needs people and what they do, rather than just policy and procedures
- Cannot give 100% assurance, only reasonable assurance
- Adaptable to all org’s
2
Q
Three key focus areas of internal control
A
- Operational objectives – operational and financial performance goals + safeguarding assets against loss
- Reporting objectives – internal, external, financial and non-financial
- Compliance objectives – laws and regulations
3
Q
COSO internal control - integrated framework (COSO Cube):
A
- Objectives:
* Operations
* Reporting
* Compliance - Components of internal control:
* Control environment
* Risk Assessment
* Control activities
* Info + communication
* Monitoring activities - Levels of org:
* Function
* Operational unit
* Division
* Entity level
4
Q
Factors that support internal control:
A
- Organisational structure including responsibility centres
- Integrity and ethical values
- Corporate codes of ethics
5
Q
How does responsibility centres work?
A
- Managers are given objectives and degree of autonomy to achieve them
- Managed by establishing performance measures to monitor managers performance
- Poorly defined performance measures could be counter-productive
6
Q
Types of responsibility centres:
A
- Cost centres:
* Managers control costs only
* Achieved by fixing inputs and requesting output to be maximised or fixing a set level of output and requesting costs to be minimised
* Cost centres could achieve targets by reducing quality, but would not be goal congruent
* Non-financial controls could include introducing efficiencies in way labour is used - Profit centres:
* Managers control revenues and costs
* Grants more discretion over how profit is maximised or targets achieved (either by reducing costs or increasing revenues)
* Managers have little autonomy over available resources - Investment centres:
* Managers control revenues, costs and investment
* Managers accountable for overall performance using whatever funds allocated
* Assessment using specific targets such as return on investment to provide good incentive
* Non-financial controls could include introducing technology and considering trade-off between investment and operational return
7
Q
Fundamental principles:
A
Professional behaviour
Integrity – truthful and honest in all situations
Professional competence and due care
Confidentiality
Objectivity – freedom form bias or discrimination
8
Q
Ethical threats:
A
Management responsibility – making management decisions but also being responsible for reviewing them Advocacy Self-review Self-interest Intimidation Familiarity
9
Q
Why are corporate codes of ethics used?
A
Used to make statement about how org manages risks such as legal and regulatory requirements as well as moral obligations
10
Q
Responsibility of board according to the COSO Internal Control - Integrated framework:
A
- Board is responsible for having an effective system of internal control which senior management operates on their behalf
- Board will be supported by internal and external auditors
11
Q
What is the responsibilities of the risk management group?
A
- Building on overall strategy and framework prescribed by the board and risk committee
- Prescribe methods of risk management
- Concentrate on risk responses and monitor risk management
- Report to risk committee and will receive reports from line managers and employees
12
Q
Responsibilities of internal and external auditors:
A
- External auditors = concerned with risks that have most impact on figures show in financial accounts
- Internal auditors = more flexible, approach will depend on their focus on controls that are being operated or overall risk management process
13
Q
Responsibilities of line managers:
A
- Carry out detailed risk management functions
- Communicating risk management policies to staff
- Preparing reports
- Set a good example
14
Q
Responsibilities of staff:
A
- Follow risk management procedures
* Report any concerns relating to risk, failures of existing control measures and variances in budgets and forecasts
15
Q
What is Management accounting?
A
Process used for decision making, problem-solving, forward planning. Profit measurement, inventory valuation and performance measurement
16
Q
What is Strategic Management accounting?
A
- Provides management accounting info on business and competitive environment in which it operates
- Collection of competitor info and external info
- Exploitation of cost reduction opportunities
- Focus on continuous improvements and non-financial performance
- Matching accounting practices to org’s position and expectations
17
Q
Managerial + operational control info:
A
Managerial control info:
* Embraces entire business unit
* Quantitative and expressed in financial terms
* Reported regularly from tactical perspective (weekly/ monthly)
Operational control info:
* Daily info
* Detail reported will vary depending on operational requirement
* Usually quantitative non-financial terms (units, hours or kg’s)
18
Q
Budgeting as internal control:
A
- Allows individual areas of business to demonstrate accountability
- Encourage goal congruent behaviour
19
Q
Transfer pricing for internal control:
A
- Used where divisions each have own performance targets and they require appropriate methods of recording inter-company transfers
- Transaction price economics (costs involved with negotiation, administration and other opportunity costs) is used to calculate transfer prices
- Could lead to dysfunctional behaviour
20
Q
Advantages and disadvantages of costing systems:
A
Advantages: * Manages costs in high volume production markets * Identifies fixed costs * Allocated costs to activities (ABC) Disadvantages: * Attempts to manage uncontrollable costs * Ignores value streams * Imprecise overhead valuations * Rewards excess production * No incentive to improve
21
Q
Advantage and disadvantage of performance management:
A
Advantage:
* Use of various reward systems aids accountability
Disadvantage:
* Inappropriate measures – e.g. bulk-buying to reduce adverse cost variances ignores sales and profit implications
22
Q
Advantages and disadvantages of capital investment appraisal:
A
Advantage:
* Straightforward techniques for matching costs and revenues with timescales
Disadvantages:
* Cost of capital is difficult to estimate
* Assumptions are often too broad
* Ignores non-financial factors
23
Q
What is JIT and backflush accounting
A
- System of continuous improvement where demand pulls production
- Reports costs in a simplified way to aid efficiency
24
Q
What is throughput accounting?
A
- In the short-term, all costs except for materials are treated as fixed
- Inventory should not be created
- Valuing products using material costs only and profitability is determined by sales, not production
- Requires attention to bottlenecks
25
What is Lean management accounting?
* Emphasis on continuous improvement and eliminating waste and unnecessary costs
* Eliminating all activities that do not add value
26
What is Life cycle costing?
* Accumulates all relevant costs and revenues across products whole life cycle
* Manage costs considered primarily during development, not production
27
What is Target costing?
* Set a target price that customers are willing to pay, deduct a required rate of return to arrive at the target cost the product should not exceed
* Market focused and drives efficiencies
* Difficult to predict realistic sales prices, market behaviour and production volumes
28
What is Kaizen?
* Continuous improvement in all aspects of an entity’s performance on every level
* Management to identify incremental improvements to reduce costs
29
What is Economic value added?
* Calculates operating profit less an imputed charge for capital employed
* Focuses on long-term shareholder wealth
* May direct managers to reject projects which require large initial investments and deliver low EVA measures
30
Non-financial information to use in performance measures:
1. Sales budgets = Volumes sold, volumes returned, market segmentation and product mix sold
2. Variance analysis = Actual activity vs. budget, no of staff employed vs. budget, quality of output and reject rates
3. Investment appraisal = Timescales, assumptions on market behaviour, changes in legislation and forecasting optimism
31
The balanced scorecard:
1. Financial perspective:
* Survive – cash flow
* Succeed – monthly sales growth
* Prosper – increased market share
2. Customer perspective:
* New products - % sales from new products
* Responsive supply – on-time delivery
* Preferred supplier – share of key accounts purchases
3. Internal business perspective:
* Technology capability – manufacturing configuration vs. competition
* Manufacturing excellence – cycle time, unit cost, yield
* Design productivity – silicone efficiency
4. Innovation and learning perspective:
* Technology leadership – time to develop next generation of products
* Manufacturing learning – process time to maturity
* Product focus - % of products that equal 80% of sales
32
Risks of performance measurements:
* May be too short-term and too focused on financial measures
* Created too long after an event to be of use to an org that may have already lost customers due to poor-quality outputs and changes in market dynamics
33
Performance measurements in not for profit org’s:
1. Economy:
* Obtaining suitable inputs at the lowest cost relative to the quality supplied
2. Efficiency:
* Process working as expected with minimal waste or downtime
* Maximising the output achieved from inputs available
3. Effectiveness:
Achieving org’s goals
34
Performance measurement for service organisations: (FIRE FC)
* Flexibility
* Innovation
* Resource utilisation
* Excellence (quality)
* Financial performance
* Competitive performance
35
What is Total quality management:
Applies zero defects philosophy to all resources and relationships within org as a means of developing a sustainable culture of continuous improvement that focuses on meeting customers’ expectations
36
What are the characteristics of TQM?
* Only thing that matters is the customer
* Quality relates to all customer-supplier relationships
* Cause of defects should be prevented in the first place
* Employees must be personally responsible for defect-free production/ service
* Any level of defects must be unacceptable
* Try obsessively to get things right the first time
* Quality certification programmes should be introduced
* Cost of poor quality should be emphasised – good quality generates savings
37
Costs of quality:
* Conformance costs = prevent problems + appraise quality
* Non-conformance costs = internal failures such as waste + external failures selling faulty goods
* Emphasis should be on minimising or eliminating non-conformance costs
38
Project controls - project development:
Collecting ideas:
* Gathering environmental info, staff suggestion schemes, innovation committee, innovation targets
Suitability and feasibility of the project:
* Analysis of the project vs. strategic direction (SWOT)
* Analysis of resource requirements (feasibility)
39
Project controls - Project Analysis:
Acceptability of the project:
* Financial analysis of return (NPV etc.)
* Analysis of risk and uncertainty (sensitivity analysis etc.)
* Analysis of real options
* Analysis of intangible benefits
* Impact on stakeholders (e.g. staff)
40
Project control
Implementing and monitoring the project:
* Project committee
* Time and cost targets
* Post completion audit – did the project achieve its aims?
41
Post completion audit:
* Should be independent
* Carried out during the project life
* Used to learn from mistakes
* Should ensure that the original project forecasts were not wildly optimistic
* Danger of creating blame culture
42
Post completion review:
Focused on results/outcomes of project and establishes whether objectives and target performance criteria have been met
