Basic structure

Definition Kootnz & ODonnel

Management 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 interrelated 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 process
Goal Congruence
Universality
Total System
Co-coordinating Agency
Financial Structure
Flexibility

Pre-Requisites
Control requires plans
Clear-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 dayto-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)

Thank you