In the emphasis of the importance of creativity and innovation as part of the characteristics of the modern organizations, it is also important to pay attention on the organization's response in highly dynamic and competitive environments. Therefore, the control within the organization is important in order to ensure that the people and their performance is aligned and can answer the needs of the organization. The extensive use of formal procedures and rules and job standardization as instruments of organizational control can create rigidities which can stifle initiative and creativity among managers and employees especially at the lower levels in an organization. The rationale for the many modern day organizations suggests that there should be programs in business firms wherein the management is focused on the realization of their through improvisations or small modifications in established work procedures or working tools or production processes undertaken at the initiative of lower-level employees or managers result in substantial savings in cost or in company's competitiveness. The possible loss of such creative employee initiatives and ideas as a result of excessively "tight" control of operations is a "cost" which managers should keep in mind in designing systems for controlling operations.
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The aim of the paper is to understand the objective of audit and management control that is implemented among the business firms and this can be possible through understanding the different processes of audit and management control. In order to facilitate the investigation, there are objectives that will serve as the guidance of the study. First is to determine the principle of control. Second is to determine the application of various controls in the organization such as the accounting control and the issues related to the control implementation. Third is to address the control processes such as the function of accounting and auditing in facilitating the control. And fourth is to formulate some suggestions in strengthening the control functions and processes in the organizations.
Basic Principles of Management
There has been development in the field of management which regards to the body of principles to be applied in conducting the business. These fundamental principles have been developed through the years of practical experience. They can be applied in any businesses - large or small, partnership or corporation, industrial or commercial - for they are based upon the understanding or truth that in their fundamental objectives and operation all businesses are alike. It is the application of the principles that is varied suitable to the needs of the individual business. Just as an automobile, it is not the invention of any one man but an aggregation of the invention of many, so the body of principles has been the contribution of a number of men in the management field (Rodriguez & Echanis, 1993).
In focusing to the idea of "control" it usually falls in the category of standardization. The principle of standardization arrives whenever practicable, best practices should be determined, expressed in terms of definite units or standards and adopted as a pattern for use in operation or performance and in planning and control. A standard is a norm, rule, model, size, type, quality, or measure, which is set up or established such that future things or activities will e expected to conform to it. Therefore, setting up of standards is essential towards the sound management (ACCA, 2008).
In business there can be developed an infinite variety of standards, such as standards of methods, process, task, operation, time, material, design, and others. When it comes in management or administration, the standards or performance will give the management definite measures by which to gauge efficiency, to evaluate and control current performance and to estimate and plan for the future Daroca & Nourayi, 1996). With the help of such standard, the management has a definite basis of comparison, a way of knowing whether the organization is working at its full productive capacity or how far it falls below the level it is capable of reaching.
Arriving at the principle of control, the planning is given a little value unless there is a subsequent control to make certain that the plans are carried out. After the plans have been made and instructions issued, those in-charge must have some means of determining whether the plans are being carried out (Calhoun, Oliverio, & Wolitzer, 1999). In many instances, determining is done through observations of the work in process or examination or the finished job. In other cases, a definite system of control is instituted whereby, work is first issued and orders given and then through observation, inspection, and the use of records, those in charge can more ascertain that the plans are being carried out (Guttierrez, Pura, & Garcia, 1994).
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In general, the audit and management control do not share the same meaning but comes together with a purpose of securing the financial health of the organization. The management must recognise the changes that might create an impact in the organization. Therefore, the specific controls are needed to provide the effective nature of operation. It is important, in the managerial controls, that the management periodically examine the systems implemented and if necessary, modify the system to ensure that it remains effective and eliminate the unnecessary controls that may become burdensome. Most likely among the organizations, the management strengthens its controls through giving it priority and answering the transitions in the industry. These controls are also important requirement in performing the periodic assessment and reporting any deficiencies. In order to ensure that the management control is implemented among its various departments, the organization's internal and external auditors are called to provide the accurate and effective assistance in assessing the financial status and others like inventory, handling cash flows, and suggesting various ways of overcoming weaknesses that are disclosed (Havens, 2000).
In an organization wherein a group of persons working together for specified purposes or goals there exist the organizational and personal goals. Based on the Exhibit 1 (see Appendices) there may be a gap between personal goals and organizational goals, this suggests the needs to design a control system that will facilitate the goal congruence. In the application of controlling practice in the organizations, it typically embodies the activities that include the restraining, checking, and motivating influences exercised by the management (Vanzante & Ketcham, 2005). The control requires knowledge of what is being done, what conditions. When necessary, it includes the power to compel corrective action to be taken (CCAB, 2009; Leibowitz & Reinsten, 2009). Control keeps the activities of an enterprise within their proper channels. The behavioral aspect of control should not only narrow the gap between personal goals and organizational goals but should also motivate employees to strive toward these organizational goals. The formal control system must help provide the tools to influence the behavior of the employees towards the attainment of desired goals. The control system consists of the control processes and the control structure (Rodriguez & Echanis, 1993; Guttierrez, Pura, & Garcia, 1994).
Overview of the Control Process
Control is the process of assuring management that organization plans, programs, and specific tasks are carried out effectively and efficiently. Plans and programs are usually translated into quantitatively measured targets like company market share or company sales for specific periods of time. For control purposes, depending on the size of the organization, these targets are usually made the responsibilities of individuals heading smaller units within the organization. When targets are met by these units, they are considered effective (Allen & Bunting, 2008). In doing its work to meet its target, an organization unit utilizes resources. The organization unit is efficient if it is able to use the minimum amount of the resources in meeting its targets. Thus, management should be concerned not only on the extent to which targets are achieved but also with the costs incurred in meeting these targets. This process of monitoring the adherence of performance to plans and programs and motivating employees to adhere to these plans is called Management Control (Guttierrez, Pura, & Garcia, 1994).
In the framework of the control process (Exhibit 2) there involves the three basic activities: (1) establishment of establishment of standards, (2) analysis of performances, and (3) correction of deviations from standards or plans. These activities are undertaken in this sequence in a formal control system. Usually, a company manual sets forth the procedures to be followed for each activity, the dates when each activity is supposed to be completed and the paper forms that are to be used. The discussion of these three basic control activities in the following sections is developed under the assumption that a formal system is in place (Jiambalvo & Kennedy, 2002).
First, the Establishment of Standards is a process by which criteria or benchmarks are set against which actual performance can be measured. When a formal control system is in place, the most common tool used by management as a benchmark is the budget. The budget is quantitative expression of a plan of action. The master budget integrates the quantitative targets of the different units within the organization and shows the expected impact of these on income, balance sheet and cash flows. As is evident in the listing, budgeting takes off from planning and programming assumptions. Furthermore, in the preparation of the operating budget, it is necessary for the company to develop standards for manpower needs, materials requirements and other operating expenses for the target levels of Sales and Production (Tsuji & Garner, 1995).
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Second, the Analysis of Performance wherein the established standards should be used to measure the performance and the control system is to influence people to change their behavior. When comparing actual performance with the standards, reports should be prepared for management to signal whether managers and their units are performing satisfactorily or not. These reports are based on financial and non-financial data. In using the financial data, the accounting information does not have to be presented in conformity with generally accepted accounting principles (ACCA, 2008).
And third, the Correction of Deviation which pertains to the analysis of performance and should lead to the remedial actions when actual performance of managers, or their respective units, is not in accordance with planned performance. This activity could feed back to the first step of the control process such as the establishment or re-construction of new standards that is why the control process is considered as recurring cycle of activities as shown in Exhibit 2. The presence of deviations like in auditing may merely require a revision of plans or programs. On the other hand, it may require a drastic change in the company's organization structure or a change in managers. The correction of deviation may also require a change in technology specifications or the process of managerial and accounting control (CCAB, 2009).
Issues in Control
In designing a control system or in adopting a control tool or technique, the management must weigh the benefits to be derived from the system against the costs of installing and maintaining the system. But despite of the implementation of the standards, the financial management faces various challenges in which calls the attention of the auditors. One of the greatest and hard to defeat challenge in internal controls are composed of three factors. The accountability and reliability of the reports, the consistency of the information, and proficiency of the people engaged in the internal controls. There are also problems regarding the completeness of the financial reports and the involvement of the erroneous or inaccurate data collecting (Calhoun, Oliverio, & Wolitzer, 1999). In the world were the challenges hinder the development and progress of the organization, it is a great opportunity to address those challenges and create a room to solve them. These challenges are the way for the business leaders to bring back the competency in the internal auditing.
Through the past experiences and assessment of the senior managers, there is a positive way to create a standard that can bring the honor and trust in auditing and minimize the impact of the challenges in the service. Furthermore, most of the past researches regarding on the effectiveness of the auditing, identified that the responsibility of the auditor towards his work can be the either the challenge or the benefit in the internal auditing (ANAO, 2004). If the issue of performance is not fully resolves then there is a train of other consequences and emerging challenges. To minimize the impact of the challenges which appeared in the audit practices, there should also be changes in the accounting and auditing education (ACCA, 2008). If there is an increase change in the nature of the auditing, then the education should provide additional pedagogical intervention that is centered in the audit practices (Johnson, et al., 2003).
Management and Control Function
The workplace constitutes an important segment of a modern enterprise. The management is concerned with the direction and supervision of the office work. Part of the office work includes the recording of the transactions as well as the results thereof, writing and answering letters, filing papers, computing, and other related activities. Therefore, the office management is basically concerned with the overall direction of clerical activities, as distinguished from such activities as finance, manufacturing, sales, personnel, and purchasing (Allen & Bunting, 2008).
The office management function maybe specialized through the appointment of office managers. If the company has an office manager, he, therefore, will be responsible for the efficient execution of office management and services. The office manager must have a general knowledge of every part of the enterprise and a very intimate knowledge of some portions. He must solve problems involving the practically every activity in managerial work. The manager may have an assistant to whom he assigns such responsibility, but the basic command and contract are vested in him (Hull, Wright, & Ennew, 2002).
The function of management in terms of control is also dependent on size, on the nature of the business, and on the philosophy of top management. The philosophy of top management as regards in centralizing or decentralizing the office function will affect the organization. However, the office management is not only a facilitating function. It is also an important center for coordination. The office manager is a good executive and supervisor who is expert in clerical details and office procedures. At the same time, he must realize that records and all the things he deals with are only means to facilitate executive control and to promote the smooth functioning of the productive functions (Vanzante & Ketcham, 2005).
Importance of Management Control
The function of management in the organization is considered as part of executing the controls. First, the office work in the management is a facilitating function which is an essential medium through which the various activities of an enterprise are fused together and consider as the life blood of any modern enterprise. Second, the office services are the bases of the entire managerial activities of planning, coordinating, directing, and controlling (Rodriguez & Echanis, 1993). Facts and information are necessary for intelligent planning. These data involved separate records which in turn, involves office ordination, requires the exchange of information and instructions and adequate communications between members of management. Finally, all activities involved necessitate the full coordination of the office. Third is the technical and individual work of practically every department of the enterprise is implemented by the office management function (Healy-Burress, 2007).
Management Control Tools
In most small businesses, the owner or manager exercises the personal control over the business. This allows him to have an intimate knowledge of key control variables such as product sales, salesmen's performance and certain individual customer's orders. Thus, the requirements of the owner or manager with regard to the form frequency and amount of detail in these reports will differ from those bigger businesses (Hull, Wright, & Ennew, 2002). The control reports that are frequently used in the large organizations are shown in Exhibit 3 which is should be prepared by the accountants. The Financial Accounting Reports that is prepared in accordance with the generally accepted accounting principles. The balance sheet and income statement also serve as feedback devices to the management regarding the soundness of the company's plans and programs (Pike & Neale, 1999). The management may revise the plans and programs if the information reflected on the interim balance sheets and income statements signals the need for revision. Another is the Measurement Reports that presents the management summaries and analysis of deviations from established standards or plans (Jiambalvo & Kennedy, 2002). On the other hand, the Responsibility Accounting Reports and Control Structure measure the effectiveness and efficiency of the responsibility centers. A responsibility center is an organizational unit headed by a manager who is accountable for the work done by his organizational unit. Through these reports, the audit committee can have a point of origin in auditing the financial status or health of the organization.
Auditing or internal auditing is considered to be one of the most stressful works in the corporate world. Many auditors are placed under the series of workloads, deadlines, and pressures. In this, the production of quality work can be a sinister. Added to that is the existence of changing roles which considered as placing the auditor is a disadvantage situation. The stress and pressure felt by the auditors might be the cause of sub-standard work outcomes. Auditors, albeit had a professional record and credentials should work according to the provision of policies and procedures. This is settled in order to follow the standard, and one of the practices applied in the audit planning. Audit planning is created to use the resources in an efficient way, follow the organizational objectives, and have a control over the auditing process. The continuous implementation of audit planning establishes the growth and improvement of the auditor's performance. In addition, the audit planning can reduce the fraudulent activities that might pose threat not only in the organization but also in the integrity and credibility of the profession. Although defined as a stressful job, auditor's still adhere on the audit planning and their related activities to align the management and control towards the organizational goals. The audit processes are created to secure the interest of the client or the organization and thus, this very same reason should be on the top priority of the auditor in audit planning. The audit planning might start in accepting and performing the initial audit through touring in client's plants and offices. It is important that the auditor understand the nature of client's business in order to review the different reports such as the key ratios with their competitors, and management controls and procedure implemented. The next step is to assess the business risk by identifying the various engagements of the business and the parties involve. In performing the analytical procedures, it is more likely appropriate to consult the accounting principles used by the organization and suggests other accounting techniques to derive in the most desirable financial statements.
It is important that the auditors took responsibility in their action which is founded by their education, training, and professionalism. The qualities of auditor's are often taken to their experience and standards in professionalism. In addition, the planning stage in auditing is one of the most essential elements that might derive in the ability of the auditors in executing professionalism in their field. The importance of planning represents the appropriate action that an auditor can create, which is not solely relying in the basic knowledge but also through the organizational standards.
Scope of the Audit Practices
The main concern of the audit activities is to determine the level of the professionalism in the internal functions. In addition, to determine the risks, such as fraudulent actions, that might plague the organization. If the risks are not recognized early, the organization's performance and effectiveness in the industry might saturate until completely dissolve. And this is the other face of hunch on why do some organization fail to exist in the market for a long time. Auditing practice and related activities should consider and discuss the applicability or inapplicability of the issues involved in auditing. The support of the audits and the third party are indeed vital in the creation of the reports. Subsequently, the assessment of risks is determined through understanding the scope, depth, and status of the environment all for the pursuance of the quality reports and reliability of the information (IRS, 2003).
The audit practice lies in the hands of the people and therefore, they should manage well the internal practice without any hesitation and influence from the other people. It is suggested that the independence of the people is indeed necessary and can be manifested in the management of the entire organization. Independence of the people reflects in the fulfillment of the employee on to their appropriate responsibilities. With this emphasis on the role of the people in the workplace, the role of the auditors can be free from the various interferences which might affect the complexity of the internal auditing.
Through the responsive action of the personnel, the performance can be delivered and then, communicated through the presence of a sound financial report. The scope of the standardized auditing can help build the proficiency among the internal controls and managers. The broadened standards can cover the engagements with the clients and consultancy services. The assistance of the auditors is essential, most especially if the people working in the internal controls have the knowledge, skills, and competencies in facing the challenges and the process of engagement. It is advised that an auditor should possess all of the ideal characteristics in order to perform well on the auditing and the other related performances (Franzel, 2008).
C. Role Played by Audit Committee
Within the corporation, an effective audit committee should be established. Therefore, the board should establish an audit committee with written terms of reference which deals clearly with its role, authority and duties. The role of audit committee is mainly through assessing or auditing the financial reporting of the financial information. The purpose of the examination of the financial reporting is to ensure that all the information involved in the report is correct, reliable, and sufficient. The board has the power over the appointment, re-appointment, or replacement and even removal of the auditors based on their contract and review on the performance as part of preventing any fraudulent action and through the company's compliance with the corporate governance. The responsibility of the audit committee is to refer on the conditions stipulated in the Accounting Standard and has independence or the ability to create decisions without the influence of the other people, such as the Board member, manager, or another auditor. The related transactions are observed and assessed to promote the credibility of the information. The audit committee had timely discussions with the other auditors regarding the periods of internal control systems, audit planning, and the scope of auditing such as the involvement of the observations of the auditors.
In addition, the review on the implemented and compliance of the internal system is also part of the investigation. The professionalism among the authority remains the top priority of the audit committee. In the investigation of the committee, the auditors have the authority to questions any faults found within any transaction because they are allowed to determine the risks that might affect the growth of the company. The auditing practice and related activities involved in auditing are through the understanding of the scope, depth and status of the corporation's environment. The practice of the audit committee can be manifested within the organization and free from the various interferences most especially in terms of accounts in internal auditing. As the result of their investigations, the results are forwarded to the Board who have the only corporate body to have an access on the information and seeks for the professional advice, if necessary. With the responsive actions of the auditors, the Board can use the financial reports as references in creating decisions. The deliverance of the standardized auditing in the committee builds the proficiency and strengthening the control among the managers and the company's compliance with the corporate governance.
D. Role Played by External Auditor
In the idea of corporate governance is anticipated to remain and be effective in the organization. The process of corporate governance should be monitored and controlled by the Board with the objectives of decision making, accountability, and monitoring. In the highlight of accountability, the management is bound to ensure the interest of the shareholders and other stakeholders. The recommendation to address the roles played by the external auditors is almost the same as the roles of the audit committee which is to contribute in the corporate governance of the organization. External auditors are the bodies understand the relationship of the firm with the other institutions like the banks and the assessing the impacts that it might create. It is recommended that the external auditor should be knowledgeable in addressing the principal agent problems that involves in the firms structure and market performance. Therefore, the external auditor's contribution towards the corporate governance is maximized through fulfilling the long-term aims of the organization, ensuring the protection of the shareholder and employees, ensuring the compliance of the organization towards the society and, as well as, in environment, following the laws and regulations implemented, and through presenting the correct and reliable financial reports.
Audit Quality and Importance
The need for the high quality financial reports can address the issues relating the internal controls. The management in internal control can have the ability to develop and understand the influential factors in the business environment. Managing the internal control and its related activity can be equaled to the idea of ensuring that the internal affairs are handled effectively, without causing too much problem in the entire organization. Management is also believed to begin with the use of the appropriate communication. In all aspects of business interactions and facilitating the progress, the communication cannot be set aside.
Communication is valued most in delivering the information to the leaders that can address the issues and fulfill the accountability. More important, the communication is highly suggested to minimize the revolving pressure within the organization, and at the same time, emphasize the importance of auditing (Franzel, 2008). In the deliberation of the leaders through the broadened view of internal auditing, there is one thing wherein they find very important and considered as the benefit of the internal auditing. The identification of the risks in the management may heighten the alert level of the people and the leaders are compelled to manage it well. Through the massive communication and placing the quality in it, the requirements that set in the standardized auditing can be fulfilled and the application of the risk management can be also set.
Monitoring is one of the common actions involved in the quality of internal control and performance in the system. For over time, it is a big dilemma for the propellers and managers to deal with the internal problems and taking part in the necessary corrective actions. The process of monitoring can be in the ways of comparison the actual results to the other reports already made in the areas such as budgeting, and can assure the effectiveness of the internal audit function. In the financial investigation of the auditors, the process of financial reporting and managing the risks can be the most important results. The responsibility of the management to collect and report the information can be the start of a complete, accurate, and reliable financial statements (McGladrey & Pullen, LLP, 2008).
Internal Auditing Standards vs. Professional and Ethical Standards and Guidance
The standards in the nature of internal auditing are characterized through the cooperation of the parties in the internal audit activities. Through the application of these standards, the development can be expected. Firstly, there is a need for the approval by the audit committee regarding the purpose, authority, and the responsibility of the internal audit activity. Under the internal auditing, the issue of independence and the internal auditors are emphasized which will be the main objective of the performance of their work. With this value on the independence of the people, the proficiency and improvement in the nature of their work can be assured.
The responsibility of the auditors is to maintain the quality of the auditing that can add value to the internal audit within the organization and assessment of the risks. In addition, the internal auditing is expected to evaluate and contribute to the improvement of the internal control, risk management, development of the long-term plan of the organization, disciplinary approach, and follow the process of monitoring to achieve the objectives of the organization (IIA, 2005). All of the applied procedures under the standards of internal auditing are purposely made to ensure that there is an effective management control.
On the other hand, the code of ethics is entirely made to promote the internal audit profession. This guidance establishes the trust and provides a strong foundation in the reliance of the auditor's judgment. The integrity among the auditors is built by observing the law, while contributing in the legitimate and ethical objectives of the organization. In addition, the internal auditors are expected to exhibit the highest level of professionalism and objectivity in terms collecting the necessary data, evaluating the information, and communication. To foster the reliability of the information, the auditors avoid unnecessary actions, activities, or relationships that might affect their credibility and objectivity.
In the boundaries of ethics, there should remain a respect in the ownership of the information. Meaning, the auditors themselves are not allowed to use the information for their own benefit and it is under the legal supervision that all the information should be addressed under the appropriate authority. Under the ethical standards, the clients are also protected with the support to their right in confidentialities, which suppresses the action of the auditor if the client did not allow the use of information in the purpose of engagement (Meredith, 2009). Through the knowledge, skills, and experience of the internal auditors, their roles in the organization is emphasized towards the continuing professional development (IIA, 2005). Moreover, the fundamental responsibility of the practice in auditing is to pay attention in the public interest, professional competence and due care for judgment, professional independence, and the confidentiality in which emphasized in the ethical guidelines (Meredith, 2009).