INTERNAL AUDIT

Internal Audit
• Parallels process of external audit
• Gathering information on:
• Management
• Marketing
• Finance/Accounting
• Production/Operations
• Research and Development
• Management Information Systems
Internal Audit
• Involvement in performing an internal strategic-management audit
provides vehicle for understanding nature and effect of decisions in
other functional business areas of the firm
• Key to Organizational Success: coordination & understanding among
managers from all functional areas
• Functional Relationships: number and complexity increases relative to
organization size
• Financial Ratio Analysis: exemplifies complexity of relationships
among functional areas of the business
Resource Biased View
• Approach to Competitive Advantage: internal resources
are more important than external factors

Encompassing Categories Empirical Indicators

• Physical Resources • Rare
• Human Resources • Hard to imitate
• Organizational Resources • Not easily substitutable
Organizational Culture
• Pattern of behavior developed by an organization as it learns to cope
with its problem of external adaptation and internal integration…is
considered valid and taught to new members
• Resistant to change
• May represent strength or weakness
• Can inhibit strategic management
• Miss external changes due to strongly held beliefs
• Natural tendency to “hold the course” even during times of strategic change
Integrating Strategy and Culture
Rituals Myths

Rites Symbols

Beliefs Heroes

Cultural
Values Legends
Products
Management
Strategy Formulation
Planning

Strategy Evaluation

Controlling Organizing

Functions of
Management
Strategy
Implementation

Staffing Motivating
Strategy
Implementation
Strategy
Implementation
Planning
• Beginning of management process
• Bridge between present & future
• Improves likelihood of attaining desired results

Establishing Devising
Forecasting
Objectives Strategies

Developing Setting
Policies Goals
Organizing
• Achieves coordinated effort
• Defines task & authority relationships
• Departmentalization
• Delegation of authority

Organization Job Job Job Span of

Design Specialization Descriptions Specifications Control

Unity of
Coordination Job Design Job Analysis
Command
Motivating
• Influencing to accomplish specific objectives
• Communication – major component

Leadership Communication Work Groups Job Enrichment

Needs Organizational
Job Satisfaction Morale
Fulfilment Change
Staffing
• Personnel management
• Human resources management

Wage & Employee

Interviewing Hiring Discharging
Salary Admin Benefits

Management Affirmative Labor

Training
Development Action Relations
Management Audit Checklist
• Does the firm use strategic management concepts?
• Are objectives/goals measurable? Well communicated?
• Do managers at all levels plan effectively?
• Do managers delegate well?
• Is the organization’s structure appropriate?
• Are job descriptions clear?
• Are job specifications clear?
• Is employee morale high?
• Is employee absenteeism low?
• Is employee turnover low?
• Are the reward mechanisms effective?
• Are the organization’s control mechanisms effective?
Marketing
• Customer needs/wants for products/services
• Defining
• Anticipating
• Creating
• Fulfilling
Marketing Functions
1. Customer analysis
2. Selling products/services
3. Product & service planning
4. Pricing
5. Distribution
6. Marketing research
7. Opportunity analysis
Customer Analysis

Market
Customer Consumer
Positioning
Surveys Information
Strategies

Market
Customer
Segmentation
Profiles
Strategies
Selling Products/Services

Advertising Sales Promotion

Sales Force Customer

Publicity
Management Relations

Dealer
Relations
Planning Products/Services
Test Brand Devising
Marketing Positioning Warranties

Product
Product
Packaging Features or
Style
Options

Quality
Pricing
Forward
Discounts Credit Terms
Integration

Condition of
Markups Costs
Sale

Unit Pricing
Distribution

Warehousing Channels Coverage

Retail Site Sales Inventory

Locations Territories Levels

Transportati
on
Marketing Research

Data Collection Data Input

Support
Data Analysis Business
Functions
Opportunity Analysis

Assessing Assessing
Costs Benefits

Cost/Benefit/Ri
Assessing Risks
sk Analysis
Opportunity Analysis
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are the distribution channels reliable & cost effective?
5. Is the sales force effective?
6. Does the firm conduct market research?
7. Are product quality & customer service good?
8. Are the firm’s products/services priced appropriately?
9. Does the firm have effective promotion, advertising, & publicity strategies?
10. Are the marketing planning & budgeting effective?
11. Do the firm’s marketing managers have adequate experience and training?
Finance/Accounting
• Determining financial strengths & weaknesses key to strategy
formation

• Functions:
1. Investment decision (Capital budgeting)
2. Financing decision
3. Dividend decision
Basic Financial Ratios
• Liquidity Ratios
• firm’s ability to meet its short-term obligations
• Leverage Ratios
• Extent of debt financing
• Activity Ratios
• Effective use of firm’s resources
• Profitability Ratios
• Effectiveness shown by returns on sales & investment
• Growth Ratios
• Firm’s ability to maintain economic position
Finance/Accounting Audit
• Where is the firm strong/weak indicated by financial ratio analysis?
• Can the firm raise short-term capital as needed?
• Can the firm raise long-term capital as needed through debt and/or
equity?
• Does the firm have sufficient working capital?
• Are capital budgeting procedures effective?
• Are dividend payout policies reasonable?
• Are the firm’s financial managers experienced & well trained?
Production/Operations
• Functions
• Process
• Capacity
• Inventory
• Workforce
• Quality
Production/Operations
Process
Flow
Facility Analysis Facility
Layout Location

Technology Line
Selection Balancing

Facility Process
Design Process Control
Production/Operations
Aggregate
Scheduling
Planning

Facilities Capacity
Planning Planning

Queuing
Forecasting Capacity Analysis
Production/Operations

Work in Finished
Progress Goods

Raw Materials
Materials Handling
Inventory
Production/Operations
Job
Enrichment

Work Work
Measurement Standards

Motivation on
Job Design Workforce Techniques
Production/Operations

Testing
Quality
Sampling
Assurance

Quality Cost
Control Quality Control
Production/Operations Audit
• Are suppliers of materials, parts, etc. reliable and reasonable?
• Are facilities, equipment & machinery in good condition?
• Are inventory-control policies and procedures effective?
• Are quality-control policies & procedures effective?
• Are facilities, resources, and markets strategically located?
• Does the firm have technological competencies?
Research and Development
• Functions:
• Development of new products before competitors
• Improving product quality
• Improving manufacturing processes to reduce costs

• Financing as many projects as possible

R&D • Use percent-of-sales method
• Budgeting relative to competitors
Budgets • How many successful new products are
needed
Research and Development Audit
• Are the R&D facilities adequate?
• If R&D is outsourced, is it cost effective?
• Are the R&D personnel well qualified?
• Are R&D resources allocated effectively?
• Are MIS and computer systems adequate?
• Is communication between R&D & other organizational units
effective?
• Are present products technologically competitive?
Management Information Systems
• Improve performance of an enterprise by improving the quality of
managerial decisions
Management Information Systems Audit
• Do managers use the information system to make decisions?
• Is there a CIO or Director of information systems position in the firm?
• Is data updated regularly?
• Do managers from all functional areas 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?
• Is the information system user-friendly?
• Do all users understand the competitive advantages that information can
provide?
• Are computer training workshops provided for users?
• Is the firm’s system being improved?
Internal Factor Evaluation (IFE)
1. List strengths and weaknesses identified.
2. Assign a weight to each factor. The sum of all weights must equal
1.0.
3. Assign a 1-4 rating to each critical factor to indicate the major/minor
strength/weakness
4 – major strength 3 – minor strength
2 – minor weakness 1 – major weakness
4. Multiply each factor by its rating to determine a weighted score
5. Sum the weighted scores for each variable to determine total score
for the organization
Internal Factor Evaluation (IFE) Assign a 1–4 rating
Assign a weight effectiveness of strategies
to each factor
Weighted
Key Internal Factors Weight Rating
Score
Strengths
1-MT Aggressiveness of sales force 0.08 4 0.32
2-F Strong financial position 0.10 4 0.40
3-M Established brand 0.15 4 0.60
Efficiency of organizational set-up vis-a-vis business
4-HR 0.10 4 0.40
operations
5-R Expansion of product range 0.10 3 0.30
6-R Strong business portfolio 0.12 4 0.48
Weaknesses
1-M Website information is not frequently updated 0.08 2 0.16
2-HR Limited manpower provided by support groups 0.07 2 0.14
3-O Very tedious sales documentation process 0.10 1 0.10
Land acquisition is focused on expansion of existing
4-R 0.10 2 0.20
big projects
Total 1.00 3.10
C=Culture, MT=Management, M=Marketing, F=Finance, O=Operations, HR=Human
Resources, I=Information Systems, R=Research and Development
Rating System: 4=Major Strength, 3=Minor Strength, 2=Minor Weakness, 1=Major
Weakness