Corporate Social Responsibility In Mauritius Accounting Essay


The purpose of this study is to scrutinize the current practice of CSR that firms in the financial sector and the tourism sector, more precisely banks and hotels, have to engage themselves in CSR activities and to investigate the relationship between CSR and financial performance. In Mauritius Corporate Social Responsibility (CSR) has gained much popularity and has become a subject of concern, after that the government has introduced an innovative legislation about CSR. Previous research on the topic is reviewed, the engagement of Firm in CSR. This study by means of questionnaires, also tries to investigate their motivations behind investing in CSR. Data collected was then analyzed using SPSS. The results highlighted that there are no differences between banks and hotels in the motives to engage in CSR activities. The results also highlighted that there is a relationship between CSR and Financial performance. Also the implications of other findings are discussed and the study concludes with its limitations and directions for future research.



Mauritius since Post- colonial independence, the country over the last four decades have seen the mono-crop sugar island, our first pillar of the economy has significantly moved from the Sugar industry to Financial services industry on large scale offshore financial institutions from multinational companies to local industries, such as the Giant of Rogers Group, Air Mauritius, Island Blyth, Floreal Textile, Mauritius Commercial Bank (MCB), Barclays Bank, HSBC and others.

The field of Corporate Social Responsibility has developed exponentially in the last decades. In the past two decades, CSR appears to have become more omnipresent and perceived as being actually pertinent to companies all over the world (Aras and Crowther, 2008). It is at the forefront of strategic outlook of contemporary organisations of all kinds. A larger number of companies than at any time before are engaged in a serious efforts to define and incorporate CSR into all facets of their businesses. In recent years a great deal of time and attention has been devoted to the concept of corporate social responsibility. This basis has considered it necessary to take notice not only of the economic and financial transactions in a company, but also the social and environmental consequences a business places on its shareholders and society as well as the ecological “footprint” in all aspects of their operations, which extends beyond their statutory obligation to comply with legislation.

CSR has variously been described as a ‘motherhood issue’ (Ryan 2002, p. 302) ‘the hot business issue of the noughties’ (Blyth 2005, p. 30) and ‘the talk of the town in corporate circles these days’ (Mees & Bonham 2004). In fact, the last few decades have seen a rise in awareness on behalf of corporate bodies, on the issue that they have a moral duty to give something back to the society. This rise in awareness is plausibly the effect of the recent corporate scandals involving well reputed companies, such as Enron, Parmalat and WorldCom as well as the growing impact of climate change on the environment.

One of the fundamental questions still to be answered concerns the effect of corporate socially

responsible behavior on profitability. The answers one finds in the specialized literature are

numerous and often contradictory. Views emerging from Corporate Social Responsibility can contribute to the financial performance of a company.

This approach, has been described as ‘enlightened shareholder approach’, believes that corporate decision makers must consider a range of social and environmental matters if they are to maximize long term financial returns. Even if they sometimes can be, CSR initiatives are certainly not always compatible with other organizational strategic goals (namely growth and money-making).(McWilliams, Siegel, & Wright, 2006).

Even though the link between CSR and corporate performance remains tenuous (Lindgreen, Swaen, & Johnston, 2009), companies are following to CSR principles and practices and incorporating CSR principles and aims into their overall corporate strategy in exponential numbers (Godfrey & Hatch, 2007; Lee, 2008; C. Smith, 2003).

Similarly, as those major scandals have undeniably raised the view of greediness among senior managers, CSR is also seen as a tool for counteracting allegation of corporate greed (Deloitte report, 2008).

Each company integrates Corporate Social Responsibility differently. The differences depend on factors such as company’s size, the specific industry involved, the firm’s culture, stakeholder demands, and how progressive the company is in engaging CSR. Some companies concentrate on areas which they consider more important for them, for example human rights or environment while others incorporate CSR in all aspects fields of their operations.


CSR initiatives go quite a long way in corporate Mauritius up to 20 years back. According to a report by Deloitte et al. (2008), it was found that the contribution in CSR has ongoing at varying period for the companies surveyed. Many enterprises are involved in CSR initiatives for the welfare of their employees and the society. Due to Government limited means to handle today’s social problem, an appeal was made to the private sector in July 2009 to spend 2% of their profits to CSR activities. Government suggested that all gains from various companies regardless of their size should invest part of their profit into non profitable organization such as charity, scientific research and wild life to restore and preserve nature in order to maintain a good balance in the ecological system which means to ‘give back to nature’. Moreover, the government has set up a national CSR committee comprising of representative members from the public sector, private sector and the civil society. Additionally, the companies need the approval of the CSR committee before the application or investment in any CSR activity. In the occurrence that a company has not spent the total amount of the compulsory two per cent of its profit, it should remit the remaining amount to the MRA.


CSR is nowadays gaining more and more importance especially after the major corporate scandals and due to changes in norms held by the general public. Such changes have given rise of the interest in the field of CSR. However, most studies have concentrated mostly on the consequences or end results of engaging in CSR activities. Furthermore many researchers have worked to find any empirical relationship between CSR and financial performance. Various Studies have identified different kinds of relationship (positive, negative, no relationship), but currently there is no clear empirical relationship. CSR is problematic as it is often perceived that there is a contrast between CSR activity and ¬nancial performance with one being harmful to the other and companies having an authoritative to follow shareholder value.


The main goal of the study is to scrutinize the current practice of CSR and what are the motivations that lead firms to engage in CSR activities. The study also aims at evaluating the relationship between turnover and level of CSR activities undertaken. This is an issue which has been the subject of an ongoing debate and has become a topic of concern, in the Mauritian context, especially after that the local government revised legislation making investment in CSR activities compulsory.

Objectives of the study:

Objective 1: To investigate the current practice of CSR conducted by banks and hotels.

Objective 2: To investigate what factors motivate firms to increase their involvement in CSR

Objective 3: To investigate how these firms benefited from conducting CSR

Objective 4: To investigate the differences between firms in different sector of operation in the reasons to engage in CSR activities.

Objective 5: To investigate whether there is a relationship between level of CSR activities undertaken and Financial performance.


Chapter One: Introduction

This chapter consists of general overview of CSR. It provides a brief overview of the growing importance of CSR in a general as well as in the context of Mauritius. It consists the problem statement along with the aims and objectives.

Chapter Two: Literature Review

This chapter consists of reviewing the existing literature by examining diverse articles pertaining to the subject matter. The literature review helps to have a better understanding of what different researchers found on CSR.

Chapter Three: Research Methodology

This particular chapter describes who are the target population for this survey, what is the sample size, what are the procedures and techniques used for data collection, the methods used to analyze the data to get results and limitation of the study.

Chapter Four: Results and Discussions

This chapter shows how the collected data is analyzed by carrying out various tests.

Chapter Five: Conclusions and Recommendation

In this chapter, conclusions are derived from the study and some recommendations are mentioned forward.



Corporate social responsibility (CSR) is a fast-growing facets of organizations. The European Commission defines CSR as “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” (Simms 2002). Adams and Zutshi (2004) define it as “the integration of business operations and values whereby the interest of all stakeholders including customers, employees, investors and the environment are reflected in an organisation’s actions and policies”.

In present concept of CSR states that the business enterprises is in their usual process of business decision making should pay due attention to the social interests of the people in the community. A company is not only an economic entity but a social and political entity also. Most of the decisions taken by businesses not only affect the stockholders but also the stakeholders namely, creditors, debtors, employees and the society at large in one way or the other. ( Kapoor and Sandhu, 2010).

CSR is nowadays gaining more and more importance especially after the major events such as the collapse of Enron and the James Hardieasbestos scandal in Australia and due to changes in norms held by the general public. The argument about the place of CSR in the global economy continues with Solomon’s opinion that multinational corporations ‘should take responsibility for the improvement of world-wide social and environmental conditions’. (Scherer and Smid in Windsor 2001, p. 245).

CSR is also looked upon as an umbrella term, including many other business concepts and social practices. Synonymous with some and overlapping a few others, CSR indicates the concept of common relations between businesses and society the world over. Businesses, however small or large, are governed by their place in society and have to take into account the responsibility they bear to the society, people and environment within which they operate.

Economist Theodore Levitt criticizes in the Harvard Business Review that is no longer “fashionable for the corporation to take gleeful pride in making money. What fashionable for the corporation to show that it exists ‘to serve the public’ (Time, 2008). It is now being more and more realized world over that a firm cannot afford to function and continue in the long run unless it performs in a legitimate and socially responsible way.

Moreover, many recent definitions draw attention to the financial benefits gained through CSR. For example, Vaaland et al (2008, p. 931) explain CSR as ”management of stakeholder concern for responsible and irresponsible acts related to environmental, ethical and social phenomena in a way that creates corporate benefit”. While Mittal et al (2008, p. 1437) define the concept as ”a business approach that views respect for ethics, people, communities and the environment as an integral strategy that improves the competitive position of a firm”.

Hence, it is important to understand the point that, whether corporation’s appreciate it or not, herein lies the idea of CSR. The matter is not that of profit earning alone for a corporation, but that of looking beyond the profit-making attitude. This awareness has made corporations identify the need of CSR and its application along with their particular businesses (Gupta and Saxena, 2006).

Economics drivers of CSR

Researchers have identified different method in which CSR approach to business decision making may lead to better financial performance.

The following ‘economic drivers’ have been viewed by the World Economic Forum and Business in the Community that have explained the adoption of the concept corporate social responsibility by companies around the world (ADL 2003). It is advocated that these drivers do not operate in isolation, and that different companies may have different drivers. Several drivers may also be stronger in different areas and for different companies. An alteration to adopt corporate social responsibility may arise from a combination economics of drivers.

Employee recruitment, motivation and retention

Recent studies show that corporate social responsibility is more and more an important factor in attracting and retaining a brilliant and diverse workforce (Globescan Inc 2005). Companies that cater for the interests of their employees by offering good working conditions will attain better performance in terms of quality and delivery, and, thus, experience higher levels of productivity.

Learning and innovation

Learning and innovation are serious to the long-term survival of any business. Corporate social responsibility can be a vehicle for business to respond to environmental and social risks and turn these into business prospects.

Reputation management

Businesses function in a market of opinion. Depending on the judgment by customers, suppliers and the broader community on companies will have an impact on their profitability and achievement. Corporate social responsibility offers a means by which companies can manage and influence the attitudes and opinions of their stakeholders, building their trust and enabling the benefits of positive relationships to deliver business advantage.

Risk profile and risk management

Corporate social responsibility offers more effective management of risk, helping companies to reduce unnecessary losses, identify new emerging issues and use positions of headship as a means to gain competitive advantage.

Investor relations and access to capital

The investment community is increasingly viewing corporate social responsibility as similar to long-term risk management and good governance practices. Recent studies show that analysts place as much emphasis on corporate reputation as they do on financial performance (Hill & Knowltown 2006).

Licence to operate – A Global Outlook

Companies that fail to accomplish their duties to society as a whole risk losing their licence to operate – a concept whereby a company’s stakeholder’s grant the company an unwritten authority to do business. This may be supported by favoring competitors, refuses or calls for deregistration.


CSR activities and practice used are not intended to be exactly the same in different companies. Companies have diverse resources and all cannot take responsibility to the same extent. According to Lantos (2001), organizations may practice three different forms of CSR namely:

Ethical CSR

It means going beyond the firm’s economic and legal obligations and take actions that is morally mandatory. A corporation is morally responsible towards any individual or group that might be harmed or injured by a particular course of action. For example; reduce shareholders profits and used the money to decrease pollution. Ethical CSR may in the long-run generate goodwill by building the public’s trust in the company. This will probably minimize the cost of fines and also bad publication that otherwise may prevail from unethical behaviour.

Strategic CSR

It is an activity where there is a win-win situation. Both the company and some of the stakeholder will benefit. This type of CSR actions implies short-run sacrifices which will usually result in long-run gains. For example, Ford campaigned that children should be seated in booster-seats and gave away millions of such seats. This generated goodwill among customers and government regulators. They believe that the investment will be profitable in the end.

Altruistic CSR.

It is when organizations are contributing to the common good and making the Society a better place on some sort of expense of the firm, involving corporate competences of the company to societal and community needs. Altruistic CSR goes beyond ethics and are actions that are not necessary for the company to take. The company does not expect any financial gain from it. Examples of altruistic CSR are activities that aid the society to fight drug and alcohol problems, poverty, crimes and chronic unemployment.

The three approaches are mutually exclusive and based on the activities nature (required or optional) and the purpose (stakeholders’ good, firm’s good), or both.

Today businesses are facing high competition which many firms want to perceive as best quality or valuable in customer perception. Moreover, the number of multinational companies has been increasing each year and it demanded a higher responsibility for social, environmental and economic. As the result, the influence of Sustainable Development is growing and accepted from all people. Moreover, due to the environmental issue, many researchers are concerned about environment that many natural resources can be run out if we do not use it wisely.

CSR emphasizes the concern of corporate action and accomplishment in the social sphere with a performance perspective, it is clear that firms must formulate and implement social goals and programs as well as integrate ethic sensitivity into decision making, policies, and actions”(Carrol,1991). As in the present time, CSR turns people’s attention to be the perception of the corporate engagement, in terms of how well corporate is able to engage with stakeholders.

Current practice of CSR worldwide

In practice much of the business activity that has been labeled as ‘CSR’ has been determined by the concerns of investors, companies and consumers based in the world’s richest countries. National CSR agenda in middle and low income countries have been less viewed internationally.

For the past five years or so, governments, companies and NGOs in many middle and low income countries have implemented CSR program from developed countries through greater direct engagement. CSR activities have developed in countries such as China, India, South Africa, the Philippines, Brazil and others. Governments in middle income countries have pressed companies to engage in summiting these tasks, as with Black Economic Empowerment in South Africa encouragement of business efforts to reduce poverty in the Philippines.

CSR has also potential link with government strategies aiming at ensuring better access of certain categories of citizens to the economy. One example of such strategy is the Citizen Economic empowerment in Zambia, which aims in particular at increasing local participation in economic activities.

With detail to developing countries, one major CSR concern is that government will ignore corporate irresponsibility or refuse to enforce protective efforts or environmental criteria in the law as an incentive to foreign investment (Aman, 2001). China for instance, has heavy-duty to collective negotiations, by law, and yet many people in jail for trying to use those rights (Diamond, 2003). Yet some developing country governments are transmitting laws requiring higher standards of responsible environmental or social ways in order to compete for foreign capital and institutional investment, in addition to competing on the more familiar ‘rule of law’ issues of contract and property law rights, financial transparency and reduced government corruption (Hebb and Wojcik, 2004). Comparing these legal improvements in different emerging countries would be further helpful in understanding the contribution of CSR.

Chapple and Moon (2005), have found that CSR in Asia is unrelated to preexisting levels of economic development but is related to the extent to which domestic companies engage in international trade, even where that trade is with other Asian nations.


Mauritius is the first country in the world to require businesses to donate a portion of their profits to NGOs or government projects in the name of Corporate Social Responsibility (CSR). Apparently recognising the poor level of corporate citizenship in Mauritius, in 2009, the Ministry of Finance introduced the CSR Fund.

A company using a Corporate Partner to implement its CSR programme will be allowed to spend only an amount not exceeding 25% of the CSR Fund. A company implementing CSR programme is eligible to administrative costs not exceeding 15% of the CSR value.

The company is provided a 12 months period from the end of its financial year to fund project from its CSR fund. If it has not given the 2% CSR fund then they will have to submit it to the MRA. The corporate programme form and Declaration by Applicant is presented below in Appendix D.

Banks in Mauritius especially the leading one such as Mauritius Commercial Bank (MCB), State Bank of Mauritius (SBM), HSBC, Barclays and such that, invest huge amount of money in CSR. Not only Banks but also in the Hotel sector invest in CSR. The role plays by some Banks and Hotels in CSR are briefly described below;

Mauritius Commercial Bank (MCB)

J.Francois (2012), of the MCB Forward Foundation, in the Mauritius l’express Journal talk about “A CSR Budget of Rs 45 millions”. The creation of the MCB foundation in 2010 was a step in the development of CSR activities of the group. Since its creation, MCB has always affirmed as ”a bank with a heart”. The foundation gather dedicated professionals concentrated only on CSR and handle projects in medium and long terms. Moreover in 2007-2008, Rs23 millions have dedicated to CSR. In 2008-2009, it has been increased up to Rs30 millions. According to J. Francois (2012) the CSR budget varies with their profits. For the Financial year of 2009-2010, they predicted about Rs45 millions. They invest the money of CSR mainly in Eradication of Poverty, Vulnerable Children, Education, and Environment. The value proposition of the Foundation is described below.

MCB Forward Foundation

Why the Foundation

To help meet the social and environment challenges of the country


To develop and support sustainable initiatives for the benefit of the community in which we live and work


To be instrumental in the creation of sustainable value for the social, environmental and economic well-being of the community

HSBC Mauritius

HSBC Mauritius has continued to invest in education, poverty alleviation and environmental sustainability. In the year ending December 2011, the HSBC group in Mauritius has spent 6 million Rupees on community investment. In addition to sustaining communities, HSBC has been continuously involved in environmental sustainability. It also has a long partnership with The Mauritian Wildlife Foundation, engaged in preventing rare species.

Sun Resort (including La pirogue, le Tousserouk, Long beach hotel and such that)

Sun Resort Company has commitment towards corporate social responsibility programmes at both local and national level has proved to be a very influential tool for the advancement of local communities and unprivileged circles of the population. In 2010, the Sun Resorts Cancer Trust helped a number of children and their families in their fight against cancer. The company also has opened a four-bed Cancer Unit at Victoria Hospital in May 2009. Corporate Social Responsibility donations made by Sun Resort Ltd during the year 2010 amounted to Rs3.9 million.

Apart from Hotels and Banks, there are other private companies such as Terra, Ireland Blyth Limited (IBL), Omnicane and such that, they invest much in CSR projects. For instance, the IBL Foundation has financed 80 projects costing Rs17, 9 million. Rs6, 7 million for the socio economic development, Rs6,4 million for education and Rs1,2 million for sports. Moreover, there is the Omnicane Foundation which have spent Rs11, 1 million for vulnerable children, Health care, Education, Eradication of Poverty and on environment.



The motivations for firms to engage themselves in CSR activities can thus be broadly viewed from two main perspectives which are strategic perspective and the moral perspective.

Strategic motive linked with Agency theory

Agency theory put emphasis on the point that managers are recruited in order to work for the company that employs them, thus their major duty is to maximize the value of the firm and therefore the wealth of those who possess the company. Moreover, from an agency theory perspective, engagement in CSR activities is often viewed as a misused of company’s resources which could instead be used invest in projects where profits are maximized. Nevertheless, managers will invest in CSR activities only if such investment will help them to improve the reputation of the firm or simply help them to increase shareholders’ wealth (Jones, 1995). However an agency problem may occur because of ”concern that the agent (e.g, the internal or external recipients of funds)” will not follow the ”interests of the principal (e.g., the donor)” who wishes to pursue CSR activities (Husted & Allen, 2007). Very often, managers are motivated by their self- interest and therefore cannot be relied on to work in the best interest of shareholders.

Strategic motive linked with the Resource-Based View Theory

The Resource- Based View (RBV) theory regards CSR as a resource that firm must know how to exploit in order to gain competitive advantages over its competitors. According to Branco and Rodrigues (2006) the firm in this model, is viewed as a ”unique bundle of resources and capabilities that is developed overtime as the firm interacts with all its stakeholders”. This theory assumes that firms are a set of various resources and competences that are not exchangeable among firms.


The moral motive is also linked to the normative stakeholder theory, which is commonly known as intrinsic stakeholder commitment. Success of an organization, according to the stakeholder theory, depends on the ability of the firm to handle and manage its relationships with a number of constituents, such as financers, shareholders, customers, employees, suppliers and then community at large (Donaldson and Preston, 1995).

According to Freeman (1984), managers also ”bear a fiduciary relationship to stakeholders” instead of having solely fiduciary duties towards owners of the firm. Similarly, Donaldson and Preston (1995) defined stakeholders as ”persons or groups with legitimate interests in procedural and or substantive aspects of corporate activity”. Thus, CSR is viewed as a means of fulfilling the duties that the company has towards its stakeholders, and therefore it is crucial that the firm engage itself in CSR activities that are significant to the stakeholders. However, the more influential stakeholders are, the more the company has to adjust itself to their demands and this has given rise to questions whether firms engage themselves in CSR activities because they really want to assume their social and moral responsibilities or this is done only to get strategic advantages such as to prevent any stakeholder from withdrawing their support to the firm.

Meijer, Bakle, Smith & Schuyt (2006) argued that despite the fact it is rational to presume that companies want to do good for the society, it is also true that managers of those companies realize that this will benefit their organizations as well. Thus, put in simpler terms even though reporting pure unselfish intentions, firms engage themselves in CSR from strategic perspectives.

On the other hand, Graafland and Van de Ven (2006) exposed through their study that despite some firms strongly believed that engaging in CSR activities might lead to improvement in profitability, enhancement of reputation and more employee commitment, they were also much concerned with making ” the world a better place to live”.


This section will try to examine what are those advantages firms get by investing in social activities which, as many academics found, ultimately leads to improvement in the firm’s financial performance.

According to Galbreath (2009), there are only three main benefits a firm can derive from investing in CSR activities and they are namely: increased customer satisfaction; reduced employee turnover and improved reputation; and. It is these benefits that will consequently lead to improvements in the financial performance of the company.

Increased customer satisfaction

Customers are one of the most important stakeholders of a firm and by meeting ”justice needs of customers”, CSR is likely to increase customer satisfaction (Galbreath, 2009). Hence, customer satisfaction may lead to brand loyalty and consequently improve and increase future sales of the firm.

Reduced employee turnover

Employee turnover is of the essence since the loss of human capital in companies can have dramatic effects on competitive advantage of a company (Barney, 1991; Huselid, 1995). A key potential gain from CSR initiatives involves establishing the situation that can contribute to increasing the dedication and incentive of employees to become more innovative and dynamic. Galbreath (2009) found that, owing to demonstrated justice, ”socially responsive activities” appear to be a means to reduce employee turnover.

Turban and Greening (1997) found that demonstrating CSR is essential for attracting potential employees. In their study on French firms, Maignan and Ferrell (2001) found that CSR is positively linked with employee commitment. Companies employing CSR related perspectives and tools tend to be businesses that provide the prerequisite for increased loyalty and commitment form their staffs.

Such conditions can facilitate recruitment of employees, retaining and motivating them to develop skills, reduce absenteeism, and may also translate into marginally less demands for higher wages (Deloitte Report, 2008). According to Galbreath (2009), firms that are unjust, that does not exhibit comportments that match with employees’ moral or ethical frameworks are prone to obtain negative results that affect profitability. Therefore, reducing employee turnover is crucial so that a firm can improve its performance.

Improved reputation



Exploring the objectives of Borealis new budgeting system

Borealis abandoned its traditional budgeting system in 1995 and implemented a new system, which is set to achieve 4 objectives:

Improve financial management and performance measurement.

Decentralise authority and decisions.

Simplify the budgeting process.

Reduce the resources used in the process.

In this report, we would examine failings in the current budgeting process and modifications that would make the existing system more useful. We would then provide more suggestions to Borealis’ new system and evaluate if Beyond Budgeting is a suitable system for other companies.


Borealis is the world’s fourth largest polyolefins producer and its main competitors are Dow, Exxonmobil, Basell (Shell & BASF), Equistar, BP, Du Pont and AtoFina.

Borealis operates in a rapidly changing, cyclical business environment where profit margin is highly affected by volatile input prices. Barriers to entry are high due to high initial capital investments. Overall industry capacity had increased despite demand being stable, leading to low prices and profitability. Therefore, gaining operating efficiency is important in keeping the required profit margin.

Failings in Borealis’ Previous Budgeting Process

Fixed and not Flexible

The problem with Borealis’ previous budgeting process lies in the way that the management used the system. Borealis operates in a business arena where their products demand/supply and cost/profit are highly volatile and dependent on short-term oil price movement,which can have significant impact within a short 1 week cycle. For example in 2008, oil price had a spread of USD60 within a short period of 3 months which had a significant impact on companies’ short-term commitment and strategy.

The traditional budgeting institutionalises in companies a set of tools and procedures that lead to a fixed and static annual performance contract between top and lower management etc. it creates an interlocking set of fixed annual plans, typically arrived at by a process of negotiation and assumption, that has few to do with customers and market demand, and that is tied to rewards in a deterministic way (Daum, 2004). Resources and incentives are allocated and set centrally and in advance, regardless of the changes in market condition. Consequently, everyone in the company is focused on making the budget numbers, and not on satisfying customers or beating the competition or reacting to markets changes as fast as possible in order to leverage them as opportunities for growth and for building competitive advantage (Daum, 2004). This budgeting exercise becomes more of an internal role playing game among different business units and managers to ‘look within’ the company and set targets among themselves rather than ‘look outwards’ at the existing market condition and set targets relative to competitors and market.

For example, many companies projected budget has to be redone when oil price move from USD40 a barrel to USD120 a barrel. The same cycle of undoing the budget has to be performed again when oil price falls back to USD40 a barrel. However as budget is already pre-committed and reviewed only at the end of a financial year, managers have to wait till a new financial year to highlight the effect of the changes. By the time this effect is communicated in the new reporting year, the cyclical effect is over and revision to budget and business strategy would have lagged behind the changes.

Fixed annual performance contract should be removed. The applied tools and procedures should be self-adaptive, where customer orientation, entrepreneurship, immediate reaction to market development and customer demands would be a natural behaviour of every employee. The tools should be guiding the business unit and employees towards a more flexible and adaptive system, where employees use their full potential, benefiting the company and themselves and not spending time and resources on gaming and adhering to an outdated budget.

A Budget Serving Too Many Purposes

Traditional budgeting tries to serve too many purposes i.e. a single set of report is used to i) chart long-term strategies; ii) communicate between top management and employees; iii) forecast yearly business volume and expenditure; iv) set future targets; and v) appraise performance of business unit and employees.

It is clear that we have to separate financial forecasting from target setting and performance management as we will never get accurate and honest forecasts if bonuses and performance appraisal of employees are linked with these forecasts (Daum, 2004). This encourages gaming among business units and managers i.e. negotiate a higher budget for cost and lower targets so that they can meet the performance for the year at the expense of the company long-term strategy and competitiveness.

In addition, as quoted in the case study: ‘budgets not only set a ceiling on costs, but also a floor’. The budget constraints hinder decentralised decision-making. It may have controlled the cost but does not truly reflect the value and profit creation that a business unit should be focusing on. For example, a manager might have to incur more costs beyond the allocated budget on certain business activities, which will produce a higher ROCE. However, in order to adhere to allocated budget which is tied to his performance appraisal, he has to forgo the profit creating business opportunities, which is in conflict to the business objective of creating more value for the company and shareholders.

Abandoning Budgets

Borealis replaced the functions of traditional budgeting with a set of tools that allows it to achieve its objectives. Rolling financial forecast, Balanced Scorecard (BSC), Activity-based costing and investment management provide Borealis the following abilities.

Flexibility to adjust investment priorities, policy and volumes in accordance to market opportunities and threats without the need to adhere to a ‘cut-off’ time and ‘investment limits’ set by a budget. This allows investment in the right area which supports corporate strategy and growth in accordance to the changing economic conditions.

A continuous view of performance and financial forecast that is generated using up-to-date information such as prices, exchange rate, volumes etc. This rolling financial forecast allows early warning information that may trigger strategy adaption (Daum, 2004) and also provides a longer term financial analysis to study the need for any change in priorities or need for corrective actions. As forecast is updated quarterly rather than annually, the effect of any changes can be captured and reacted promptly.

Benchmarking business performance, operational efficiency, activity and cost to a relative target, set by market environmental developments and competitors’ achievement. This adaptive and continuous benchmarking encourages efforts to be fundamentally better-than-your-peers by setting relative performance against them and also to improve what you have achieved the previous quarters.

A system of performance management that reward and incentivise employees on a broader perspective instead of just on financial result. Staff will be incentivised to focus on creating values both on short term financial performance as well as longer term strategic drivers of the business e.g. enhancing values to companies’ non-tangible assets such as corporate image.

Decentralised decision making by providing front line people with strategic, competitive and market-based information. Hence they can self-regulate and implement appropriate operational strategy to deal with competitors’ threats, rapid changing business environment and market demand effectively. Control is achieved by holding them accountable for their costs through benchmarking with transparent market information.

Additional Suggestions to Borealis system

Borealis Beyond Budgeting approach has the essence of removing the constraints and time limit set by a budget and put in place a more fluid and dynamic mechanism that encourages company to become a more productive, nimble and adaptive organisation.

Decentralise does not mean No Control

The performance management practices discussed above are consistent with transitioning to an empowered organisation. However, some fundamental decentralisation principles are also necessary to maintain adequate control and avoid unpleasant surprises (Libby et al., 2003). Employee needs the freedom to act, but freedom to act does not mean giving employees a blank cheque. They need to be given boundaries within which to make decisions and also broader base strategic boundaries which have to take into consideration the company’s macro strategic goals. People need the appropriate training and support to act decisively and be able to access timely and complete information to deal with problems and opportunities.

Comparison of Performance

Quantitatively, any applied mechanism to control or to monitor performance has to be relative and not absolute, both in space and in time, and it has to achieve the purpose of reporting the problem areas. A set of relative comparison has to be put in place to quantitatively show and highlight performances relative to the market, the competitors and yourself. For example, if we are looking at the ROCE trend of Borealis from 1998 to 2000, what could be derive from it is that the ROCE had been decreasing over the years. Net sales volume had increased substantially from 1999 to 2000 but operating profit had dropped drastically from 216mil€ to 92mil€. A fall in ROCE might be a general trend of the industry at a period and not because the company is not doing well. A customised set of tools has to be implemented to chart this performance variance, inform and incentivise employee accordingly.

Using another example to illustrate, a comparison of the cost-to-sales percentage changes over the year would have indicated that Sales and Distribution departments are in fact performing well even though there was an absolute increase of cost of 66mil€ (or 25%) (see Exhibit 1) and drop of operating profit by 124mil€ from year 1999 to 2000. The cost/sales decrease from 8.84% to 8.79% (Exhibit 1), which represents a lowering of unit cost-to-sales from year 1999 to year 2000.

When evaluating the performance of Production department, there was an increase in absolute value of 817mil€ (or 35.3%) (Exhibit 1) from year 1999 to 2000, while operating profit only increased 25.7% (Exhibit 1). Unit cost/sale had in fact risen from 73.9% (year 1998) to 77.5% (year 1999) to 83.4% (year 2000) (Exhibit 1) when other departments had registered an improvement over the years. However, this relatively poor performance has to be compared to the existing market parameters i.e. is Dow/UCC doing better than 83.4% of cost/sales? If so, Borealis management needs to review the internal activity-based costing again for the production department.

Target Variance as KPI

Target variance should be set for various business units. Assessment, which is relative to market performance, is done on the variances to effectively distinguish the high performance business units from the low performance ones. The management can utilise this to focus on the problem areas.

For example, Sales and Distribution cost/sales has improved while profit level has drop. The rolling forecast or target for the next few quarters should show a positive variance of improvement relative to the market and what you have achieved from the previous quarters.

Performance measurement and incentives paid should not be tied to an absolute number e.g. KPI based on return of assets i.e. EBIT/NA *. This is to effectively exclude the exogenous market factor and the misalignment of objectives between different business units. Sales would want to increase EBIT by dishing out discount to achieve a higher KPI while management might want to maintain competitiveness of the group by investing in low yielding assets for sustainability of market leadership. The incentivising method will have to take into account the importance of collective team effort, in order to steer the direction of achieving the target performance as a group rather than as different business units with differing objectives.


Is Beyond Budgeting Model for everyone?

In principle, this model should work for any organisation. The objective of the various tools implemented has the in principle of, get better and beat the competition, not negotiate a budget and compare yourself to it (Daum, 2004). The various tools that are developed and implemented for measuring and rewarding can come in any form, but the essence of it all is to look ‘outwards’ at the competitors and not ‘inwards’ at a rigid committed numbers.

* EBIT – Earnings before Interests and Taxes

* NA – Net Assets


Audit Planning And Risk Assessment Accounting Essay

Chapter 6

[LO1] The audit plan documents detailed information about audit procedures to be performed on the engagement.


[LO2] Scaling the audit refers to fitting the audit work into the proper context in terms of the engagement’s size, environment, and complexity.


[LO2] Statutory audits are required on all integrated audits performed in accordance with international accounting standards.


[LO2] An audit plan will be the same regardless of whether the client company outsources its financial activities to a service provider or conducts the activities in house.


[LO3] Materiality is a measure of magnitude; yet, it is affected by both quantitative and qualitative factors.


[LO3] Materiality is first set at the account balance level and is then aggregated to the financial statement level.


[LO4] The components of the fraud triangle include incentive, opportunity, and rationalization.


[LO5] A client company’s new or modified accounting information system requires more audit effort to understand the new system and assess its design and operating effectiveness.


[LO5] An audit strategy will focus on going concern issues for a client company operating in an industry which has experienced a recent market downturn.


[LO6] Computers are the primary resources used on an audit.


[LO6] A highly effective audit would have all of its testing performed at an interim Øلمؤقتة date.


[LO7] An IT specialist may be used to inspect systems documentation and perform other procedures for an audit engagement when the client company uses new, emerging technology.


[LO7] Preliminary time budget information is compared to actual time worked and is used for purposes of billing, performance evaluation, and future bidding.


[LO8] Auditors test the operating effectiveness of those controls that are intended to prevent and detect material misstatements.


[LO8] Tracing refers to looking at the supporting documentation for a recorded number.


[App.A] A principal auditor may share responsibility for an audit opinion when another auditor performs all of the audit procedures for subsidiary of the client company.


[App.A] For accounts that involve significant estimates, require a high degree of judgment, or are susceptible to management override of controls, a principal auditor may completely rely on the work of others in determining whether those accounts are materially misstated.


Multiple Choice

[LO1] Planning is a continuous process that must occur throughout the audit engagement because

(a) disconfirming information is likely to arise.

(b) the audit committee is likely to point out flaws in the original audit plan.

(c) all information affecting the audit occurs concurrently.

(d) auditor skill levels are continuously fluctuating.


[LO1] Development of the audit strategy includes all of the following activities except

(e) specifying the work that has to be performed.

(f) specifying the timing of the work to be performed.

(g) documenting an audit planning memorandum.

(h) defining initial estimates of audit risk and materiality.


Risk assessment points the auditor to the important areas of the client’s operations and financial statements in order to

(i) understand important areas of the client’s operations and financial statements.

(j) identify potential problems.

(k) determine what needs to be accomplished during the audit.

(l) all of the above


LO1,2] Which of the following is not a consideration for an auditor while “scaling” the audit?

(m) The client company has multiple locations throughout the region.

(n) Another firm is responsible for auditing one of the client’s out-of-town subsidiaries.

(o) An outside service provider prepares all of the client company’s payroll accounting records.

(p) The client company plans to hire and develop employees so that it can prepare its payroll accounting records in-house within the next two years.


[LO2] An experienced audit team will begin planning the audit before it knows all the specific information about a particular client company because

(q) experienced auditors know the general framework of what needs to be done on any audit.

(r) auditors experienced in the client’s industry understand the activities and risks of the industry, which gives them an understanding of the important financial statement accounts and ICFR areas.

(s) auditors experienced with this client company have already gained quite a bit of information from the client acceptance or continuance processes.

(t) all of the above


[LO2] Scaling the audit refers to

(u) weighing the risks associated with the client’s susceptibility Ù‚Øبلية to fraud.

(v) preparing evidence for an outside service provider.

(w)fitting the audit work to the specific characteristics of the client.

(x) delivering products or services as contracted in the engagement letter.


[LO2] Deliverables refers to the

(y) timing of the auditor’s acceptance of the client company.

(z) products and services as contracted in the engagement letter.

(aa)degree of correlation between the audit work to the specific characteristics of the client.

(bb)auditor’s experience in the client’s industry.


[LO2] The scope of the engagement depends upon all of the following considerations except the

(cc) presentation of the client’s accounting information.

(dd) use and importance of IT to the client’s activities and ICFR.

(ee) ability to use audit evidence performed by the client’s internal auditors.

(ff) timing of the client’s fiscal year-end.


[LO2] The scope of an audit team’s work will be more extensive

(gg) for a first year audit engagement as opposed to a continuing audit.

(hh) when internal auditors perform work to be used as evidence by the external auditors.

(ii) when a user company’s auditor relies upon a report provided by an auditor of the service provider.

(jj) for a company with effective entity-level controls.


[LO3] An internal control that is ineffective to the extent that it might not prevent the financial statements from being materially misstated is referred to as a

(kk) significant risk

(ll) substantive error

(mm) material weakness

(nn) tolerable misstatement


[LO3] Which of the following would not be an appropriate benchmark مرجعية to use in setting financial statement-level materiality?

(oo) a percentage of total revenue

(pp) a percentage of total assets

(qq) a percentage of current liabilities

(rr) a percentage of profit from continuing operations


[LO3] The materiality threshold عتبة for each account balance or class of transactions is called

(ss) tolerable مقبولة misstatement

(tt) material assertion تأكيد

(uu) substantive rule of thumb

(vv) account deficiency


[LO3] For purposes of an integrated audit, materiality is assessed within the context of users who have

(ww) appropriate knowledge of business and economic activities

(xx) an understanding that financial statements are prepared and audited to levels of materiality

(yy) the ability to make appropriate economic decisions on the basis of information in the financial statements

(zz) all of the above


[LO4] Which of the following is not an area of interest for anti-fraud controls?

(aaa) journal entries and adjustments made in the end-of-period financial reporting process

(bbb) related party transactions

(ccc) auditor credentials وثØئق Øلتفويض

(ddd) significant management estimates


[LO4] An example of an incentive/pressure for fraudulent financial reporting risk factor is

(eee) a threat to the client company’s financial stability caused by rapid growth compared to that of other companies in the same industry.

(fff) significant operations located across international borders in jurisdictions where differing business environments exist.

(ggg) inadequate job applicant screening processes for employees with access to cash.

(hhh) ineffective communication of the company’s ethical standards by management.


[LO4] An example of an opportunity for misappropriation ØختلØس of assets risk factor is

(iii) compensation Øلتعويض inconsistent غير متنØسقة with expectations.

(jjj) lack of complete and timely reconciliations of assets.

(kkk) management’s practice of committing to creditors to achieve unrealistic forecasts.

(lll) known history of violations of laws and regulations.


[LO5] Significant developments within the client that affect audit strategy include:

(mmm) A change in ownership and/or capital structure has occurred.

(nnn) Acquisitions or discontinued operations have recently occurred.

(ooo) The accounting information systems have been modified.

(ppp) All of the above


[LO5] Significant developments in the client’s external environment that affect audit strategy include:

(qqq) Industry competition has increased.

(rrr) Acquisitions or discontinued operations have recently occurred.

(sss) A change in ownership and/or capital structure has occurred.

(ttt) All of the above


[LO5] Going concern issues may arise when:

(uuu) Acquisitions or discontinued operations have recently occurred.

(vvv) The accounting information systems have been modified.

(www) The economy has negatively impacted the client company.

(xxx) Changes in applicable accounting standards affect the client company.


[LO5] When audit clients acquire new, more sophisticated IT systems,

(yyy) The audit strategy will not be impacted as long as the duties of accounting personnel are primarily unchanged.

(zzz) Auditors with advanced IT knowledge may need to be added to the audit team.

(aaaa) The design of internal controls will be considered ineffective until those new controls have been tested.

(bbbb) The timing of the auditor’s procedures for reviewing interim financial statements will be accelerated.


[LO5] One of the first procedures performed by auditors during on-location audit work is the

(cccc) Development of the firm’s audit strategy.

(dddd) Preparation of the audit report.

(eeee) Design of the audit plan.

(ffff) Establishment of an understanding of the company’s ICFR systems.


[LO5] Auditors may obtain information about a client company during other engagements conducted for the client such as

(gggg) audits of a subsidiary or other related party entity.

(hhhh) reviews of quarterly financial statements filed with the SEC.

(iiii) examinations of information included in a registration statement.

(jjjj) All of the above


[LO6] Which of the following would not be likely to participate in an audit planning meeting?

(kkkk) The core audit engagement team.

(llll) The audit team’s tax manager

(mmmm) The audit team’s partner for IT

(nnnn) The chair of the client’s audit committee.


[LO6] Which of the following items are included in the audit planning meeting?

(oooo) brainstorming about fraud risks

(pppp) establishing responsibility for preparing the financial statements

(qqqq) establishing responsibility for monitoring of internal controls

(rrrr) preparing the engagement letter.


[LO6] Which of the following items would an audit engagement partner likely communicate with the members of his or her audit team during a planning meeting?

(ssss) Responsibility for notifying appropriate individuals of any significant issues or difficulties encountered during the audit.

(tttt) Identification of the type of audit report to be issued.

(uuuu) The need to complete the quarterly review before communicating with any tax professionals assigned to the audit engagement.

(vvvv) Responsibility for notifying the audit committee and internal auditors of the firm’s specific audit approach.

[LO6] The audit planning meeting must

(wwww) take place before the client acceptance decision is made.

(xxxx) be attended by the entire core engagement team and the predecessor auditors.

(yyyy) establish an understanding among the members of the audit team about the objectives of the audit.

(zzzz) prepare the internal auditors for the work they will be asked to perform to supplement the auditor’s procedures.


[LO6] The document that presents all of the issues discussed as part of audit strategy is the

(aaaaa) engagement letter

(bbbbb) quarterly financial statements

(ccccc) audit planning memo

(ddddd) risk assessment memo


[LO6] Which of the following items in not typically documented in an audit planning memo?

(eeeee) audit engagement objectives and deliverables

(fffff) the auditors’ understanding of ICFR and IT systems

(ggggg) planned use of the work of others during the audit

(hhhhh) results of the quarterly review process


[LO6] What is the primary resource used on an audit engagement?

(iiiii) the client’s IT systems

(jjjjj) the auditor’s IT systems

(kkkkk) human resources of the audit firm

(lllll) the client’s internal auditors


[LO6] To properly instruct and review the work of audit team members, the supervising auditor must:

(mmmmm) keep abreast of accounting and audit issues and manage differences of opinion among team members regarding audit findings.

(nnnnn) obtain instruction from the chair of the audit committee regarding the objectives of the audit engagement.

(ooooo) communicate with the predecessor auditor regarding differences of opinion regarding prior year audit findings.

(ppppp) all of the above


[LO6] It is important for auditors to be on-location on the last day of the client’s fiscal year when the client

(qqqqq) operates a restaurant that does a considerable amount of business on New Year’s Eve.

(rrrrr) has significant inventory activities such that the receipts and shipments of inventories at year-end should be observed.

(sssss) relies upon electronic verification to indicate the timing of transactions.

(ttttt) refuses to pay overtime rates for the audit team during its busy season.

[LO6] Which of the following is not a valid reason for the performance of audit procedures at an interim date?

(uuuuu) More time is available for management to correct problems identified by interim audit testing.

(vvvvv) The client company does not retain the records that are needed as audit evidence through the year-end time frame.

(wwwww) Most controls and transactions cannot be audited during busy season.

(xxxxx) More time is available for the auditors to concentrate on problem areas, if needed.

[LO6] If audit tests are performed at an interim date, supplemental audit evidence:

(yyyyy) is not necessary because the same controls are assumed to be in place that resulted in the balances tested during interim.

(zzzzz) is still needed regarding the account balances between the interim testing date and the end of the fiscal year.

(aaaaaa) is obtained from the predecessor auditor, when needed to corroborate any changes in the client’s ICFR systems.

(bbbbbb) is the responsibility of the audit committee, as it would be inefficient for the auditors to focus on a single audit area during multiple time periods.

[LO6] When audit tests are performed at an interim date, the auditor must

(cccccc) obtain a letter from management to confirm the continued performance of internal controls and accuracy of the year-end balances.

(dddddd) perform roll forward audit procedures to determine whether a control continued to perform the same way through year-end.

(eeeeee) reconcile account balances tested at an interim date with the year-end balances in the same accounts.

(ffffff) Both (b) and (c)

[LO7] Which of the following is an example of a specialist who might assist an audit engagement team on a high-risk audit area?

(gggggg) actuary

(hhhhhh) banker

(iiiiii) internal auditor

(jjjjjj) tax accountant

[LO7] An IT specialist may be involved in an audit engagement to assist with any of the following except

(kkkkkk) inspecting systems documentation.

(llllll) inquiring of company personnel about how the processes are carried out and how IT controls are designed.

(mmmmmm) preparing the IT planning memo.

(nnnnnn) planning the tests of IT controls.

[LO7] Which of the following is not a relevant consideration in deciding whether an IT specialist is needed:

(oooooo) the client company’s capital structure

(pppppp) the complexity of IT controls and systems

(qqqqqq) the use of emerging technologies

(rrrrrr) the use of data by multiple systems or processes

[LO7] Audit firms use time budgets for

(ssssss) indicating the amount of time expected for the various levels of auditors for each audit area.

(tttttt) tracking and reporting time spent on each audit area.

(uuuuuu) billing and bidding and future engagements.

(vvvvvv) All of the above.

[LO7] Time budgets are typically

(wwwwww) approved by the audit committee

(xxxxxx) detailed by areas of the audit

(yyyyyy) signed by the predecessor auditor

(zzzzzz) All of the above.

[LO8] Auditors test the operating effectiveness of internal controls only if they

(aaaaaaa) are effectively designed to prevent or detect material misstatements.

(bbbbbbb) address multiple risk factors.

(ccccccc) are applied in conjunction with other controls to address a single risk factor.

(ddddddd) cause susceptibility to material misstatements.

[LO8] Substantive audit procedures are performed so that the auditor may identify

(eeeeeee) deficiencies in the design or operating effectiveness of internal controls.

(fffffff) weaknesses in the effectiveness of the client company’s audit committee.

(ggggggg) material misstatements in the client company’s financial statements.

(hhhhhhh) Calculations and controls that mitigate the risk of fraud.

[LO7] Which of the following is not a form of audit evidence?

(iiiiiii) recalculation

(jjjjjjj) reperformance

(kkkkkkk) repetition

(lllllll) inquiry

[LO7] ICFR tests to provide evidence on whether the controls can be relied upon for the financial statement audit can be performed

(mmmmmmm) only during year-end because they must be performed at the same time as financial statement audit procedures.

(nnnnnnn) only during interim because they must be performed at the same time as financial statement audit procedures.

(ooooooo) at any time the evidence is available, as long as the entire period of reliance is evaluated.

(ppppppp) at any time after the substantive procedures have been completed, so that the opinion on financial statement misstatements is not superceded by the opinion on the effectiveness of controls.

[LO8] Sufficient evidence may be provided without examining all of the transactions in an account balance is the auditor uses well-designed

(qqqqqqq) sampling approaches

(rrrrrrr) internal control procedures

(sssssss) inspection techniques

(ttttttt) assertions related to the fair presentation of account balances.

[LO8] The nature, timing, and extent of audit needed audit tests will depend upon the answers to each of the following questions except TYPO / Grammar – suggest deleting highlighted words

(uuuuuuu) How could a material misstatement happen?

(vvvvvvv) What internal controls has the client implemented to address potential misstatements?

(wwwwwww) How might internal controls fail such that a material misstatement occurs?

(xxxxxxx) How many times have material misstatements been undetected?

[LO8] When inquiry, observation, and inspection are all used to trace a transaction as it is initiated, authorized, processed, and recorded, the process is called a(n)

(yyyyyyy) inspection

(zzzzzzz) walkthrough

(aaaaaaaa) assertion

(bbbbbbbb) analytical procedure

[LO8] If an audit program calls for the auditor to interview the client about an important control activity, this is an example of which type of audit procedure?

(cccccccc) reperformance

(dddddddd) tracing

(eeeeeeee) inspection

(ffffffff) inquiry

[App] Which of the following is not a form of evidence obtained through the auditor’s direct personal knowledge?

(gggggggg) observation

(hhhhhhhh) reperformance

(iiiiiiii) inquiry

(jjjjjjjj) inspection

[App] A principal auditor may share responsibility for an audit opinion with

(kkkkkkkk) another independent auditor who has performed a significant portion of the audit work.

(llllllll) the client’s internal audit staff, if they provide significant assistance to the audit team.

(mmmmmmmm) a specialist who provides expert advice on the valuation of inventory.

(nnnnnnnn) an attorney who provides expert advice on a pending legal matter.

[App] Which of the following is not an indicator of competence that is relevant to an auditor’s evaluation of other individuals performing a portion of the audit work?

(oooooooo) professional certification

(pppppppp) professional experience

(qqqqqqqq) level of education

(rrrrrrrr) access to the board of directors

[App] If internal auditors provide direct assistance to the external audit team, the independent external auditor must

(ssssssss) reperform all of the work provided by the internal auditors.

(tttttttt) supervise and evaluate the work performed by the internal auditors.

(uuuuuuuu) refuse to issue an audit opinion, due to a lack of independence.

(vvvvvvvv) indicate a division of responsibility in the performance of the audit.


[LO3] Following are the planning steps involved in considering materiality in a top-down approach to planning for tests of controls. Number the items in from 1 (top) through 6 (bottom) to indicate the proper top-down sequence of the steps.

___ Identify risks that could cause material misstatement of relevant assertions in a significant account.

___ Set financial statement level materiality

___ Design audit procedures addressing controls

___ Investigate controls addressing risks

___ Identify significant accounts

___ Determine relevant management assertions for significant accounts and set materiality at the account level

Short-Answer Questions and Exercises

[LO4] For each scenario below, indicate which element of the fraud triangle is present.

(wwwwwwww) Large amounts of cash are on hand.

(xxxxxxxx) Management failed to correct ICFR deficiencies in a timely manner.

(yyyyyyyy) The organizational structure is complex and lines or authority are unclear.

(zzzzzzzz) Future employee layoffs are expected.

(aaaaaaaaa) Employee behavior suggests dissatisfaction with the company.

(bbbbbbbbb) Restrictions on the auditor limit access to evidence.

(ccccccccc) Management attempts to influence the scope of the audit work.

(ddddddddd) Industry factors threaten the company’s financial stability.

(eeeeeeeee) Significant related party transactions are audited by another firm.

(fffffffff) The personal financial situation of management is threatened.

[LO6] Indicate the preferred timing during the audit process for performing each of the following procedures. Explain your choice.

(ggggggggg) observing the client’s physical inventory

(hhhhhhhhh) testing of the operating effectiveness of ICFR

(iiiiiiiii) observing the shipment and receipt of inventories

(jjjjjjjjj) substantive testing of property and equipment account balances

(kkkkkkkkk) roll forward procedures

(lllllllll) testing of the design effectiveness of ICFR

(mmmmmmmmm) examining adjustment made during the course of preparing the financial statements

[LO8] What different audit procedures (forms of evidence) are appropriate for financial statement audits that are not applicable for testing of controls?

[LO8] For each of the following audit procedures, indicate the type of evidence that is involved.

(nnnnnnnnn) reading a sales contract

(ooooooooo) determining whether a sales invoice is properly included in the sales journal

(ppppppppp) communicating with management about changes in accounting personnel

(qqqqqqqqq) watching the cashier perform the daily closing procedures

(rrrrrrrrr) verifying the mathematical accuracy of discounts included on the sales invoice

(sssssssss) verifying the accuracy of the sales journal by reference to a supporting shipping document and sales invoice

(ttttttttt) receiving verification from an independent third party

Suggested Solutions for Test Bank Questions – Chapter 6



















Multiple Choice






















































Short-Answer Questions and Exercises

a. Large amounts of cash are on hand. – Opportunities

b. Management failed to correct ICFR deficiencies in a timely manner. – Attitude/Rationalization

c. The organizational structure is complex and lines or authority are unclear. – Opportunities

d. Future employee layoffs are expected. – Incentives/Pressure

e. Employee behavior suggests dissatisfaction with the company. – Attitude/Rationalization

f. Restrictions on the auditor limit access to evidence. – Attitude/Rationalization

g. Management attempts to influence the scope of the audit work. – Attitude/Rationalization

h. Industry factors threaten the company’s financial stability. – Incentives/Pressure

i. Significant related party transactions are audited by another firm. – Opportunities

j. The personal financial situation of management is threatened. – Incentives/Pressure

k. observation of the client’s physical inventory should be performed at the end of the client’s fiscal year so that the financial statement balances can be verified.

l. testing of the operating effectiveness of ICFR should be performed at interim, as internal controls are expected to be operating and subject to evaluation at any point. Also, the interim testing will provide time for the auditor to spend more time on related testing if problems are encountered, and management will have more time to remedy the problem before the end of the fiscal year.

m. observation of the shipment and receipt of inventories should be performed at the end of the client’s fiscal year so that the auditor can determine that the transactions were recorded in the proper period.

n. substantive testing of property and equipment account balances should be performed during the year-end testing phase, as final account balances. However, it is also possible to audit these balances during an interim testing phase and later perform a roll forward to year-end.

o. roll forward procedures must be performed during the year-end testing phase, as final account balances are needed in order to evaluate the change during the period from interim testing through the date of the client’s fiscal year-end.

p. testing of the design effectiveness of ICFR should be performed at interim for efficiency reasons. See b. above.

q. examining adjustment made during the course of preparing the financial statements must be performed during year-end testing (after the financial statements have been prepared).

Both tests of controls and substantive tests of financial statement account balances involve inquiries, inspection of documents, observation of operations, and reperformance of controls. However, the following additional procedures are available for audits of financial statements:

i. inspection of tangible assets

ii. external confirmations

iii. recalculations

iv. analytical procedures

r. reading a sales contract – inspection of documents

s. determining whether a sales invoice is properly included in the sales journal – inspection of documents; tracing

t. communicating with management about changes in accounting personnel – inquiry

u. watching the cashier perform the daily closing procedures – observation

v. verifying the mathematical accuracy of discounts included on the sales invoice – recalculation

w. verifying the accuracy of the sales journal by reference to a supporting shipping document and sales invoice – inspection of documents – vouching

x. receiving verification from an independent third party – external confirmation


The Impact On Marks And Spencer Key Stakeholders Accounting Essay

Corporate governance means that the companies which are administrated, controlled and directed. It performs how to set and achieve the objectives of the company, how to measured and monitored the risk and how to get the optimized performance. It creates new values to the companies through innovation and gives the control and responsibility appropriate with the risks concerned. It is a main factor to improve the organizational performance and sustainability.

Corporate governance reforms should be viewed as an opportunity to improve internal compliance and communications systems which will, in turn, improve the potential profit-making ability of the company and its competitive status in an ever-increasing global market place. The most successful governance-improvements are therefore not undertaken sorely in response to dictates from regulators or pressure from investors. They are undertaken to improve the system of corporate governance within the corporation the system of accountability with all its checks and balances between management, shareholder and the board in the pursuit of yielding greater shareholder-value.

The major players in the area of corporate governance can be classified into two groups: 1. External, and 2. Internal. Externally, the pace of corporate governance is set by the Government, investors, financial institutions and customers. Government as the regulator sets the legal, financial and business framework which defines the scope and extent of corporate governance. Internally, corporate boards, the shareholders and employees within the corporation decide how companies are directed and controlled. Corporate governance is a broad and somewhat vague terms which is used to refer to a range of corporate controls and accountability mechanisms designed to meet the aims of all the stakeholders. It is the process of direction, supervision and accountability of corporations. It concerns the theories and practices of the board of directors and its relationships with the shareholders of the company. Corporate governance relates to laws, procedures, practices and implicit rules that determine a company’s ability to take improved managerial decisions.

Entrenching sustainable development within corporate governance have need of companies to recognise and identify with their social impact and environmental and responsibilities and to act accordingly. The process requires using the fact and experience of the management and others in the concern to determine every task related to issues, liabilities, and performance.

Launching integrate sustainability corporate governance should sketch the financial with social accounting and reporting through the audit to know the complete scope of the companies of activities. The course of sustainability and corporate governance meets with the new demands and tasks. It holds balance between social and economical goals and between joint and individual goals. The framework of the corporate governance is to utilize the resources. The success of the sustainability depends on to get the right issues and the right voices. It portrays to understand the social and environmental goals. here in this research we are going to assess the corporate governance of Marks and Spencer and the impact on key stakeholders.


To examine the quality of the corporate governance and the impact on marks and Spencer key stakeholders.


what is the core objectives of the company in the present scenario ?

how the organization tackles sustainability with the governance?

what are the roles played internally?


A literature review is a text that intends to review the critical points of present acquaintance on a topic. Its ultimate goal is to bring the reader up to date with current literature on a topic and forms the basis for another goal, such as a justification for a the future research in the area.

A good literature review is charecterised by: a logical flow of ideas; current and relevant references with consistent, appropriate referencing style: proper use of terminology; and an unbiased and comprehensive view of the previous research on the topic. It helps with all types of assignments as well.

The Impact of corporate Governance on auditor independence: A study of audit committees in uk listed companies by Ismail Adelopo in 2010 this research speaks about the changing roles of the audit committees these have to be recognised and incorporated in the regulatory framework for corporate governance in organisations.

A case study analysis report of Marks and Spencer plc by Emma Bunce gives us idea about the problems in Marks and Spencer.

Best environment practices of Marks and Spencer : A Case Study by Dr. Leigh Sparks gives us wider knowledge about the execution plans carried out in making the goals.

Mainstreaming the Corporate Social Responsibility Agenda: A change model grounded in theory and practice Francois Maon and Valerie Swaen gives us idea about corporate social responsibility.


UK’s leading retail shop is Marks and Spencer. It provides home products, food, clothing and financial services. People shopping nearly 1.3 million in everyday in above 375 M&S stores in the UK and also it manages 28 territories. The company runs with two units such as general merchandise and food. The general merchandise unit classified into menswear, lingerie, home, women’s clothing and beauty. These units contributes the vision through value, quality, trust and innovative service.

These units develops their own CSR strategy based on brand value. Strategies identified from a mixture of customer research, stakeholders, government, non-government organisations etc. and action plan developed by the stakeholders expectations and pressures. The issues tackled in the strategies are grouped into three areas such as people, products and community. The CSR strategic approach builds good relationships between the employees and the suppliers. It is focusing to enhance and maintain trust. It launches some initiatives on the environment, employability and on health. M&S has taken action to improve its impact on society by means of Ready for Work [1] . Philosophy of M&S is ‘helping others to help themselves’. Promoting the highest standards of corporate governance with the help of group secretary and to build sustainable business. Leading the board meeting and have Agenda covers risks, strategies and performance of the business. Ensuring right things in a right time. Facilitating on business risk and strategy.


Most of the materials in this research are taken from secondary resources such as Journals, Books, Annual reports and the Internet, Information through Public Report, Bulleting and other Printed Resources supplied by the Company. No primary sources has been used in this research. Secondary data are those which have already been collected by someone else and which have already been passed through statistical process.



The core objective of the board is to build a sustainable achievement of the business by the means of profitable development and consistent. UK corporate governance code 2010 provides the principles of the UK companies enlisted in the London Stock Exchanges. Diversity of the board’s policy includes measurable objectives to implement the policy and to achieve the progress will be reported. M&S complied with all provisions of the compliance code with exception in the year ended 31st March, 2012. The board not meet during the short period so it proves that corporate governance not impacted.


Each and every company must be have an efficient and effective board is responsible for the victory of the company. The governance framework adopts boards responsibilities in the following:

providing guidance of the company within the effective control and practical framework which gives risk assessment and management

setting up planned aims and to ensure the required human and financial resources to focus its performance with the effective objectives

ensuring the standards and values of the companies that to set up duties and responsibilities of the shareholders and others

In the appointment of the directors, they are insisted to do and act to improve the development of the company and the benefits of their members. To satisfy this duty, they should regard the positive impacts of the decision making not in the short term, relationships between customers and suppliers, employees interests, the consequences of the environment, desire to sustain the high reputed standard of the business and to need good communication among the company members.

The board requirements to logically estimate the environment and impact of the sustainability problems looks the company, as fine as where sustainability wants to be measured in next of kin to problems such as sequence forecasting and performance assessment.

Boards are a vital part of governance composition and, at the same time as by way of other governance system, need to hold sustainable growth. There is requiring making sure that panel have the capability to guide with honesty and enjoy the right ability to build difficult resolution and handle danger.

The influences of the wider stakeholders obviously need to survive integrated in the governance method. Employee council have partaken in boards used for a mass of years; perchance the most fighting fit identified cases are during Japan and Germany. But, evidently there is a necessitate to appear beyond member of staff council alone and charily select non-executive chief with sustainability proficiency in region such as the surroundings, health and security, consumer relatives or human property, as well as persons from non-business conditions who can carry valuable outlook into the meeting room. These talent and view can permit companies to estimate key strategic sustainability problems more systematically and watch their act more successfully. Non-executive directors want the exact mix together of proficiency, experience and special qualities to enable them to advise, monitor and challenge effectively. Organisations need to be optimistic to cast the network widely in looking for such persons and to build up a deeper considerate of what ability are mandatory. The board wants to realistically estimate the personality and importance of the sustainability problems facing the company, as well as where sustainability needs to be measured in relation to the current problems such as progression planning and performance estimatation.

The Board consist of nine directors which includes the Chairman, Chief Executive, two executive directors and five non-executive directors who are measured to be of self-governing character and conclusion. This conform with the secret code as readily available is a balance of executive and non-executive directors permit for fair and decision-making. The Non-executive directors have provision concurrence with the company for an early three-year term after which they seek out re-election.

The Group also has superior independent directors who offer a communication channel between the Chairman and Non-Executive directors. The Board meets ten times in every year and determines the on the whole group strategy; control its accounting, operating plans and remuneration policies etc. The Board have the committees are the Audit, Remuneration and Nomination Committees.

Audit Committee:

The Marks and Spencer audit committee includes four independent non-executive directors. At least one member of the committee has fresh and applicable financial experience in accordance with the combined code.

It met four times in the year and it functions to present independent guarantee by supervise the honesty of financial statements to shareholders, make another study of effectiveness of internal control and threat management systems; and sustain an appropriate correlation with the company’s outside auditors, Pricewaterhouse Coopers (PwC) committee also reassessed the self-government and neutrality of the outside auditors.

Remuneration Committee:

The Marks and Spencer payment committee covers four independent non-executive directors. It meets eight times in a year. Its position is to suggest to the board a suitable remuneration scheme and make certain that executive directors are remunerated for individual charity. The remuneration of Non-executive directors is resolute by the Chairman and Executive directors.

Nomination Committee:

M&S has a official nomination committee prepared by the Chairman, Chief Executive and five non-executive directors who meet once a year and ensuring that suitable measures are in place for nomination, selection and evaluation of directors. They think about the balance of membership and necessary unify of skills, knowledge, and experience of the Board.

Approach to Corporate Social Responsibility (CSR):

M&S have changed its attempt in meeting socio environmental tasks. They take action to customers ask for to supply them with information on CSR performance by initiation the ‘Look behind the label’ movement. This is extremely noticeable advertising and interactions movement planned tell consumers the span they go to certify that the whole lot they wholesale is produced reliably. They shaped the Plan A which is a five-year, £200m ‘eco-plan’ incorporated into its day-to-day action in which they prepared a 100 assurances across five areas. They aimed to become carbon unbiased, dispatch no squander to landfills, reduce wrapping by 25% and give confidence recycling, utilize sustainable raw materials, work strictly with home communities using the ‘Marks and Start’ work understanding programme. This intention who facing employment challenges i.e. homeless and disabled persons [2] .

The Group also bring in the just partner scheme to assist progress lives of people and local communities. They sustained Breakthrough Cancer Campaign serving to hoist up to £6m; and also supported Prostate Cancer charity to raise £90,000 in funds and responsiveness for the disease.

Marks and Spencer integrated in the Dow Jones Sustainability and FTSE4 Good Indexes and status 20th with a attain of 95% in Business in the Community Corporate Responsibility (BiTC CR) index.

Proficient stakeholder advice-giving panels can also assist bridge the opening between an organisation’s stakeholder commitment and its supremacy, by bringing professional together with senior panel. Companies are all the time more using connoisseur panels to warn how to respond to budding socio environmental problems in a way that is intentionally aligned to the organisation’s trade model. The reality of a committee in charge to the board permit specific problems to be walk around in more strength than is achievable at board stage, as critical responsibility remainder with the board as a totality. Everywhere this team exist it is critical that they are convincingly integrated into the usual governance composition.

King II is the shortened name for the King details on Corporate Governance for South Africa published 2002. It pursues a 1994 report normally famous as King

I. Corporation scheduled on South Africa’s JSE Securities Exchange having complied with King II.

It is a position of doctrine. It achieves not determine a comprehensive course of accomplishment. It shapes that the board is accountable for the progression of threat management and that it be obliged to decide the company’s desire and broad-mindedness for risk. The board should ensure that review of the development and result of key hazard is carried out yearly. And, significantly, hazard management information must be release annually. It is setting out the subsequent seven features of good corporate governance such as discipline, transparency, self-government, accountability, responsibility, fairness and social accountability.

The board of M&S brand guides the relationships of the stakeholders. Right thing in a right time with right way will attain the protected future.

M&S governance also focusing nook and corner of the business. Good governance produces good business and develops long-term performance.


The Chairman is accountable in the headship of the board and to ensure effective role in all aspects. The Chairman’s commitments are revealed to the board before getting the appointment. Members of the board helps to develop strategic proposals.

The chairman motivating the directors to update their knowledge and skills. Meeting location, legal information and up to date governance and customers views reviewed by the shareholders.

Chairman evaluates development needs and training in the annual general meeting. He collects information in the form of clear, accurate and timely with the gradual update of the business. Head of the corporate governance and the group secretary carried out accountability of the governance. Governance group comprises internal audit, the company files and documents, insurance, pensions and risks.

Board of members reviewed board evaluation in the last year. the board establishes professional advice in the appropriate time to the committees. Promotion of governance has dealt by the group secretary.

Governance activities in M&S is dedicated to the best in practice. It governs benchmarking, effectiveness and performance for ensuring the future development. In every three years the board has been conducting external review and feedback from the new appointments. The board and its committees sets out the annual report. Collected information resulted in year 2012-13 which deals with core spots of people development and succession, regular commitment with shareholders, body representatives, disclosure and transparency, training, skill and knowledge of the directors, risk bearing, risk tolerance and framework of the board conversation and carry on analysis.

The chairman revealed the individual performance and objectives. Remunerations reviewed by the remuneration committees. Ffion Hague has reviewed again the governance reliability in the year of 2011-12. All directors insisted to submit for re-election in the annual general meeting in 2012. Biographies of the directors has given in the annual report pages 40 and 41. The board must present company’s prospects and position clearly. The board pertains the reliable approach in the public reports.

In the annual report pages 72 and 73 presents what are the responsibilities of the all directors in the preparation of final accounts and auditor’s report. In order to explain the innovative values of the shareholder dealt in the annual report pages 2 to 37. Going concern statement of the directors has given in the page 72 in the annual report is based on the projections and forecasting cash flows.

The board is accountable to shaping the important strategic objectives and its nature. The board must obtain sound internal control and risk management system.

The primary role of the nomination committee is ensuring the suitable procedure are nomination, selection, training and evaluation. This committee analysis the Board’s structure, diversity, size, succession needs and composition. There to keep required knowledge, skill and experience of the board. It formally meets five times a year. Each appointment considers time and diversity of new policy experiences.

The Chairman takes the important role to improve and sustain the business with the great accountability. He ensures some of the parts of board with the non-executive act as ‘critical friends’ to Chief Executive Marc Bolland and it supports the formulation and execution strategy; bringing perspectives with holding knowledge, independence and experience; seeking decisions and views of the management; acting responsibility to meet sure accountabilities to wider stakeholders and shareholders; and diversifying the recommendations with the right of experience, skills and background.

The M&S board have met ten times in the year of 2011-12. It has planned for meetings at least one and half years in advance in the financial year. The board of members determines on the whole creation or innovation, disposal or acquisition of corporate assets; how to protect and develop the brand; matters related to public desires and relating to statutory accounts; what are the important alterations in the policy which relates to account, capital, dividend and also determines indicators key performance, operating plans and policy remuneration structure.


Searching the appropriateness of non-executive directors in perceptive the materiality of non-financial problems is critical.

Institutional shareholder and fund executive have a liability to produce long-term assessment on behalf of their shareholders, the person investor, savers and pensioners for whom they are eventually working. They must insist that the concern they invest in lay adequate resource into initial governance system that distribute long term importance. Shareholders ought to take governance into financial credit as part of their task decision-making.

Institutional shareholder and other investors need to know what questions they must be invite boards. For instance, does the panel have the acquaintance and competencies are essential to comprehend the sustainability inferences of the current market and board works reflect the direction of the prospect strategy? Inquiring the aptness of non-executive directors in accepting the materiality of non-financial problems is vital. Eventually investors call for to request if the board and human being are conveyed. Element of this is launch if governance get together international values. The case under indicates the feedback of shareholder as the retort.

Marks & Spencer flashed a angry reaction from large institutional shareholders in 2008 after declare that it was come together the responsibility of chairman and chief executive to maintain Sir Stuart Rose at the big business until 2011. Shareholders reacted robustly to the pronouncement and, though they have because been relieved to a certain degree, the thing highlights the aptitude of investors to manipulate and pressure the significance of governance to this society.

The Co-operative’s liable investment director at the time stated that ‘The configuration obviously leave from preeminent practice. Not have of earlier consultation with shareholders.’ The leader of equities for lawful & universal, one of the largest shareholders emphasised the significance of responsible governance:

‘As set out in the Combined Code we believe strongly in the separation of the roles of chairman and chief executive, believing this allows a much needed balance in the boardroom and prevents the potentially damaging concentration of power.’

Other governance models

The excellence of governance is significant not only for a single person business but also for combined initiatives, joint venture and economic systems.

Collaborative proposal and a variety of types of business have seen by a lot of as a way to fruitfully address numerous sustainability challenges. On the other hand, these combined proposal and enterprise do not forever carry their objectives. Basically lots of the challenges are governance system which fails to convey liable decision making. Business performance depends on valuable governance. Firm supposed to produce new traditions for society, stakeholders and attracted parties to hold in the freedom of sustainable result. Ensuring the governance of partnerships is effectual there is require to create encouragement for good firm governance, to ensure firm governance systems grow the trust of central part stakeholders and to fabricate the knowledge and capability of partnerships and its stakeholders to administrate efficiently.

New global governance

Present economic conditions raise grave problem as to the sufficiency yet bearing of many set ideas of good corporate governance, particularly those originate from global best practice embedded broadly in Anglo-Saxon approaches that contain proved missing. There is a rising emotion that at the present is the right time to counterfeit a supportive approach to the calamity, and to construct a stronger, additional inclusive worldwide financial and economic governance design that will also deal with other overall challenges such as vigour and weather change, safety and violence, and deficiency and fitness issues.


Directors decided an indemnity from the company in value of responsibility acquired as a effect of its workplace. M&S keeps suitable liability insurance to the benefit of directors. There is a separate house-hold task between the decision making responsibility and the board. an individual should not have open minded powers.

All directors should allocate adequate time and responsibility. Senior Independent Director directly communicate between the Non-executive directors and the chairman. He is the chairs for the general meetings. He has given payable consideration. Directors records the minutes of the board. He should give a written statement on his resignation for giving circulation.

The board of new directors should be have transparent procedures, accurate and formal. As under the Articles of Association of the company all directors looks for election at the first annual general meeting, re-election offered at every three years by the shareholders.

All directors should accept training on amalgamation the board and also update their knowledge and skills. They can meet the chief shareholders.


The primary role of the accountant is to grant transparency in exposure, monetary or else, to shareholders and the wider stakeholder assembly who have an awareness in the performance of the trade.

The effort of accountants is evidently crucial to successful governance, in particular in next of kin to its conventional focus on economic performance and book-keeping integrity. To embark on this role accountants should ensure they are memorable with the broad management, risk management, functioning and reputational portion of the company to provide framework to the facts presented in the economic statements. In order to offer independent judgment on a company’s financial statements, that is its annual report, accountants should have right to use to data on all company deeds which can be fabric to its monetary position.

Accountants running in a business are concerned in quite a few of the governance system, which may comprise nominations committees for the board, payment committees and risk and observance committees as well as the inspection committee. The Sarbanes-Oxley Act 2002 describe the audit committee as ‘a committee established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer’.

Audit committee members are looked with increased prospects from many collections, including shareholders, governing activities of shareholder, supervisory body, the media, and beneficiary board members. The other region where accountants’ employment in business presently supports good corporate governance is in ‘de-coding’ instruction for the company and opinionated internal incorporation and loyalty. Accountants carry their dictatorial knowledge and industry standard experience to their clients to drive through best practice. Additionally they interpret the listing needs relevant to its business and lawful structure.

Accountants carry a professional strictness in challenging transparency; in order to sustain professional reliability, accountants should follow principles and measures that will emphasize concerns. They should make certain their risk negotiations with organization are strong and industrious and assist the company and the board to prepare for alteration.

Accountants are in the most excellent position to make available sovereign challenge to preparation they examine within a company. It is within their specialized conduct to have this task and disagreement practice which is not in the comfort of the long-term sustainability of the business and its stakeholders.

Bring into line their detailed approach to set up financial statements with wider governance reviews permits accountants to endow with a full observation on a company’s annual and long term performance. Eventually this will afford the company, their stakeholders and people with a truer and additional strong reflection of the dealing performance and its potential impact on wider social, environmental and ethical concerns.

M&S assured that its prevailing corporate goal is to maximise the long-term shareholder value all the way through sustain by reliable, money-making growth and as well go beyond the outlook of its stakeholders from side to side value creation. They reaffirmed pledge by building a number of superior management alteration take in new persons with the true bring together of skill and knowledge to pick up commodities and services and follow new chance for enlargement. The group’s report appears to assemble a balance between the requirements of shareholders and stakeholders in the company.


Organisations preserve no longer wish if they wish for engage by way of stakeholders or not, the simply choice they want to obtain is at what time and how fruitfully to take on. Stakeholder commitment is premised on the view that ‘those groups who can affect or are precious by the attainment of an organisation’s scope [3] ‘ should given in the chance to remark and input keen on the development of assessment that influence them. In today’s the public, whether they are not aggressively wanted out, sooner or later they may claim to be confer with.

Situations arise when organisations do not actively engage but are forced to do so by the demands of society as a result of a emergency situation. In retort, organisations occupy crisis-management performance, and are frequently required into a cynical talk with stakeholders, chief to a important and long-lasting failure of reputation. This kind of dealings is often opposed and injurious of belief. significant meeting occurs as soon as organisations, awake of the alteration in the broad society and how they relay to organisational presentation, wish to establish affairs with stakeholders as a way to deal with the force of those modify, such as persons shaped as a outcome of global monetary decline. Organisations can either look for to moderate risk in the course of the use of stakeholder supervision, or develop these new trends to categorize and ascertain new occasion from side to side the use of consequential stakeholder commitment; the end is characterised through a motivation to be release to alteration.

As in the company of some other selling process, the practice for meeting should be regular, logical and realistic. This practice is


The importance of budget control in organization

Enterprise is a complex man-made running coupling system and a contractual association with body; it is very necessary to the business activities of its process and implements control. According to the modern management guru Robert • Simon’s theory, management control achieve management objectives. Through the implementation of a series of management control lever, so it should increase the importance of budgetary control and devote energies to the management of budgetary control to ensure that business objectives and performance management of the smooth realization.

The essay will first give an overview of budget control. Secondly, it will introduce the Performance Management Overview. Thirdly, it will discuss How to improve the effectiveness of budgetary control. Finally, it will give a short conclusion.

An overview of budget control

â-The meaning of budgetary control

Budgetary control has the existence of broad and narrow sense. Broad budgetary control sees the entire budget system as a control system, which it is the formation of a prior, during and after the whole process control system (David E.W. Marginsona, 1999). Through the budget preparation, budget evaluation, reward and punishment by monitoring of budget execution. Narrow budgetary control prepares a good budget as a basis for performance management and standards on a regular basis to compare actual performance with the budget analyze differences in the results and take corrective measures, which is mainly referring to something in the process of budget implementation in the monitoring of behavior.

According to control activities, budget control includes target control, process control and system control, while the budget as the primary means of corporate internal controls provides a comprehensive management platform. Budget target of control is that Budget management through strategic planning to determine the annual business objectives; then through the decomposition of indicators to clarify the responsibility of the objectives of the responsibility of the budget units as a basis for evaluation.

Budget program control is that Budget management achieves complete control over the purpose through the division of budget management decision-making authority and authorization controls, segregation of duties control is incompatible with the budget organization, budget, audit, budget monitoring and internal audit characteristics (John K. Christiansen and Peter Skærbæk, 1997). Budgetary control regulates businesses and people’s behavior through a series of system control and enhances enterprise “rule of law” capacity, at the same time improves the enterprise’s core competitiveness.

Budgetary control is the core of enterprise management control and a business management system, a very important control system. Budgetary control is a comprehensive system of budgetary control, That budgetary control infiltrates to the various business processes of enterprises¼›At the same time, it is still the core of internal control. Science and the implementation of budgetary control is an important guarantee for the effective implementation of budget management

â-The role and significance of budgetary control

Budgetary control mainly refers to the budget during the execution of the budget implementation of the routine supervision and control; it is the budget target to achieve the necessary guarantees. Control functions are the basic functions of management of the budget in the analysis of the implementation of enterprise budget management; Control effect of budget management throughout the management process.

Budgeting is a pre-budget control, budget execution is a matter of control, budget evaluation is a kind of ex post control. As the enterprise’s own internal and external conditions change, sometimes business strategy need to make corresponding adjustments, though corporate budget management must change in accordance with the strategic objectives of changes in the future management of operational activities to achieve feed forward control (Peter Brownell ,1985). In the budget execution process, from budget management, budgetary control organizations in the field and promptly discovered that the actual deviations from the budget differences, and took the necessary measures to eliminate weaknesses and achieve process control.

Budget management functions In the budget- feedback control, budget management, budget management and the implementation of the main functions keep the actual results to compare with budget targets in time, and deviations occur message to budget management and the main body so that adjust it timely to ensure the budget goals.

In short, the advance control focuses on the corporate budget management and budgeting. Things in the process control focuses on each link to control the implementation of a business, and afterwards , feedback control focuses on the feedback according to deviate from the budget target follow-up control of information. Because of the combination, only the budget to strengthen all-round management and control capabilities, it enables Enterprise’s strategic objectives to be refined to implement.

Budgetary control is not only a wide range of control, but also a full range of control; budget control must penetrate to the enterprise in all business processes and the business links, which is covering all business sectors and positions. On the one hand, the application of accounting measurement accounting methods reflect implementation of the budget process and oversight for accounting control and budget management for the basic values to provide the required information. On the other hand, in-depth into the origin of the value of management activities, the daily operations of specific business areas, such as procurement, production, sales and so on, to carry out management control. Enterprise Budget Management of the main needs of the accounting department and co-ordination between business units and communication account control and management control together.

Budget management involves many factors, the breadth of the decision of the board of directors and the boards of supervisors only grasp what is important in order to take into account the overall situation, but also decided to encourage the implementation of the budget, the main body of self-control is particularly necessary.

Performance Management Overview

â-Performance Management connotation

“Performance management” is developed on the basis of a management concept and management models in the traditional management ideas (David Otleya, 1999). Performance management objectives promote the responsible people accountable for results to achieve organizational behavior efficient; it could through the design of organizational activities and achieves the objective evaluation of the effects.

Compared with traditional management, performance management activities of the organization is advocating relaxation of process management and rules of control, the management focus from a rules-based accountability to performance-based accountability, the entire management process demonstrates the activities of the organization goals and achieve its objectives effectiveness concerns. We must establish a performance-based accountability, it is necessary for organizations and individuals to evaluate the performance of activities which result in the activities of the organization and individual performance evaluation.

By designing a set of performance evaluation index system of scientific, it reflect the objectives of organizations and individuals to achieve results, and it provide a basis for incentive and restraint and the allocation of resources for managers Performance appraisal is an important technology tool for performance management that improve the efficiency and it is the key factors of organizational behavior, thus constitute the core content of performance management

â-An overview of Performance Budgeting

The performance management concepts for budget management practices produced a performance budgeting. According to the Ministry of Finance Budget Division of the definition of performance budgeting, performance budgeting is a goal-oriented budget, it is based on achievement of the government’s public sector objectives and it is in budget preparation, control and evaluation of a budget management model( Robert Dransfield,2000).

In contrast with the traditional budget management, performance budget, focuses the effectiveness of fiscal spending in the stresses, at the same time it advocated to give managers sufficient autonomy in budget management and reporting system through the public sector, public sector reporting system in the traditional budget system to inject a kinds of incentive and restraint mechanisms to effectively contribute the organizational goals.

In the performance budget management, budget expenditure performance evaluation as a management control tool, which is a core content in performance budget management. The so-called budget expenditure performance evaluation refers to the use of certain assessment methods, quantitative indicators and appraisal criteria and functions of the department to achieve its performance goals established by the realization of the extent, as well as to achieve this goal; the implementation of the budget was carried out by the results of a comprehensive assessment and evaluation.

The aim of the department of performance objectives is rational allocation of resources, optimizing effectiveness and efficiency of the use of budgetary funds through a comprehensive evaluation. Performance evaluation of scientific conclusions of the performance of expenditure is the key to the successful implementation of performance management. This relates to how to organize the implementation, how to choose the scope of evaluation, how to determine the performance objectives, performance indicators and evaluation methods and so on; in order to obtain one scientific conclusion question on public expenditure in the “economic”, “efficiency” and “effectiveness “of the Three.

From the definition of performance budgeting, performance budget has two core elements, one is performance evaluation to solve how to set up performance evaluation system of science to arrive at the performance of scientific information; second is performance information and budget integration to solve performance information (PI) how to combine of management and budget issues, which is how to combine the performance information and budget preparation, execution and reporting system in order to achieve the efficient budget management and the promotion of organizational performance improvement (Jack Diamond,2003). Both of these two aspects are interlinked and mutually distinction, which constitute a complete performance of the budget system.

How to improve the effectiveness of budgetary control

Sometimes, the implementation of the budget alone to assess a business operation in the period may be good or bad business lacks flexibility, and thus induce businesses to focus only on some short-term, and immediate interests, rather than from a long-term, strategic point of view thinking. Therefore, we should budget for the traditional appraisal methods to do some improvements and make control tools with some other combine, so as to achieve the optimum.

â-Drawing on balanced scorecard thinking

Balanced scorecard help us from the level of multi-dimensional performance of the integrated assessment managers, it both on the organization’s financial indicators for evaluation and the organization’s customers, internal operations, the learning and growth aspects of assessment.

â-Incentive and constraint mechanism to conduct innovation

Budgetary control get people to complete it, they have to take into account people’s behavior and psychological factors, so the incentive and restrictive mechanism in the budget management is most importance (Michel J. Lebasa, 1995). Enterprises should be based on objective circumstances to develop a series of truly value-creating linkages with the staff of the incentive and restraint mechanisms to fully and effectively mobilize the enthusiasm of staff performance and creativity, so that employees consciously enterprise business objectives into their own development to be achieved goals, and actively take the initiative to complete the business plan to develop a budget, so that the budget management companies could be more active and effective implementation.

â-Dynamic evaluation

Dynamic evaluation refers to the budget implementation process, the budget of the implementation of dynamic and tracking of evaluation of the budget in the implementation, the timely detection of the budget in the implementation of the problems found and processing and adjustment of the budget in time. Through dynamic evaluation, we can more timely control the budget management and ensure its effective implementation.


Some companies focus only on practical preparation of the budget and ignore the control of the budget implementation process. In fact, the control of budget management play a key role in the budget; if there is no budget control, the budget would be a mere formality lose control. Budget management control system is adopted by various government departments and budget implementation of the relevant series of internal control procedures and the adjustment mechanism, whose main function prevent errors and fraud to ensure the correct implementation of the budget, as well as the efficient realization of organizational goals. Budget management and budgetary control systems also known as the internal control system, which constitute a complete budget control system together with the budget and external control systems.


Advantages And Disadvantages Of Making Accounting Rules Accounting Essay

Financial reporting is part of financial accounting which is the activity involved with “classifying, measuring and recording the economic transactions of an entity in accordance with established principles, legal requirements and accounting standards” (Collis & Hussey, 2007). Financial reporting provides information about both the financial performance and position of an entity, and is involved in the communication of financial statements to external users. The process of financial reporting is monitored by a regulatory framework that ensures all statements are prepared according to rules prescribed by said framework (Collis & Hussey, 2007). Over time, countries have developed their own regulatory frameworks leading to differences in local accounting standards. This is known as ‘Generally Accepted Accounting Principles’, GAAP (UK GAAP, US GAAP etc.). GAAP provides a set of guidelines and rules, which form the basis in the preparation of financial statements. Accounting standards are based on the conceptual framework which is a set of concepts and principles aimed at assisting and guiding preparers and standard setters of financial statements (Collis & Hussey, 2007). These accounting standards are either rules-based or principles-based. Financial statements are developed accordingly within the legal and professional framework of an individual country.

The regulatory framework in the UK is known as the UK GAAP and is primarily a combination of three sources of authority: Company law (mainly Companies Act 1985), the stock exchange rules for listed companies on the FSA and the accounting standards – ASB and IASB where necessary (Collis & Hussey, 2007). UK GAAP was based solely on company law, which provided a broad framework. However, the regulatory burden resulted in incorporation of legal directives from the EU. These are included in the Company Act 1985 which lays down the requirements and format of the financial information that must be disclosed by all private and public companies. Regulation is also comprised with accounting guidelines which enables maximum level of up-to-date data and precision within the financial statements.

There are at least two reasons why a regulatory framework is needed both within a country and internationally. The first reason is that of irregular information. Let’s assume that the managers of a firm are responsible for preparing financial statements. These managers will have access to information regarding the firm’s activities while other members will not. Managers could therefore exploit their position within the firm to pursue their own goals at the expense of others. Secondly, for financial reporting to be relevant and reliable and thus, meeting the needs of shareholders and other users, the need of a regulatory framework is essential. In most cases, financial statements are the only source of information regarding the performance of a company. This is where regulatory framework ensures that the statements reflect valid and up-to-date information.

Since the time of the accounting scandals at Enron and Anglo Irish Bank for faulty statements and hidden loans, there has been pressure on the regulatory framework to modify their standards. The fact that companies and stakeholders might be deceived by fictitious financial statements is another factor which gives more value to the stress on modification on framework.

Current way of accounting has been under a great deal of criticism and there has been much debate on whether principle-based accounting would be more efficient than the popular rules-based accounting – especially in response to accounting scandals such as Enron and WorldCom.

Rules-based accounting consists of a set of detailed rules that must be followed when preparing financial statements. Many participants (preparers, auditors and regulators) favour the prospect of using rules-based standards, because in the absence of rules, if the financial statements prepared by these participants were incorrect they could be brought to court due to their misjudgements. “Rules-based standards provide detailed guidance and clarification and precise answers to questions”, (ICAS, 2006, p. 9) consequently increasing accuracy and reducing the ambiguity that can trigger aggressive reporting decisions by management. A rule is defined as “a means of establishing an unambiguous decision-making method”, (ICAS, 2006, p. 9) therefore, rules-based standards provide greater comparability and consistency. Making accounting rules by law is advantageous since it adds greater recognition of individual national interests concerning accounting standards as opposed to the international interests of the International Accounting Standards Board (IASB). Taking the example of Germany, it applies the HGB (Handelsgesetzbuch), the German Law of Commerce, which is focused more on protection of capital lenders, as opposed to the focus of the International Financial Reporting Standards (IFRS) on investor information. Rules-based standards are authoritative and enforceable. As a result, these qualities represent the strictness of this approach and hence, the possibility of lawsuits is diminished.

Rules-based accounting certainly brings strong advantages to financial reporting but it can also be source of significant disadvantages. The belief is that this type of accounting adds unnecessary complexity, due to the fact that rules often become very detailed, with standards approaching hundreds of pages (ICAS, 2006). It also encourages financial engineering and does not necessarily lead to a ‘true and fair view’ or a ‘fair presentation’. Bratton (Bratton, 2003) further points out “that rules sometimes fail to capture the particularities of the individual cases”. Another negative aspect of rules is that in the event of ‘gaps’ it does not provide enough guidance on how to proceed with these.

In the absence of specific guidance, management of a firm may randomly choose between several even opposing accounting policies (Elliot & Elliot, 2009).

The IASB is an independent accounting standard-setting body, based in London. The IASB began functioning in 2001, when it succeeded the International Accounting Standards Committee (IASC).  It is funded by contributions from major accounting firms, private financial institutions, industrial companies, central and development banks, and other international and professional organizations throughout the world (IFRS, 2010). It consists of 14 members from nine countries, including the United States. More than 1200 companies in 100 countries have adopted these standards.  International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB), and is becoming the global standard for the preparation of public company financial statements (IFRS, 2010). This has been an effect of globalisation as companies have become multinational and by adapting the same principle standards, they will be able to compare and compete equally on capital markets. Principles-based standards, such as IFRS, are used as a conceptual basis for accountants. A simple set of key objectives are set out to ensure good reporting. The fundamental advantage of principles-based accounting is that its broad guidelines can be practical for a variety of circumstances. Strict requirements can sometimes force managers to manipulate the statements to fit what is compulsory.

Companies interested in being placed on the stock exchange in two different countries are supposed to prepare accounts pertinent to GAAP. This method can be very time consuming and immensely costly to prepare two or more sets of financial statements. By adopting IFRS only one set of statements will be prepared and is acceptable worldwide. The Enron debacle is a demonstration of the need for a principles-based definition of control. Enron did not consolidate hundreds of off-balance sheet entities and therefore failed to recognize the associated liabilities, “The irony is that even though Enron violated the core principles of financial reporting, the financial engineering resulted in compliance with the rules” (AICPA Professor/Practitioner Case Program, 2004, p. 2).

No matter what accounting method is used, it must always have to provide relevant and reliable information. Many issues and discussions have now pushed accountants towards principle-based accounting, but it is recognized that the method needs to be modified to make it more effective and efficient. It is different from the underlying “box-ticking” approach common in rules-based accounting standards (Shortridge & Myring, 2006). Thus, providing broad and modified guidelines may develop representational authenticity of financial statements. A principal-based system also results in simpler standards, as principles are easier to grasp and apply to a vast range of transactions. “Principles-based accounting standards based on a clear hierarchy of overarching concepts will provide a comprehensive basis for the preparation of financial statements that has the flexibility to deal with new and different situations” (ICAS, 2006, p. 3). They also require less maintenance. The use of principal-based accounting standards may also provide accounting statements that reflect a company’s actual performance since an increase in the application of said standards would reduce manipulation of the rules (Nationwide News, 2002).

Finally, principles (IASB standards) have their potential drawbacks as well. There can be a lack of accurate guidelines that could also create inconsistencies in the relevance of standards amongst organizations. An example may be the US GAAP, which is principles based, but the rules have grown over time due to the demands of preparers and auditors for implementation guidance and consistency. The problem with principles-based standards is that lack of guidelines can produce unreliable and inconsistent information that makes it difficult to compare one organization to another (Investopedia, 2010). The disadvantage associated with principles is that they are susceptible to abuse by, in some cases, allowing management to choose the appropriate accounting treatments that best suit its interests (Bratton, 2003). ) Additionally, the vagueness of principles makes them difficult to enforce and thus creates uncertainty.

In conclusion, this essay has highlighted the fact that both accounting rules by law and IASB standards have their advantages and disadvantages and that financial reporting is influenced by many different factors such as regulation. The key fact is that whichever you do select, one still has to make sure that the financial statements are produced ethically and provide a true and fair view of the company’s financial position, since that is after all, what financial statements are about. The inclination seems to be towards IABS standards; nevertheless the convergence is a long process which will certainly take its time.

In light of these findings, it can be said that the more uniform financial reporting is, the higher the possibilities to compare between firms of different industries and therefore leading to higher confidence in financial statements which result in lower transaction costs and thus lowering financing costs for companies.


Defined Benefit And Defined Contribution In Pension Schemes Accounting Essay

Pension is fund that is built during the working life of the employee and then used to secure the income after retirement. These funds can be operated by employer (occupational pension) who invests over time or alternatively employee can invest in a fund of their choice (private pension scheme). Both of these schemes generate income after retirement.

The pension funds are operated in many countries. According to international financial service the UK pension fund is $1,464 billion, Germany had $268 billion and France had $164 billion.

Pension schemes are of two major types:

Defined benefit scheme

Defined contribution scheme


Define benefit scheme is a type of pension scheme which ensures a particular level of income/benefit after retirement. Most of the cost of the benefit and risk of the investment is borne by the employer however in the contributory define benefit scheme employees also make compulsory contributions. The pension amount is either calculated on the bases of the final salary of the employee or depend upon the average earnings of the employee throughout his employment years.

From the employer prospective the final salary scheme is expensive for the employer as compare to other pension schemes.

Employee’s contributions to the scheme are dependent on various factors such as:

Value of the scheme assets and investment yield.

 The composition of scheme membership.

 Rate of salary growth of the scheme members.

 Longer life span after retirement.

 Changing regulatory requirements.

In the cash salary scheme, a non contributory define benefit scheme, employer contributes a certain amount to the pension fund on behalf of the employee. There is no responsibility of the employee for these contributions.

Source :


Defined contribution schemes are also known as money purchase scheme in which the employee and the employer make contributions into a pension fund according to prescribed rules. At retirement the pension fund is used to buy annuity which is an income guaranteed for life of the recipient. Under defined contribution schemes following factors determine the pension income available at retirement.

The contributions invested in the scheme;

Product provider/managers charges;

The performance of the pension fund;

The annuity rate at retirement date.

In this scheme the risk of poor returns on investment or high cost lies with the employee instead of employer, however this scheme can provide a combination of investment growth and security by investing initial contributions in risky but high yield investments. Near retirement these contribution are invested in comparatively safer financial products. At the time of retirement employee also have the option taking a tax free lump sum amount from their pension fund. On changing the job the employee can either stop making payment to his fund or transfer it to his new employer with some additional cost. Some experts advise that the defined contribution plans have higher risk as these are dependent on the return on investments Most of the private and occupational schemes in the UK are define contribution schemes.


The defined benefit and defined contribution schemes can be best differentiated by determining where the risks lie. In a defined benefit scheme, the employer bears the vast majority of costs and if investment returns poor yield or costs increase, the pension fund can become insufficient and the employer must replenish the fund out of the business revenues. Whereas in a defined contribution scheme the employer’s contributions are paid at a fixed level and therefore it is the employee who bears these risks. If they are not able to increase contributions when fund performance is poor or cost increases, then their retirement income will be lower.

In UK there is an upper limit to the level of income from a define benefit scheme where as there is no such upper limit to the level of income generated from define contribution scheme. Hence the economic conditions like inflation, cost of living etc will have less effect on the employees in defined contribution scheme.

Employees have no control over the investment decisions in the defined benefit scheme and are only eligible for predetermined excess returns on the investment where as in defined contribution scheme employees have full control of their investment and eligible for receipt of all the returns on the investment.

Define contribution scheme can be easily transferred between employers as employee changes his job this may involve some additional cost and hence the employee can continue making investment in his own pension fund. However in case of define benefit scheme the benefit from previous contribution cannot be easily transferred but the employee can stop making future payments of benefits acquired till date.

Several recent studies have examined define benefit or contribution plans. Balcer and Sahin (1979) compared bothplans in a lifecycle setting, and found that earnings fluctuation and job transfers effect gains from define benefit plan . Bodie, Marcus, and Merton (1988) mentioned that define benefit and define contribution plans both have risks, but that these risks are different. However Both these studies failed to make quantitative estimation of relative risks. The results of later studies by Samwick and Skinner (2004) suggest that for many workers define contribution plan will result in more post retirement earnings when compared to the actuarial present discounted value (PDV) of define benefit plan benefits. Finally, Schrager (2005) analyzed data on earnings and job change patterns from the Panel Survey of Income Dynamics and found that increased job turnover in the 1990s made define contribution plans more attractive relative to define benefit plans for many workers

Why are Defined Contribution Schemes becoming more important:

In the last few years there is a large shift towards Defined Contribution schemes and many firms have frozen define benefit plans. Munnell and Sotos(2006) analyzed data from Department of Labor and found that the number of defined benefit plans have decreased to 6.6 million in year 2003 from 9.6 million in the year1990. The major factors behind the decline of defined benefit schemes are connected with the regulatory and accounting restructuring.

New Regulations: In UK the new regulation require employers to represent actual pension fund liabilities arising from contractual deficit or negative investment return within their accounts.

Increased cost: Now a day people are living longer hence putting extra pressure on pension funds causing reduction in fund values. Additional costs are involved due to removal of advance cooperation tax relief and due to regulatory requirements introduced to protect employee’s interest.

Peer pressure: many high profile companies closing their define benefit scheme encourages other to do the same.

Defined contribution schemes are becoming increasingly popular due to various perceived benefits mainly for employers and also for employees as well.

Risk Stratification: In the private sector, this trend has helped in shifting the risks associated with the investment from the employers to employees. Employers do not have to replenish pension fund in case of loss from poor yield from investment or increasing cost. Recipients are now in full control of their investments and have increased responsibility to manage their retirement assets. Employees are becoming more involved with the financial markets as their pension fund is invested in these products.

Growth and Security: With the Defined Contribution Plan there are more chances to have growth in pension fund than the Defined Benefit Plan. Post retirement earnings are based on average career income rather then final salary and also on the performance of investment. Defined Contribution Plans provide the option of receiving fixed income with a fixed annuity and at the same time has potential to increase the pension fund. Therefore it provides both security and growth of employee funds

Workforce Mobility: One main reason behind the increased importance of Defined Contribution Plan is the workforce mobility. Employees move from one place to another for better job. It is easier to transfer defined contribution plan between employers whereas defined Benefit Plan is non transferrable.


Pension Regulations and Tax Policies: Define Benefit Plans are directed by the complicated pension regulations and taxation policies to protect the interests of employees. These complicated regulations and policies have increased the cost of administering Define Benefit Plans and has resulted in the shifting towards Define Contribution Plans.

Decline in manufacturing industries: Define Benefit Plans were mostly used by the manufacturing industry. But with the decline in these industries the use of Define Benefit Plans has also decreased and this has lead to the increased usage of Define Contribution Plans particularly by service sector such as various non -profit making government organizations.

Life Cycle Funds: Define Contribution Plans also provides the employees with products such as Life Cycle Funds. The main purpose of these funds is to simplify the complicated investment process for the employees. Life Cycle Funds have also resulted in the shifting from Define Benefit Plans to Define Contribution Plans.


Both define benefit and contribution schemes are meant to ensure a guaranteed income for employees after retirement. Each has its advantages and disadvantages both for employers and employees. Although employers are prefering define benefit scheme now a days, certainly when looking back at the recent credit crunch andtroubled financial markets, it was not uncommon for defined benefit arrangements to be holding surpluses and/or to be taking contribution holidays This will not be possible under a defined contribution scheme where the employer is required to maintain the agreed level of contributions irrespective of how well the investments are performing.

When employers try to compare the real overall cost of providing a typical defined benefit scheme with a typical defined contribution scheme, they usually forget that employers benefit from favorable investment returns with defined benefit schemes as many defined benefit arrangements actually cost a lot less when contribution reductions and contribution holidays are taken into account.

Under define contribution schemes, workers are in more control of their pension fund. In addition to this risks are also under the control of the worker, who may decide whether or not to work for a firm with particular pension characteristics, whether or not to voluntarily separate from a firm with a define benefit plan, or whether or not to contribute the maximum amount to a define contribution plan.

Where the employer cant maintain a defined benefit scheme for all employees then the objective must be to ensure that the defined contribution scheme agreed is essentially based upon contributions that will actually deliver an adequate pension for future retiring employees.


The Industrial Training Experience Accounting Essay

Lawrence Wong & Co. was established in 1986 before the Malaysian economic recession in 1987. It has established itself as a recognized Management Consultancy Firm specializing in all kinds of management and consultancy services, including corporate secretarial, administrative, bookkeeping, auditing, taxation, business or financial planning and other management allied services.

The company was founded by Mimi Gian Guek Poh and Lawrence Wong Fook Heng, both are Chartered Accountants from Australia. The business started as a sole

proprietor on 6th August 1965 as an employment agency and was converted into a private limited company on 16th February 1986. As an associate member of the

CPA Australia, the Malaysia Institute of Accountants, and The Institute of Secretaries and Administrators, Mimi Gian, my company supervisor, draws on more

than 25 years of audit, management, secretarial, taxation, information system and corporate advisory experience in international and multinational

corporations in Australia, Singapore, and Malaysia.

Lawrence Wong & Co’s success today depends heavily on the confidence and trust their clientele have with them and also due to their dedicated workforce

who has been continuously contributing their efforts to the overall success of the firm’s nearly 20 years of services. The company hopes to continue to

expand its business by providing quality and reliable services in Malaysia as well as internationally.

1.2 Industrial Training Experience

Industrial Training is one of the compulsory subjects in all Faculty of Business and Finance Programmes’ course structures. It is compulsory for every

final year undergraduate to undergo industrial training for the duration of three months before completing their courses. With the combination of knowledge

and work experience during the three months training, students are required to produce a written report.

The objective of industrial training is to provide an opportunity for students to observe real life practices and develop their understanding of methods

and applications of the accounting theoretical and conceptual framework in a real working environment. Additionally, the training program also provides an

opportunity for the industry to identify potential employees from the industrial trainees.

I joined Lawrence Wong & Co on 1st October until 31st December 2012. During these three months of industrial training I was involved in bookkeeping,

auditing, taxation and the company’s secretarial function. This was a good opportunity for me to learn more about the business . Because of this, I can now

apply my accounting knowledge to the real world, such as accounts entry, auditing and so on.

At first my company supervisor discussed with our colleagues my tasks , after that only my colleagues assigned tasks to me. My company supervisor only gave

me tasks after I had completed the work that was assigned by my colleagues. When I faced some problems that I have never encountered before, I discussed

with my company supervisor and colleagues together to solve the problems. Luckily they treated me well and taught me with patience. Therefore, I increased

my knowledge of accounting, auditing, and taxation from my company supervisor and colleagues.



2.1 Statutory audit

When I arrived on my first day, my first task was to do a statutory audit. Statutory audit is part of an in-house audit. Whilst I was doing this, I needed

to get information from the company secretary file, such as annual return, minutes of meeting, and SSM forms. My colleagues told me that use of some of the

SSM forms needed recording, such as Form 24, 44, 49, 32A, and so on. If one of these forms are used, the auditor report needs to disclose the information,

as well as statutory audit. For example, form 49 which is the form of return for directors, managers and secretaries. If this form is used, it means that

the company has appointed a new director or an existing director has resigned or is deceased. Therefore, this kind of information must be included in an

audit report and statutory audit.

2.2 Accounting data entry

During this internship, I did a lot of accounting data entry, such as receipt and payment entries. In order to have a better understanding of the basis of

accounting, my company supervisor assigned me to a lot of the company’s account entry, using UBS Accounting System and Microsoft Excel. This was a test for

me, whether my double entry transactions were posted correctly. I posted the entries in accordance with bank statements, payment vouchers, cheque books,

and receipt books. After I had done, I printed out the general ledger, bank reconciliation statement, income statement, and balance sheet to give to my

colleagues and company supervisor to review.

2.3 Bank Reconciliation

Bank reconciliation statements are the important documents that need to be prepared every month. Bank reconciliation is the process which prepares a

statement accounting for the differences between the cash balances in a company’s cash account and the cash balance according to its bank statement

(Roshayani Arshad, 2007). During my training period, I prepared this by using UBS Accounting System and Microsoft Excel. Some clients prepared bank

reconciliation statements by themselves. Therefore, I needed to check whether the bank reconciliation statements that were prepared by clients were the

same as my results.

2.4 Auditing

During these three months, I not only did a lot of accounting data entry, I was also involved in auditing work. Firstly, I prepared statutory audits

because this was the easier part. Next, I started to do audits working on paper, such as accounting journal entries, income statements, balance sheets,

variances, tax computations, and other working papers including information related to assets, liabilities, taxation, revenue, and expenses. In addition, I

had learnt how to prepare every detail of the working paper. After that, I prepared an audit report, confirmation letter, letter of representation (which

is a summary of all accounts), and an audit memorandum planning. Once I had done this, my colleagues reviewed my work and asked me to amend errors, before

it was passed to my company supervisor to review. Lastly, I filled in the Form C & R after my company supervisor reviewed and confirmed that all

working papers were correct.

2.5 Others tasks

My company supervisor had asked me to make some payments, such as telephone bills, water and electricity bills, EPF, SOCSO, client’s income tax payments,

as well as banking some cheques. Before my company supervisor issued the cheques, I needed to prepare the payment vouchers and attach them with the

invoice, delivery order, and other related statements. I also had to call the suppliers to collect the cheques. After the payments were made, I filed all

of the documents in the payment voucher file.

Other than that, my company supervisor also assigned me to prepare client company’s stock list and check list. Stock list is a detailed list of the stocks

available of a company while check list is prepared for checking the stocks.

In addition, I had filed some documents and letters received from Inland Revenue Borad (IRB) into the client’s files. I also sent out documents to clients,

such as tax refund from IRB, audit reports and others documents.

Furthermore, I had updated the client company tax control list. For this task, I had to record the date received for the Form C & R 2012, financial

year end, the latest audit report that had already been submitted, and the date of CP 204 to IRB. After I completed this, I prepared a latest list of

client company and IRB’s schedule of payment code.



3.1 Knowledge and Skills Applied

3.1.1 UBS Accounting System

These accounting entries, which are receipt and payment entries, I had been taught during my studies how to complete using the UBS Accounting System. So, I

had no problem when I posted these accounting entries into UBS Accounting System because it is same as what I have done before. For example, for the pay

for travelling expenses, the entry is debit in travelling expenses and credit in bank or cash account, so this is called a double entry. Before I passed my

work to the company supervisor to review, I double checked the entries.

3.1.2 Financial Accounting

Financial Accounting Framework I and II are the compulsory subjects for accounting students. These two subjects teach us how to prepare the financial

statements such as income statements, balances sheets, cash flow statements, and statements of changes in equity. These subjects were very useful for me to

apply to my work. By using the knowledge that I learnt, I had completed my tasks with minor errors.

3.1.3 Taxation

Taxation is another important subject for accounting students. I took this subject in Year 2 Trimester 3. During my training, I had to prepare tax

computation for companies and individuals. Mostly I prepared tax computation for companies, because when I was doing client companies’ audit, I needed to

prepare it as well. This subject was very useful to me because I could apply the knowledge that I learnt to prepare the tax computation, making it easier

for me to complete the tasks.

3.2 Knowledge and Skills Gained

3.2.1 Auditing

During my studies I found that auditing was a totally theoretical subject that is different from accounting and taxation subjects because it is not

included in any calculation matter. I had the opportunity to complete audits on client companies during the three months of training. I completed many

tasks relating to audits, such as audit working papers, statutory audit, audit report, and many more.

3.2.2 Information Technology

Lawrence Wong & Co. accounting software includes Microsoft Excel and UBS Accounting System. With the UBS Accounting System, I learnt how to key in

double entry transactions and look through the financial statements during my study. I also learnt how to prepare the bank reconciliation statements by

using this system, and to do year end processing, which is to close the current accounting year and switch to a new accounting year (Sage UBS Range of

Software, 1991). Before I performed year end processing, I needed to ensure that all transactions were up to the last period, back up all of the data

files, update all stock values, print all reports, and check that there was only one retained earnings account. After I completed this, the system would

generate an all balance brought forward account and accumulated profit would be transferred to the retained earnings account. All transactions from period

1 to 12 will be removed.

Furthermore, Lawrence Wong & Co. used Microsoft Excel to prepare audit works. This was an advantage for me when I was doing the audit working papers as

I could key in the amount and generate the formula fast, then the software would automatically calculate the final amount for me. I had also learnt how to

adjust the paper margin and make it neat before I printed the working papers.

Other than that, I learnt how to use new software, which was the UBS Inventory and Billing System. This system is a real time system that updates the stock

immediately after entry. It also performs as an invoicing system whereby you can print out the invoice, credit note, debit note, and many more (Sage UBS

Range of Software, 1991). During my training, I had prepared a list of every client company’s secretarial and filing fee in Excel form. My colleague taught

me how to check the latest invoices inside the UBS Inventory and Billing System. Therefore, I could check the invoices easily and key in the information




4.1 Weaknesses

During the three months of industrial training, I faced a lot of problems that I had never encountered before as they were problems that I could not learn

from books. This made me feel weak because sometimes I did not know which methods should be applied to solve the problems.

At the beginning, I had spent most of time finishing the audit works because what I had learnt in university was theory, but the training was more focused

on practical tasks. These tasks were quite different from what I had studied in text books and from lecture notes, so I was a bit confused when I prepared

the audit works.

I also faced problems when I was doing account entries. Before I started to key in receipts and payments into UBS Accounting System, I spent a lot time

trying to understand the company’s business transactions and concepts, because different companies may have different versions of these. After I keyed in

all the transactions, I printed the general ledger, income statement, and balance sheet to give to my company supervisor to review. Unfortunately, my works

were rejected by her because I did not key in the transactions and descriptions properly. Moreover, some of the clients did not provide enough financial

information, such as details of income received, so I did not know exactly what those incomes were.

In addition, I had difficulty in using my English language because the company mostly has English speaking clients. Sometimes the clients did not

understand what I said, so I had to use Chinese language or Malay language to communicate with them.

4.2 Strengths

During this internship, I learnt a lot and practiced my knowledge and concepts relating to accounting, auditing, and taxation. I have come across many new

things and gained knowledge from my company supervisor and colleagues.

I was able to use other languages to communicate with clients, such as Hokkien, Cantonese, and Malay. The reason for this is that some of the clients

cannot speak English, they only know to speak their own language. Therefore, I was able to use these languages to communicate or discuss some matters with


I felt lucky that my company supervisor gave me the opportunity to practice my knowledge in her company. She always motivated me and taught me many new

skills as a trainee, and also helped me to acquire new knowledge. Furthermore, she was also a very patient person. When I did not understand how to do the

tasks that she has assigned, she was very patient in explaining to me the steps. Another strength was that my colleagues were willing to help me whenever I

encountered problems.



Through this training program, I have gained so much new knowledge and experience , improved my communication and computer skills, as well as learning how

to adapt to working life quickly in a new atmosphere. It also prepared me to be more responsible for my actions and tasks in the future working life.

Furthermore, I have covered knowledge of auditing, accounting, and taxation during my time spent inside the company. For the auditing part, I learnt how to

prepare the audit program, confirmation letter, auditing working papers, and others. I also learnt how to key in the account entries properly by using UBS

Accounting System and Microsoft Excel. For the taxation part, I learnt about how to prepare tax computation. All of the learning made me feel interested

and challenged although it was stressful at times .

I can conclude that the industrial training was well organized. My company supervisor and colleagues were caring and willing to teach me all of the working

steps and concepts. With their guidance, I was able to do my tasks properly and apply the accounting knowledge that I had learnt in university into real

working life.

In conclusion, I have been trained to be prepared in facing the real working environment in the future and gained some ideas about the work flow of a

company. I am pleased that I did my industrial training in Lawrence Wong & Co. and thank my company supervisor and all colleagues for caring and giving

me a chance to learn all of the work involved. I hope I can use my experience and knowledge that I gained further in my education.


The Education In Reduce Audit Expectation Gap


The issue of “audit expectation gap (AEG)” has been very significant to the accounting profession since mid 1970s and continues to be debated until today. In the 1970s and 1980s, massive corporate failures have caused the accounting profession to be severely criticized by the public. For example, in 1973, Equity Funding – an insurance firm based in Los Angeles – collapsed when its computer-based fraud was discovered. In May 1982, Drysdale Government Securities collapsed followed by Penn Square Bank two months later. In 1985, the $340 million fraud in ESM Government Securities has been the largest securities fraud case ever to come before a US federal court at that time. Auditors were then forced to battle with legal suits taken against them. Meanwhile, the mounting list of corporate failures and abuses, alleged audit failures, and lawsuits against prominent accounting firms has generated concern outside the profession which subsequently called the House Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce to conduct a hearing or congressional investigation of the profession, which was chaired by John Dingell, (“Management Accounting”, 1985). In defense, the profession defined the concept of AEG and focused public criticism on that concept.

The US accounting profession also responded to the scandals and criticism by appointing the Commission on Auditors’ Responsibilities (the Cohen commission) in 1974 and in 1978. The Cohen report concludes that there is an “expectations gap” between what auditors do and what the public expects of them. And then in 1986 the Anderson committee issues its report, Restructuring Professional Standards to Achieve Professional Excellence in a Changing Environment, in response to concerns over the profession’s ability to serve the public interest and retain public confidence. In 1987 The National Commission on Fraudulent Financial Reporting (popularly known as the Treadway commission) reports on how fraudulent financial management can be reduced and how auditors can reduce the “expectations gap” between themselves and the public (Mousselli, 2005). This is followed by the Accounting Standard Board released, in 1988, of nine “expectation gap” standards (SAS no. 53 through 61) which were intended to reduce the gap between what the informed public perceives auditors to be responsible for and what auditors regard their own responsibilities to be. However, those standards have not succeeded in closing the gap (Martens and McEnroe, 1991).

The profession has the view that, in general, the public believes that auditors should take more responsibilities in detecting fraud, illegal acts, and material misstatements and to perform better in communicating about the nature and the results of audits including giving early warning about the possibility of business failure (Guy and Sullivan, 1988). The nine new standards are believed to address these issues. The standards cover four broad categories: improving external communication, detecting fraud and illegal acts, making audit more effective, and improving internal communication. This also involves a new auditor’s report (Kolins, 1988). However, the public regards that auditors have a covenant with society to be responsible for the independent certification of financial statements. And one crucial way in which SAS Nos 56-61 fail to express the auditing covenant and, hence, fail to close the expectation gap, relates to auditors’ responsibilities with regard to illegal acts by clients (Martens and McEnroe, 1991).

Therefore, despite the profession’s efforts to address the issue of AEG, the gap still exists. As mentioned by the SEC’s Chief Accountant Michael Sutton, there were five “dangerous ideas” held by some accountants; one of it being “auditors have closed the expectation gap”. According to Steinberg in 1997, even the new auditing standards on fraud cannot be expected to totally close the gap. This is supported by Sikka, Puxty, Willmott and Cooper’s (1998) contention that due to social conflict, the meaning of social practices, such as audits, is subject to continuous challenges and renegotiations and the gap between competing meanings of audit cannot be eliminated. And so, in 2002, the profession is back under the spotlight following another series of corporate collapses that made history in the United States. As noted by Eden, Ovadia, and Zuckerman (2003), the criticism against the auditors is renewed with every public corporation’s failure and each financial loss the public takes.

The firm Arthur Andersen came to its demise because of its association with Enron, even though the verdict of obstruction of justice against the firm was overturned in 2005 by the United States Supreme Court (Moussalli, 2005). The crisis then led to the enactment of the Sarbanes-Oxley Act 2002 that is said to be “the most sweeping reform ever to affect the accounting profession” (Castellano, 2002). Now the accounting firms are regulated entities.

Those corporate crises led to new expectations and accountability requirements, and hence, create this called expectation gap. An expectation gap is detrimental to the auditing profession as highlighted by Limperg, 1933 (cited in Porter & Gowthorpe 2001) that:

If auditors fail to identify society’s expectations of them, or to recognize the extent to which they meet (or, more pertinently, fail to meet) those expectations, then not only will they be subject to criticism and litigation but also, if the failure persists, society’s confidence in the audit function will be undermined and the audit function, and the auditing profession, will be perceived to have no value.

In view of the detrimental effect of AEG to the auditing profession, various methods have been suggested in the literature to reduce the AEG. Education is one of the methods often recommended by researchers and practitioners as a means of reducing the AEG (Gramling, Schatzberg and Wallace, 1996).

Definition Of Audit Expectations Gap

The expectation gap is the gap between the auditors’ actual standard of performance and the various public expectations of auditors’ performance (as opposed to their required standard of performance). Many members of the public expect that:

auditors should accept prime responsibility for the financial statements,

auditors ‘certify’ financial statements,

a ‘clean’ opinion guarantees the accuracy of financial statements,

auditors perform a 100% check,

auditors should give early warning about the possibility of business failure, and

auditors are supposed to detect fraud.

Such public expectations of auditors, which go beyond the actual standard of performance by auditors, have led to the term ‘expectation gap’. According to the auditing profession, the reality is that:

management, as preparers of the financial statements, is primarily responsible for their content, even though management may request the auditors to prepare them;

an audit only provides reasonable assurance that financial statements are free of material misstatement based on The CPA Journal entitled The Past and Future of Reasonable Assurance;

an audit is no guarantee of solvency or financial performance;

auditors are only required to test selected transactions – it does not make economic sense, in to-days world, to check all transactions; and

although auditors plan and conduct an audit engagement with an attitude of professional skepticism recognizing that circumstances such as fraud may exist that will cause the financial statements to be materially misstated, an audit does not guarantee that fraud will be detected.

Several accounting researchers and professional accounting bodies have offered their definitions. For example, the phrase “Audit Expectations Gap” was first introduced into the literature over twenty years ago by Liggio (1974). In his article “The Expectation Gap: The Accountants Waterloo?” has defined that:

“…the expectation gap is a factor of the levels of expected performance as envisioned both by the independent accountant and by the user of financial statements. The difference between these levels of expected performance is expectation gap.”

A few years later, in 1978, when the Cohen Commission Report was published, the definition extend to adds that a gap may exist due to the difference between the public’s expectations and needs and what auditors can and should reasonably expect to accomplish. Porter (1993), however, argued that the definitions used by Liggio (1974) and the Cohen Commission Report were too narrow as they failed to consider the possibility of substandard performance by auditors. She states:

‘…these definitions are too narrow in that they do not recognise that auditors may not accomplish ‘expected performance’ (Liggio) or what they ‘can and reasonably should’. They do not allow for sub-standard performance. It is therefore, proposed that the gap, more appropriately entitled ‘the audit expectation-performance gap’, be defined as the gap between the public’s expectations of auditors and auditors’ perceived performance.

According to Porter (1993), the gap has two components: the “reasonableness gap” and the “performance gap”. The reasonableness gap explains the expectation gap as the result of differences between what societies expects auditors to achieve and what auditors can reasonably expect to accomplish. Conversely, the performance gap views the issue as the differences in the public’s expectations of auditors and their perceptions of auditors’ performance. Viewed in this way, the gap can be widened either by an increase in society’s expectations (some of which can be unreasonable) or a deterioration in perceived auditor performance (sub-standard performance arises where the auditor fails or is perceived to fail to comply with legal and professional requirements). Therefore, the gap can be narrowed either by a reduction in society’s expectations or an improvement in perceived performance.

Other than that, a few researchers also attempt to define the audit expectations gap in general terms. For example, Liekerman (1990), indicates that expectations gap refers to the discrepancy between what professionals (auditors) appears to believe they are telling the rest of the community and what the rest of the community believes it is being told. This highlights the seriousness of the problem faced by the auditing profession which serves society rather than its immediate clients. Monroe and Woodliff (1993) defined the audit expectation gap as the difference in belief between auditors and the public about the duties and responsibilities assumed by auditors and the messages conveyed by audit report. Jennings et al. (1993) defined the audit expectations gap as ‘the differences between what the public expects from the auditing profession and what the auditing profession can actually provide. Humphrey (1997) defines it as a representation of the feeling that auditors are performing in a manner at variance with the beliefs and desires of those for whose benefit the audit is carried out. According to Humphrey (1997), this definition can be extended to include other issues such as the adequacy of auditing standards and the quality of audit delivery.

Local Auditing Context In Malaysia

The Companies Commission of Malaysia regulates all companies including public listed and private limited companies incorporated under the Malaysian Companies Act 1965 (CA 1965). Section 169(4) of the CA 1965 requires every company incorporated under the Companies Act to have its financial statements audited before they are presented at the annual general meeting. Section 9 of the Act further requires that the audit must be performed by an approved company auditor as defined under Section 8 of the CA 1965. The auditors in Malaysia are regulated by Malaysian Institute of Accountants (MIA).

Malaysia’s first documented financial reporting regulations were the Companies Ordinance 1940, which was repealed in 1965 to make way for the Malaysian Companies Act (CA, 1965). Introduction of the CA (1965) marked a significant turn in the country’s financial reporting practice as the Act, through the provisions of section 167 and the ninth schedule, established formal requirements, rules and regulations on accounting. Section 169 of the act requires the directors of every company to present audited financial statements at the annual general meeting and to ensure that the statements give a true and fair view of the company’s affairs and results of its operation. The duties of the auditor were specified in section 174, which include:

reporting to the members of the company on the accounts;

ensuring timely submission of the audit report to the company;

expressing an opinion on the truth and fairness of the financial statements; and

ensuring compliance with the requirements of the Companies Act 1965 and the applicable “approved accounting standards”.

The “approved accounting standards” are those standards that are issued or approved by the Malaysian Standards Board (MASB). Under Section 174 (8) of the Company Act 1965, auditors are required to report to the Registrar on any breach or non-observance of any provision of the Company Act 1965. The auditors are required to follow the Malaysian Approved Standards on Auditing (MASA) in the conduct of their audits. Any breach of or failure to comply with MASA could be considered as conduct discreditable to the profession, and this could lead to disciplinary action against the auditors (Arens et al 2003).

With effect from 30 September 2004, the MIA has implemented the Anti-Money Laundering Act 2001 (the AMLA, 2001). The AMLA (2001) requires auditors, accountants and company secretaries who are members of the Malaysian Institute of Accountants (MIA) to report suspicious transactions of their clients to the Financial Intelligence Unit in the Bank Negara (Central Bank of Malaysia). In addition, Section 50 of the Securities Industry Act 1983 (SIA) stipulates that auditors are required to report to the Securities Commission any irregularities that are found during the course of the audit which may jeopardize the funds or property of the shareholders.

Qualification Levels

Education is not only aimed at meeting short-term professional and labour market needs and requirements. Education plays an important role in science and culture and for personal development. However, education has to provide access to qualifications and competences which facilitate a professional career. Most accountants and auditors need at least a bachelor’s degree in business, accounting, or a related field. Many accountants and auditors choose to obtain certification to help advance their careers, such as becoming a Certified Public Accountant (CPA), ACCA or MICPA. Generally, they take those professional papers for the purpose of become qualified professional auditors. Level qualifications usually focus on a particular subject or area in basic knowledge, skills and understanding.


The ACCA qualification is designed to provide the accounting knowledge, skills and professional values which will deliver finance professionals who are capable of building successful careers across all sectors, whether they are working in the public or private sectors, practicing in accounting firms, or pursuing a career in business.

It also embeds the global accounting education standards set by the International Federation of Accountants (IFAC). There is a strong focus on professional values, ethics, and governance. These skills are essential as the profession moves towards strengthened codes of conduct, regulation, and litigation, which with an increasing focus on professionalism and ethics in accounting.


Certified Public Accountant (CPA) is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience. CPA members and students work across a variety of roles in both ‘practice’ and ‘industry’ including, sectors such as financial services, banking, manufacturing, construction, education and consultancy.


Malaysian Institute of Certified Public Accountants (MICPA) promotes high standards of professional conduct and technical competence of members to safeguard public interest and provide quality professional education and training. It also enhances the value and distinctiveness of the Certified Public Accountant (CPA) qualification. This professional qualification is qualified for membership of the Malaysian Institutes of Accountants (MIA) after 3 years of approved working experience and as a member of MICPA.

Research Problem

The profession believes that the gap could be reduced over time through education. Studies have been carried out overseas and in Malaysia to determine the effect of education in narrowing the audit expectation gap. Previous research done in Malaysia had investigate the effect of audit education in reducing audit expectation gap by Kasim and Mohd Hanafi in 2005 and the benefits of internship to students by Minai et al. in 2005. However, Pierce and Kilcommins (1996) in Ireland suggest that although education can make a significant contribution to narrowing the expectation gap, there is a need to supplement it with other measures.

Therefore, this study seeks to provide evidence of another way of education such as implementing active learning strategies, improve the illustration of lecturers during the classroom learning and seminar or training as a further education to increase the knowledge of auditor’s roles and responsibilities.

Purpose of The Study

The purposes of this study are:

The surveys on auditors’ perceptions on issues of education in reduce the expectation gap regarding roles and responsibilities of auditors in the auditing process.

To determine whether there is a significant different in auditors’ perception between the big firms and small firms.

In particular, this study sets out to test three main method of education in order to ensure that it can be narrowing the gap:

to examine the impact of implementing active learning strategies in education.

to examine the impact of illustration of lecturer during the class room learning.

to examine the seminar or training as a further education to increase the understanding of auditor’s roles and responsibilities.

Scope of Study

This study aims to perform a research among the auditors in big firms and small firms. It investigates the perceptions of auditors between big firms and small firms about the method of education that may help to reduce the audit expectation gap. Emphasis was given on the aspects of roles and responsibilities of auditors in auditing process. According to this study, a statistical hypothesis test is used as a method of making statistical decisions based on the experimental data.


It is hope that this study on the method of education enables the audit expectation gap to be reduced in a comprehensive and effective manner. It also hoped that such an attempt can provide some valuable insights for the auditing professional and regulatory bodies to enable them to take effective steps to reduce the audit expectation gap in Malaysia. Besides, it gives a clear view that education improves the level of understanding of the roles and responsibilities of auditors in relation to the function of auditing process.



Literature relevant to the expectations problem in auditing is extensive and ranging, for example, from empirical and experimental research to ascertain beliefs about auditing and its effects on the decisions of particular groups to analysis of legal judgments and to the work of various professional and governmental investigations established to consider audit related issues. There are also studies concentrating on psychological aspects, that is, theories of human judgment relating to views and opinion formed by different groups of people. They are documented in forms of reports, research findings, commentaries and argumentative writings in various auditing and accounting journals, magazines and even newspapers.

Research On Expectations Gap

The audit profession began to face public criticism in the 1970s, leading to the emergence of the expectations gap. Most debates on expectations issues seemed to cover, broadly, the specification of the role or functions that auditing is intended to fulfill, communications and reports from auditors, the structure and regulation of the provision of audit services, and the level of quality in the performance of audits.

Most of the studies ascertain the auditors’ and the public’s view of the roles and responsibilities of auditors through the use of questionnaire surveys. In the United States, Baron et al. (1977), they had examined the extent of auditors’ detection responsibilities with respect to material errors, irregularities and illegal acts. The aims of this study are to establish whether they are any differences in the perceptions regarding auditors’ detection and disclosure duties between the auditors and users of accounting reports (financial analysts, bank loan officers and corporate financial managers). The result from this study was that auditors and users of accounting reports have significantly different beliefs and preferences on the extent of the auditors’ responsibilities for detecting and disclosing irregularities and illegal acts. They also show that small-firm CPAs, large-firm audit partners, corporate financial managers, bankers and financial analysts thought Statements on Auditing Standards (SAS) Nos. 16 and 17 inadequately clarified the CPAs’ responsibilities for detecting and reporting on clients’ deliberate material falsifications, other material misstatements and non-material illegal acts. In particular, users held auditors to be more responsible for detecting and disclosing irregularities and illegal acts then the auditors believe themselves to be.

Based on the study in Singapore by Low et al. (1988), their objective was to examine the extent of the expectation gap between auditors and financial analysts on the objectives of a company audit. The study finds that, both groups perceived the traditional objectives of the audit such as expressing an opinion on financial statements as one of the primary audit objectives. However, besides this objective, respondents possessed an array beliefs as to what they considered as audit objectives. In the views of financial analysts, they perceived an audit as setting a seal on the accuracy of the financial accounts of the company. Furthermore, their perceptions of fraud prevention and detection responsibilities of auditors were more demanding than those that the auditors believed they themselves should possess.

According to the Humphrey, Moizer and Turley (1993) in United Kingdom, they had examined the expectation gap by ascertaining the perceptions of the individuals of audit expectations issues through the use of a questionnaire survey comprising a series of mini-cases. The issues investigated include the following: What is and should be the role of the auditor? What should be the prohibitions and regulations placed on audit firms? And what decisions could the auditors expected to make? The respondents included chartered accountants in public practice, corporate finance directors, investment analysts, bank lending officers and financial journalists. The surveys review a significant difference between auditors and the respondents which represent some of the main participants in the company financial report process in their views on the nature of auditing. The result from this study showed that an audit expectation gap exists, specifically in the areas such as the nature of the audit function and the perceived performance of auditors. In this study they also found that the critical components of the expectation gap includes auditors’ fraud detection role, the extent of auditors’ responsibilities to third parties, the nature of balance sheet valuations, the strength of and continuing threats to auditors’ independence, and aspects of the conduct of audit work for example, auditors’ ability to cope with risk and uncertainty. Humphrey expressed concern over the possibility of completely closing the gaps because such problems have been persistently in existence within the audit profession.

An empirical investigation on audit expectations gap in Britain was done by Humphrey, Moizer and Turley in 1993. Questionnaires were mailed to chartered accountants in public practice, corporate finance directors, investment analysts, bank lending officers, and financial journalists to ascertain the perception of individuals about audit expectations issues. Out of the total of 935 respondents, 82% were accountants and 73% were auditors. Both groups agreed that too much was expected of auditors by the investing community. The financial directors were almost equally split on the issues, which is 42% disagreed, 19% neutral and 41% agreed. The three user groups were disagreed. From the research, 67%.of the overall of users disagreed.

Extending from the study by Humphrey, Moizer and Turley (1993), Gloeck and De Jager (1994) studied on the expectation gap in the Republic of South Africa. The respondents were grouped into users, auditors, and “financially knowledgeable person”, which have the same characteristics as the “sophisticated users” in Humphrey. The results found that “financially knowledgeable person” in South Africa seemed to be more sophisticated than their counterparts in the United Kingdom, particularly in understanding the contents of an auditor’s report. However, they also concluded that the expectation gap regarding the fraud and auditor’s going concern opinion.

Another empirical study was conducted by Porter (1993) in New Zealand to test the postulated structure of the audit expectation-performance gap and to establish the composition and extent of the gap and its constituent parts. According to Porter, this research is an extension of those conducted by Lee (1970) and Beck (1974), who investigated the duties which auditors were expected to perform in the late 1960s in Britain and early 1970s in Australia, respectively. By using a mail survey, Porter ascertained the opinions of auditors’ interest groups (auditors, officers of public companies, financial analysts, auditing academics, lawyers, financial journalists and members of the general public) regarding auditors’ existing duties, the standard of performance of these duties, and the duties that auditors should perform. The findings from the survey revealed that 50% of the gap is attributable to deficient standards, 34% from society holding unreasonable expectations of auditors and 16% from perceived sub-standard performance by auditors.

According to the study by Chandler et al. (1993), they looked at the various aspects of the development of the audit function in the United Kingdom and sought to explore the nature of auditors’ responsibilities and the public’s perception of the auditors’ role. Their study that reviewed the evolution of audit objectives over the period of 1840 to 1940 suggested that statement verification was the primary concern of auditors in relation to public companies in the period 1830 to 1860, after which more emphasis was placed on fraud detection in the late nineteenth century. In the early part of this century, the primary audit objective reverted to statement verification. The study showed that audit objectives and practices tend to follow external events and that the profession has encountered great difficulty in reconciling public expectations with the practicalities of auditing. It also suggested that general confusion over the role of auditors has existed to such an extent that it has been difficult even for the profession to reach agreement on the main purpose of company auditing and the message to be sent to the investing public.

Besides that, based on the study of Cameron (1993), he explored the relationship between public accountants and their small business clients in New Zealand by seeking the opinions of public accountants, small businesses and associated third parties like bankers, business consultants and enterprise agencies with respect to the roles that auditors are expected to perform and those that they actually perform. The results from the study were revealed that the three groups expected auditors to provide compliance services, give accounting-related advice, show concern for clients’ financial health, actively seek out client problems, and give general business advice. Auditors were perceived that they were actually providing all of the services expected of them except the service of actively seeking out client problems. In relation to the other functions, the actual performance of chartered accountants was generally perceived to fall below the expected levels.

Epstein and Geiger in 1994 had conducted a survey of investors to gather information on various aspects of financial reporting issues, in particular on the level of assurance they believed that auditors should provide with respect to error and fraud. The surveys result suggested that investors seek very high levels of financial statement assurance and there exists an expectation gap between auditors and investors on the level of assurance an audit provides.

Mohamed and Muhamad Sori (2002) performed a study about the audit expectation gap in Malaysia. They revealed that the audit expectation gap exists in Malaysia. The existence of the gap is due to a number of contributing factors; such as, uncertainties concerning the actual role of auditor; the satisfaction of clients with services provided by the auditors; and audit firm’s lack of independence and objectivity. However, this study did not include the differences in perceptions of the users and auditors in relation to the meaning conveyed by an audit report. Furthermore, issues such as the differences in perceptions between the users and the auditors in relation to the true and fair view of the financial statement and the going concern of the company were also not identified.

A more comprehensive study have been conducted by Fadzly and Ahmad (2004) to examine the audit expectation gap among auditors and major users of financial statements: bankers, investors, and stockbrokers. The study focuses on the positive view of the expectation gap, which compares auditors’ and users’ perceptions on the duties of auditors. They found that the comparison of the auditors’ and users’ perceptions is able to reveal whether there is a state of “unreasonable expectations” among Malaysian users. The study reveals that an audit expectation gap exists in Malaysia, particularly on issues concerning auditor’s responsibility. A wide gap was found regarding auditor’s responsibilities in fraud detection and prevention, preparation of financial statements and accounting records, and in internal control.

To complement the findings of Fadzly and Admad (2004), Lee and Palaniappan (2006) then conducted a survey on audit expectation gap in Malaysia to examine whether an expectation gap exists in Malaysia among the auditors, auditees and audit beneficiaries in the relation to the auditors’ duties. In addition, the study analyses the nature of the gap using Porter’s framework. The results proved the existence of an audit expectation gap in Malaysia. The study shows that the auditees and audit beneficiaries placed much higher expectations on the auditors’ duties compared with what auditors have perceived their duties to be. The analysis of the expectation gap indicated the exis


Financial statements Accruals Prudence and Going Concern concepts

Discuss the problems for companies in applying the accruals, prudence and going concern concepts when preparing financial statements, and explain why at least two other concepts might also be important.

Accounting concepts and conventions as used in accountancy are the rules and principles applied when recording economic events and in the preparation of financial statements, that all accountants abide by. Some of the fundamental accounting concepts that will be discussed are the accruals, matching, prudence, going concern and consistency concepts.

In drawing up accounting statements, you have to make sure that they fairly reflect the true value of the business and the results of its operation. Whether they are external “financial accounts” or internally-focused “management accounts”, a clear objective has to be that the accounts fairly reflect the true value of the business and the results of its operation.

Therefore we use the ‘true and fair view’. The true and fair view is applied in ensuring whether accounts do indeed portray the business’ activities. To support this view, accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting concept and conventions [online], Available from:, Date accessed 12/11/12.

Under the accruals concept revenue and costs are accrued (that is, recognized as they are earned or incurred, not as money is received or paid), matched with one another so far as their relationship can be established and recorded in the accounting records and reported in the financial statements of the periods to which they relate.. Thomas, A 1996, An Introduction to Financial Accounting, 2nd edition, McGraw-Hill

Having decided on the point at which revenue and expenses are recognised we turn to the matching convention. The matching convention in accounting is designed to provide guidance concerning the recognition of expenses. This convention states that expenses should be matched to the revenue that they helped to generate. Applying this convention may mean that a particular expense reported in the profit and loss account for a period may not be the same figure as the cash paid for that item during the period. McLaney E, Atrill P 1999, Accounting an Introduction, 3rd edition, Prentice Hall Europe

All expenses should be matched to the period for which the sales revenue to which they relate is reported. In practice, this may be difficult to do for certain expenses such as gas charges incurred, as this is unlikely to be linked directly to particular sales. As a result, the gas charges incurred would be matched to the period to which they relate. Let’s say that the gas company has yet to send out bills for the quarter that ends on the same financial year end. In this situation, an estimate will have to be made of gas expense outstanding. If the expense is predicted reasonably accurately it will have the desired effect of showing that, at the end of the accounting year. Businesses may face a difficulty in making an accurate prediction especially if it’s their first year in business or the usage of gas varies constantly.

Continuity (going concern) this states that in the absence of evidence to the contrary it is assumed that the business will continue into the indefinite future. This convention has a major influence on the assumptions made when evaluation particular items in the balance sheet. This allows us to assume that stock will eventually be sold in the normal course of business (at normal selling prices). It also allows for the principal of depreciation. If we assume a car will have a useful life to the business of five years, we depreciate this fixed asset over five years. Alexander D, Britton A 1999, Accounting An Introduction, 5th edition, Gray Publishing, Kent.

Problems may arise for companies applying the concepts of accruals and going concern. Under the accruals concept, revenue and costs are charged to the profit and loss account for the accounting period in which they were earned or incurred, not when cash is received or paid. Hence on the profit and loss account income or expenses shown is not what the business received/spent and then the concept of continuity attempts to spread the cost. Thus the concept displays a false picture as to what cash reserves are available within the business, which could result in serious cash flow problems. For example, the sales ledger may show many sales, while in reality the bank account may be empty because debtors haven’t paid yet, therefore the problems will arise when the debtors find it hard to pay off their debt, or delay in payment which will then affect the company’s working capital. Thus, the profit indicated in the annual accounts is unrealistic – as this shows a false picture on the actual business performance at the end of the financial year. The Isab Argues That The Accruals And Going Concern Concepts Are Key Underlying Assumption In The Preparation Of Financial Statements. [online], Available from: [Accessed: 12.11.2009].

Prudence is the exercise of a degree of caution when conditions are uncertain. The aim is to ensure that income and assets are not over-stated and expense and liabilities are not under-stated. Financial Accounting an Introduction 2008, Accounting An Introduction, Ashford Colour Press, Hampshire. The prudence concept dictates that if the resulting future revenue (advertising, research) cannot be assessed with reasonable certainty, the expenditure should be treated as an expense in the profit and loss account of the year in which it is incurred. Managers should also not be over-optimistic in financial reporting, i.e. overstate profits, overstating profits is potentially dangerous because it can lead to a reduction of capital and dividends being paid out of profits that have not been earned.

The prudence concept may be inconsistent with the matching principle and problems may arise for the business. Certain costs such as development expenditure should be carried forward to future years as a fixed asset and matched with the sales revenue generated by this expenditure. However, the prudence concept dictates that if future revenues are difficult to predict accurately, costs such as development expenditure should be written off to the profit and loss account in the year in which they are incurred. The business may overstate its expenses for the year when the benefit from the expense may be beneficial for many future years, like depreciation. Thomas, A 1996, An Introduction to Financial Accounting, 2nd edition, McGraw-Hill

The consistency is concept is also of vital importance for businesses. The consistency concept dictates that there should be ‘consistency of accounting treatment of like items within each accounting period and from one period to the next’. For example deprecation should be calculated the same way for every financial year and the purchase of certain tools and equipment should also be treated as fixed assets in subsequent years. This is to ensure meaningful comparisons can be made between different accounting periods and limit the possibility of misrepresentation. Thomas, A 1996, An Introduction to Financial Accounting, 2nd edition, McGraw-Hill