INVENTORY COST CONTROL MANAGEMENT

INVENTORY COST CONTROL MANAGEMENT

The cost of materials makes up a huge portion of spending in most businesses. Failure to monitor and control these costs can create serious cash flow problems. Conversely having the knowledge and ambition to identify and control big cost areas can make quick heroes of new and seasoned managers alike.

The starting point is identifying the major variable cost items in a typical business and investigating the opportunities and impacts of managing each one. Something that top managers and CEOS all understand is that in most businesses, the cost of inventory is the single biggest opportunity for cost savings and cash flow control available. Few managers make it to the top without this lesson well.

The cost of inventory is the largest regularly occurring expenditure in most business, along with salary. Having enough suppliers available to services all of your customers is critical to your business success. Ordering too many supplies can put you in a serious cash flow crisis. Managing inventory costs is critical business.

In theory, you just predict what you are going to sell and purchase the required components. The problem is the word “predict”. Depending on our business, predicting not only total sales but also the mix of what different things you are going to sell is far from an exact science. There is a certain amount of guess work required in forecasting sales forecasts are generally optimistic and generally speaking, management tip number one is that inventory levels should be heavily based on past performance and not just on future sale forecast.

Maintaining high levels of inventory has some definite advantages. High inventory enable you to secure volume purchase discounts, ensure fast delivery time and reduce the risk of losing sales due to supply shortages.

The price is that you tie up large amount of working capital and run the risk of getting stuck with “stranded inventory” that you are unable to sell when something new or better comes along.

For slow changing industries the benefit of high inventories often outweighs the risk. On the flipside, running low levels of inventory will just enough supply also has its advantages. You can save significantly on warehouse space and let your supplier worry about storage coat and facilities.

You can also keep more working capital available for other activities. Remember that money is not free and dollars not tied up in inventory can be re-invested in the business, or even in outside investments.

The downside is that you will not get the same volume discounts as you can if you keep high stock levels, and you run the risk of lost revenue if your suppliers have problems, or you have a period of higher than expected demand and run short of supplies.

Getting just enough supplies, just in time is great if you need to keep money available for other things, and if you supply needs change frequently. As a manager you need to understand that inventory control is a huge factor in your success.

You need to carefully balance inventory levels to ensure adequate supply without wasting money, managing supply levels requires good trained people, and is not an area you want to scrimp on to save a few dollars.

The most important management tip when it comes to inventory control is that this is your first line of defense when you get in a cash flow crunch.

It is most often the easiest you turn up or turn down to manage cash in a significant way; you may find other items to control but few things inside a business have the large dollar impacts you need when quick corrections need to be made. As an effective manager you need to know the inventory situation of business and learn to use it to your advantage.

REASONS FOR HOLDING INVENTORIES

REASONS FOR HOLDING INVENTORIES

Whether a business is in retailing or manufacturing, there are several cogent reasons for holding inventory. Businesses may hold stocks of raw materials spare parts for machinery, work in progress or furnished goods. Given the there are costs involved with purchases, orders and carriage inwards, a firm might want to minimize its order costs and utilize storage inventory, these costs can be offset if there are good business reasons for so doing:

1. To meet the demand: A business must ensure that it has adequate supplies to meet expected demand for its goods, regardless of whether it is a retailing or production environment.

Particularly where a business has a high demand and rapid turnover, having stock in storage ensures that the firm can comfortably meet anticipated demand.

2. To guard against shortages: holding inventory can act as insurance against future shortages. Unexpected shortages in the supply of raw materials or finished goods can affect the production run of a business or its ability to meet demand. Holding inventories allows a degree of continuity for the activities of an enterprise.

3. To benefit from discounts: Suppliers often offer trade discount for bulk purchases, once those purchases are above a certain amount. A business can reduce the unit cost of raw materials and its ordering cost (delivery, import duties) by purchasing a large amount of goods/raw material to hold in stock.

4. To deal with variations in usage or demand: “Usage” refers to production consumption in a manufacturing process. Increased usage can increase the demand for materials. This is the result of either increased inefficiency or increased production levels. Sometimes a business might cater for special orders or have high seasonal demand that it must address, requiring additional stock to facilitate such occurrences.

5. To facilitate the production process: stock can allow the manufacturing process to flow smoothly and help the business to respond quickly and effectively to contingencies.

6. In times of high inflation/supply shortages: holding vast supplies of inventories can be a deliberate strategy in respond to unusual or difficult economies circumstances. In times of high inflation, a business might not wish to purchase stock at increasingly higher prices. Once the business determines that it is feasible to hold additional inventory beyond the usual levels, this is a very sensible strategy.

7. Some processes require holding work in progress: Inventory can also include work in progress. Some products might have longer production cycles than other. (Like wine and cheese for instance). It is necessary to hold a high volume of inventory to cater for the inherent nature of production in some business contexts.

Naturally, there are restrictions on how many inventory a business could or should hold. The nature of a product, regulations and maximum storage capacity are some elements that limit or determines a business from holding too much inventory. Once a business decides to hold inventory, then a proper inventory management and control is necessary to optimize both the stock levels and inventory cost.

BENEFITS OF INVENTORY MANAGEMENT AND CONTROL

BENEFITS OF INVENTORY MANAGEMENT AND CONTROL

Inventory is an important part in every business. Inventory control refers to the proper balance between the cost and the profit, resulting from the accurate management of items on hand.

Inventory management is essential in every business and its efficiency and effectiveness can significantly reduce the capital losses of the business.

Keeping the equilibrium between the cost of stocks and the profits earned by the business can be very difficult because it requires the evaluation of several inventory related task.

The efficient control and management of stocks relies upon how inventories are organized and regulated, cost predictions, the quantity of items to be ordered and stored and the ideal time to order the items to avoid shortage and profit and loss.

The purpose of controlling and managing the stocks on hand is to determine and maintain the precise amount of investment in the inventory.

Successful businesses are incredibly proficient in managing their inventory and monitoring the items on hand. These enterprises are also very competence in developing plans and applying effective scheme for maintain the optimum levels of investment in the inventory.

Controlling and managing inventory tasks can either be very easy or can be presented in sophisticated and complicated mathematical inventory model. The level of sophistication relies on the size of the business and the requirement needed to keep an effective inventory, to keep losses at the lowest level. But how can business owners carry out a reliable inventory management?

First, it is very important for businessmen to purchase methodically. Purchasing goods only when the stocks are very low is not always a good idea. Do not wait for “out-of-stock” conditions to happen before purchase, but never purchase goods in high quantities, leaving the business loss storage space and sell items in their not-so-good qualities.

The re-ordering point is a critical time for the business. It is the moment when the suppliers are low but can still meet the customer demands and new supplies arrives just-in-time before the last item is sold. Second, it is useful for the business to monitor and frequently update their inventory to check if the items required are ordered, the deliveries are correct and on time, which items are on demand and not selling, spot shortages because of high demand or in some instances, theft and to monitor product expiration and spoilage.

Finally, assign a professional and skilled employee who can efficiently carry out the inventory task.

Businessman must also understand the expense of controlling and managing inventory. The cost of ordering may include fees needed to prepare the purchase, shipping cost, processing of the relevant documents and other miscellaneous fees.

The cost of ordering needs a careful evaluation of the correct amount of orders for the business to save more money and to avoid extra costs on small production runs, overtime and others. The cost of carrying includes financial losses that may come from spoilage or expiration of goods, payment for shortage areas and insurances for the safety of the employees.

Efficient inventory control management leads to smooth business operation and an optimized usage of resources and man power.

Additionally, if the inventory is managed perfectly there is a higher coordination which the employees, consumers and stocks and the internal affairs of the business can be systematically organized.

Proper management and control of inventory will result in the following benefits to an organization. Inventory control ensures an adequate supply of material and stores minimized stock outs and shortages and avoid costly interruptions in operations.

It keeps down investment in industries, inventory carrying cost and obsolescence losses to the minimum. It facilitates purchasing economies through the measurement of requirement on the basis of recorded experience.

It permits a better utilization of available stocks by facilitating inter-department transfers within a company. It provides a check against the loss of materials through carelessness or pilferage.

It facilitates cost accounting activities by providing a means for allocating material cost to products, departments or other operating accounts. Perpetual inventory value provides a consistent and reliable basis for preparing financial statement.

FACTORS INFLUENCING ACCOUNTABILITY

FACTORS INFLUENCING ACCOUNTABILITY

There are various factors which influence accountability in our communities. These are as follows:

1. Relevance of purpose.

2. Clearly defined objective.

3. Identification of competent personnel involved.

4. Choice of instruments for assessment.

5. Assessment practices and methods.

6. Provision of incentives for assessors.

7. Identification of support agencies.

8. A seminar for support agencies.

9. Government involvement.

10. Follow-up assessment for accountability purposes.

The effectiveness of our governmental programmers’ has to be tested in order to justify the taxpayer’s sacrifice and the government’s investments in the public system. It is necessary for the office operators whether citizens, administrators or directors etc. and at the supporting agencies to be mobilized for a total success in accountability.

PUBLIC ACCOUNTABILITY

PUBLIC ACCOUNTABILITY

Public accountability is as old as the existence of human beings in social forms. As old as it is, there remain problems as to what should and from age-old tradition implies stewardship.

One of the earliest records of this can be recalled from the allegory given by Christ Jesus in the gospel according to st. Matthew chapter 25 verse 27 of that chapter succinctly describes an expectation of stewardship. “Thou oughest therefore to have put my money to the exchangers, and then on my coming I should have my own usury.

Accountability according to Nwabueze (2005) is synonymous with stewardship. In the public sector, there appears to be great demand for regular appraisal and reviews of financial performance of public sector bodies. It is also the basic requirement that every steward should be faithful.

Accountability then can be seen as involving: Exercising public power Giving an account of the action taken and Being held to account for those actions.

It is not function of the remuneration of the steward; rather it is a test of faithfulness and transparency. When a steward is faithful in little, much will be added to him. It is by a good performance at a lower post that promotion is gained to a higher post and remuneration is increased.

According to Oshisami (1993:188) accountability in government however goes beyond the stewardship function. The complexity of accountability has very serious consequences, when decisions taken by the public scrutiny particularly by those who were either not parties to those decisions or are even incapable of appreciating the intricacies of such decisions.

Oshisami (1994) identifies five known patterns of accountability viz. legal, political, and financial, ombudsman or public complaint and public opinion.

It would appear those public office holders are expected to show accountability in these five dimensions, our concern in these would be the financial accountability, but in brief mention should be made of legal and political accountability.

Public sector accountability can also be defined as those charged with drafting and| or carrying out policy should be obliged to given an explanation of their actions to their electorate being a composite group that include clients, employees and taxpayers.

Accountability is all about relationship both internally and externally. An important way to communicate accountability is through the provision of financial and related information.

The various aspects are: Financial accountability: it is the accounting system that is intended to keep a record of all legal authorizations as well as commitments, agreements, obligations and expenditure that use any part of authorization granted.

Legal accountability: it is primarily directed towards providing protection for the individual against administrative discretion.

Political and managerial accountability: they are concern with the provision of an account of why frauds are disbursed in a particular manner and what results or benefits thereby resulted.

So every financial accountability calls for:

a. Openly declared facts and open debate of them.

b. The giving of reasons for and explanation of actions taken.

Government accounting system is good but there is lots of accounting and financial control failures and public office holders tend to use these tapes as shield.

Accounting for the stewardship of public office holders and government officials is the basic concept of public accountability. It is the reckoning of revenue and expenditure, government programmers’ and management of the activities of the community. Civil servants have always been instructed by top government authorities to be accountable i.e. answerable to their responsibilities. They should give proper account of their stewardship regularly and most especially at the end of their tenure in the office.

The researcher has the view that the concept of public accountability is difficult to be put into practice in Nigeria because of self-centeredness, social and economic injustice.

In theory, accountability may be defined as process of justifying cost by presenting the positive effect derived from expenditures (Merhens and Lehrmann, 1974).

EVALUATION OF INTERNAL CONTROL

EVALUATION OF INTERNAL CONTROL

The evaluation of internal control within a system comes from:
a. System documentation: i.e. deciding how the system works, and describing this on paper.

b. Identification of potential errors: i.e. recognizing what can go wrong in this system.

Potential errors can arise whenever the is a chance that one of the following objectives might not be achieved or satisfy:

i. Existence or occurrence – i.e. proof that something exists or has happened.

ii. Completeness – which an account balances contains every item that it should.

iii. Valuation or measurement – that a proper system of valuation has been used.

iv. Ownership – proof of ownership of assets.

v. Disclosure – those items that are disclosed whenever disclosure is appropriate.

vi. Identification of controls- recognizing the controls within the system they are designed to detect or prevent errors in the system.
Having identified potential errors and the controls detect or prevent them, the auditor can assess whether the controls appear to be good enough to do their job sufficiently well.

When a control is evaluated, the auditor must assess the level of risk that the control is inadequate or might not be properly applied. Factors to consider:

a. The nature of the control itself.

b. The timing and frequency of the internal check.

c. Who performs the control taking into consideration the competence, experience and integrity of staff, and the degree of supervision;

d. What errors the control has succeeded in identifying and eliminating in the past.

e. Whether there have been changes in the system or in staff, bearing in mind that control procedures might weaken and become slack in the early period of a new system or just after a change of staff.

f. The attitude of management to control.

QUALITIES OF AN AUDITOR

QUALITIES OF AN AUDITOR

According to Okereke (2009: 9), the qualities or characteristics required of an auditor are:

i. Integrity:

This is a skill of dealing with people so as to prevent hurting or offending them unjustly. By being tactful, an auditors can obtain more information and explanation.

ii. Independence:

Before an auditors can give an unbiased opinion, he has to be independent of all the parties involved in the account he is examine.

iii. Competence:

He must be able to perform his work in accordance with the generally accepted best practice and procedures of the day. The knowledge of accounting and auditing standard are inevitable.

iv. Inquisitiveness:

An auditor has a broad and inquiring mind in order to be prepared to ask and for the information and explanation that he or she needs.

AUDITORS RIGHT

According to the provisions of the companies Act 1990 provides the auditor with the following rights:

i. Right to access all the whole books, records and vouchers of the company.

ii. A right to attend all general meeting held during his tenure of office.

iii. Whereby there is a proposed resolution to remove the auditors or appoint another auditors, the company act gives the auditors to be removed a right to demand that those members who receives the initial notice of proposing to remove him and who are entitled to attend and vote at the meeting.

iv. Under the rules of common law, it would appear that the auditors has a right of lien over his report where the company fails to discharge his full obligation.

AUDIT TEST

AUDIT TEST

The language and vocabulary of audit test (ing) include the following;
i. Walk through audit test
ii. Compliance audit test
iii. Substantive audit test
iv. Rotational audit test

i. WALK THROUGH AUDIT TEST

This is the test of the recording of transaction to determine if the auditor has obtained a correct description and understanding of a system.

The modern system base audit requires auditor to have in his working papers a record of the accounting system, this record may be in the form of simple written description, the answer to an internal control questionnaire or a flow chart which may be prepared by audit staff or client staff.

When these has been prepared by the staff sof the client. It is necessary for the auditor to be sure that the record correctly described the system as it exist and is operated. To test the correctness of the description, the auditor takes a field transaction of each type (sample) and walkthrough them. This means tracing the transaction from it ignition e.g. as an enquiry from a customer to the entry in the books of account, looking at documents and records produced, the manner of preparation and the internal control applied.

The objective is to make sure that the auditor has a correct description and understanding of the system.

ii. COMPLIANCE AUDIT TEST

These are those tests which seek to provide evidence that the internal control procedures are being applied as described. If the system appears to be defective, weak then the auditor may need to abandon the system approach and apply substantive test. If the system is effective then the next stage is for the auditor to obtain evidence that the system is applied in accordance to its description at all times.

The evidence is obtained by examining the sample of the transaction to determine that each has being treated as required by the system. A pragmatic (practical) illustration of a compliance test; suppose that a system provided that all credit note used by a client had to be approved by the sales manager and space was provided on each credit note for the initial, then the auditor will inspect a sample of the credit note to determine if all of them have being initialized by the sales manager.

iii. SUBSTANTIVE AUDIT TEST

These are those that test of transaction and balances and other procedures such as analytical review which seek to provide audit evidence as to the completeness, accuracy and validity of the information contend in the accounting record or financial statement. It is any test which seeks direct evidence of the correct treatment of the transaction, a balance of the asset, liability or any item in the books or the account.

Some examples

a. Of a transaction: The sale of a piece of plant will require the auditor to examine the company‟s invoice, the authorization, the entry in the plant register and other books. The accounting treatment and some evidence that the price obtained was reasonable.

b. Of a balance: Direct confirmation of the balance in a deposit account obtains from the bank.

c. Of analytical review Evidence of the correctness of cut off by examining the gross profit ratio.

d. Of completeness of information: Obtaining information from client legal adviser that potential payments from correct litigation have being considered.

e. Accuracy of information: Obtaining from directors a confirmation that a correct statement of remuneration or expenses has being obtained.

f. Validity of information: Validity means base on evidence that can be supported.

iv. ROTATIONAL AUDIT TEST

These are test carried out on the assumption that the auditor will be in office for several years and can in any individual year bring to bear special emphasis on a particular branch. There are basically two kinds of rotational test:

a. Rotation of audit emphasis: The auditor perform a system audit on all areas of client business every year but each year he select one area (wages, sales, stock control, purchase etc) for special in depth testing.

b. Visit Rotation: where the client has numerous branches, factories, locations etc in such case the auditor visit them in rotation so that each will not be visited every year, all will be visited over a period of years. It is vital the rotational tests are carried out randomly so that the client staffs do not know which area of location will be selected in any one year.

Furthermore, the techniques of auditing testing involve four (4) categories which include:

1. INSPECTION
Looking at records, document and tangible assets which involves examining company‟s sales for initial of the member of staffs charged with checking invoice calculation. Give evidence of compliance with a system which prevents calculation error. Example: inspecting building provide evidence of the existence of the building.

2. OBSERVATION
With regard to the procedures actually taking place e.g observing the counting of stock at the year end with the same end in view.

3. ENQUIRY
Seeking relevant information by asking questions from knowledgeable persons inside or outside the enterprise whether formally, informally, orally or in writing. Example: Circularizing debtor or routine quarries to client staffs such as why is invoice company invoice number 63 missing.

4. COMPUTATION
Checking or performing calculation e.g. verifying the accuracy of detailed internal calculation by global calculation or checking the accuracy of stock extension (quantity × cost price).

REFERENCES

Nweke & Unegbu (1998). Introduction to Auditing. Onitsha: Scholar Book Company.

Nwokolo, C. O. (1985). Auditing as a Watchdog. Enugu Pitman Publication.

Osita, A. (1993). Fundamental of Auditing. Onitsha: Tabashi press ltd.

Pratt, M. J. (1993). Audit Practice. London: Pitman publishing company Inco.

WHO IS AN AUDITOR?

According to the Oxford Advance learners Dictionary 6th Edition defined an Auditor as “somebody who verifies accounting data, determines the accuracy and reliability of accounting statements and reports, and then reports upon its efforts.

He is an independent person who reports on the truth and fairness of a financial statement. Thus, the internal auditor(s) of the company who must be a qualified accountant is always charged with the duty of providing a complete and continuous audit or the accounts and records of revenue, expenditure, plant, allocated and unallocated stores, contracts and the internal controls relating to the financial operations of the company.

QUALIFICATION OF AN AUDITOR

Of Colossal importance of paramount necessity is it, and justifiable too to state emphatically that one of the major and indispensable qualification of an auditors is that;

Auditors must undergo professional training and must be registered with an accounting body such Institute of Chartered Accountant of Nigeria (ICAN), ANAM etc at stipulated in the Company Allied Matter Act (CAMA) 1990.

APPOINTMENT OF AN AUDITOR

According to section 358 of Company and Allied Matter Act (CAMA) 1990, the stipulations as regards to the appointment an auditors are as follows;

i. An auditors may/could be appointed by the company if there is casual vacancy in the position of an auditor.

ii. Another reason according the provisions of the said section are when the in ambient, acting auditor dies before the expiration of his tenure.

iii. Yet another reason is when the auditor resign willing.

iv. When the members agree to remove the incumbent auditor before the expiration of his tenure.

v. An auditors may be appointed when at the Annual General Meeting (AGM) of the company, the members, shareholders agree to appoint a new auditor or reappoint the incumbent one.

PROFIT AND PROFITABILITY

PROFIT AND PROFITABILITY

Sometimes, the term ‘profit’ and ‘profitability’ are used interchangeably. But in real sense, there is a difference between the two. Profit is an absolute term, whereas, profitability is a relative concept. However, they are closely related and mutually interdependent having different roles in business.

Pandey (2010), defines profits as the difference between revenue and expenses over a period of time( usually one year) while profitability refers to the operating efficiency of the enterprise. It is the ability of an enterprise to make profit on sales. It is the ability of an enterprise to get sufficient return on the capital and the employees used in the business operation.

Profit is the test of efficiency and a measure of control to the owners, a measure of worth of investments to the creditors, the margin of safety to the government, a measure of taxable capacity and a basis of legislative action to the country. Profits is an index of economic progress. National income generated and the rise in the standard of living while profitability is an outcome of profits. In other words, no profit drives towards profitability.
Firms having same amount of profits may vary in terms of profitability. That is, profits in two separate business concern may be identical, yet, many a times, it usually happens that there profitability varies when measured in terms of size of investments.

VARIANCE ANALYSIS

VARIANCE ANALYSIS

Variance analysis is defined by Ama (2001) as the process of analyzing the total difference between planned and actual performance into its constituent parts, variance analysis can also be defined as a sign post which alerts management to the need for inquiry into cause of off standard results.

Eze and Ani (2009) indicates that the variance analysis involves the analysis of the causes of variance on three major elements of costs viz; material, labor and overhead. The basic variances will be computed by looking at the components of the total cost of material, labor and overheads. These components are quantity and money value for materials while the components of labor and overhead costs are hours worked and money value. Consequently, there are possible ways of analyzing the basic variances;

Material cost variance (MCV)

It is a principal material variance which occurs when the actual material cost is at variance from the standard material cost, in fact, it is the difference between the standard cost for material and actual material costs.

It is determined thus;
MCV= actual cost –standard cost

(AQ X AP) – (SQ – SP)

Where;

AQ= actual quantity

AP = actual price

SQ = standard quantity

SP = standard price

Direct material price variance (DMPV)

This is caused by paying a higher or lower price than the standard price set for material, while the actual quantity hold constant. In equation form, the material price variance is;
DMPV = (AP – SP) AQ

Direct material usage variance (DMUV)

This is caused by using more or less of the standard amount of materials to produce a product or complete a proves where the standard cost holds constant.
In equation form, the material usage variance is
DMUV = (AQ – SQ) SP

Direct labor total variance (DLV)

This is a principal variance. It occurs as a result of the difference between the actual wage pay and standard wage pay.
DLV = (SH X SR) – (AH X AR)

Direct labor rate variance (DLRV)

This is caused by paying a higher or lower rate of pay than standard to produce a product or complete process. The direct labor rate variance is compute by multiplying the difference between the actual direct hour rate paid (AR) and the standard direct labor rate allowed (SR) by the hours of direct labor services required (AH).

In equation form, direct labor rate variance is
DLRV =(AR – SR) AH

Direct labor efficiency variance (DLEV)

It is caused by using more or less of than the standard amount of direct labor hours to produce a product or complete a process. The direct labor efficiency variance is computed by multiplying the difference between the actual direct labor hours required (AH) and the standard direct labor allowed (SH) by the standard direct labor hour rate per hour (SR).

In equation form,
DLEV = (AH –SH) SR

Variable overhead expenditure variance

It is the difference between the actual variable overheads incurred and the allowed variable overhead based on the actual hours worked.
VOEV= Actual variable overhead- (actual labour hour x overhead absorption rate)

Variable overhead efficiency variance

This is the difference between the allowed variance overhead and the absorbed variable overhead.

VOEV= (Actual labour hours – standard labor hours) x variable overhead expenditure rate

Fixed overhead expenditure variance

This is the difference between the actual fixed expenditure attributed and charged to a particular production period and the budget cost allowance for that production period. Alternatively, it is the difference between actual fixed overhead and allowed or budgeted fixed overheads.
Fixed overhead expenditure variance= Actual variable overhead x (actual labour hour x variable overhead absorption rate).

Fixed overhead efficiency variance

This is part of the fixed production overhead volume variance. It is the difference between the actual direct labor hours worked times by the standard hourly absorption rate; and the standard cost absorbed in the production accomplished.

Fixed overhead efficiency variance= Actual labour hours – standard labour hours) x variable absorption rate

Fixed overhead capacity variance :

This is part of the fixed production overhead volume variance. It is the difference between the actual direct labor hours worked times by the standard hourly absorption rate at the budgeted cost allowance for the period.

Fixed overhead capacity variance = (actual hours x fixed overhead absorption rate) – budgeted expenditure

TYPES OF STANDARD

 TYPES OF STANDARD

1. IDEAL STANDARDS

This may be described as an established standard specifically designed on the basis of maximum productive capacity of the organization i.e. standard established without providing adequately for any negative factor that may inhibit the attainment of the standards. For example, labor standards established without the provision for lateness, absenteeism, industrial action, annual leave, maternity leave etc.

2. ATTAINABLE STANDARD

Also referred to as practical standards. This will represent an established standard specifically premised on what is considered practicable within the organization. Practical standards are established with adequate provision for negative factors that may affect the attainment of the established standards. For example, in establishing production standards, adequate provision is given to ideal time or loss of production due to machine breakdown, loss of power, lack of raw materials, repairs and maintenances etc.

3. CURRENT STANDARDS

This will be described as an established standards specifically based on the prevailing working condition within the organization or the industry at large. Current standards are however subject to frequent changes in order to reflect the current position within the organization.

4. BASIC STANDARDS

This will represent an old established standards designed principally to satisfy a given objective. Basic standards are not subject to frequent alterations, therefore, outdated in nature.

INVESTIGATIVE AUDITS

INVESTIGATIVE AUDIT

Ezeilo (2010) defined investigative audit as “audit that are performed to investigate incident of possible fraud or misappropriation of institution funds.” It is usually seen as an audit that takes place as a result of report of unusual or suspicious activity on the part of an individual or a department.

It usually focuses on specific aspects of the work of a department or individual in relation to fraud and corruption, so as to examine how the systems can be reinforced for fraud prevention and detection.

Ezeilo (2010) further explains that investigative audit is a valuable part of audit toolkit because it focuses on the risks that threaten achievement such as risk of fraudulent claims for expenditure, fraudulent provision of services to an organization or fraud and evasion of revenue payments.

It also concentrates on the standards of financial management, implementation of internal control regimes and electronic services.

It is also worth noting that this audit differs from other audits because they are normally conducted without first notifying the personnel who may be affected by the findings.

In carrying out this investigation, the forensic auditors who are usually referred to as investigative auditors have certain principal tools used in investigating, and they include;

i. Information (informants)
ii. Interviews (witnesses)
iii. Interrogation (suspects)
iv. Instrumentation (crime laboratory, comparison microscopes, polygraph etc.).

Out of all these tools, information contribute to the solution of crime more than the other tools, although there are some evidence that instrumentation could be used more frequently and more effectively to solve a greater number of crimes.

FORENSIC AUDITING

FORENSIC AUDITING

As a result of all these things, the auditors coming together decided to have a special people to do an in-depth study of what is happening. The need to incorporate expertise that will be charged with responsibility of carrying out judicial functions together with accounting skills instigate forensic auditing.

Mobile greek (2011), defined forensic auditing as an examination and evaluation of a firm’s or individual financial information for use as evidence in court. It can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.

Forensic auditing is defined as “the application of auditing skills to situations that have legal consequences”. Chatterji (2009). It is also seen as “an examination and evaluation of a firm’s or individual’s financial informations for use as evidence in event”. During a forensic auditing, professionals compile and assess financial information to be used in legal proceedings, whereas the auditing is conducted by forensic auditors who rely on the principles of law, business and ethics. These reports are sometimes used to prepare legal defenses as well as prosecuting a party for fraud, embezzlement or other financial claims. Investopedia (2011).

Forensic auditing has been seen as a specialization within the field of accounting, whereby forensic auditors provides experts testimony during trial proceedings. Nigrini (2011).

In relation to this, Scott (2008) defined forensic defined forensic auditing “as a special practice of accounting that involves using auditing techniques to specifically look for financial misconduct”.

APPLICATION OF FORENSIC AUDIT

Due to the increase of fraudulent practices, there has been increasing risk of auditing skills to prevent fraud by identifying and rectifying situations which could lead to fraud been perpetrated.

It has been observed that the cost of implementing procedures to monitor and restrict the fraudulent acts are far less than the fraud risk that companies face each day. Chatterji (2007).

It will be useful therefore to discuss forensic as being either “proactive or reactive”.

Proactive Forensic: This audit helps businessmen to ensure that there processes stay robust, and it can be viewed from different aspects depending on its application. Ezeilo (2010).

i. Statutory Audit:

In this case, auditing standard prescribe that internal control should be studied and evaluated in respect of safeguarding assets and resources when performing regularity and financial audit, and in assisting management in complying with laws and regulations when performing compliance auditing. Asosai (2011).

ii. Regulatory Compliance:

This technique are usually used by government departments or agencies to access compliance with regulations governing payments or grants or subsides. Performance auditors could also use this technique while auditing such governmental programs. Ezeilo (2010).

iii. Diagnotic Tool:

Forensic auditing can be used either by management or by auditors to carry out general reviews of activities to highlight risk arising either out of fraud or from any other source, with they purpose of initiating focused reviews on particular areas and targeting specific threats to the organization. Asosai (2011).

iv. Investigation of Allegation:

The techniques of forensic auditing are useful in this case, in the sense that various complaints and allegations could be used as a guild for gathering evidence used in investigation. This is cited as being proactive because it is widely felt that the existence of a system of investigation in such cases is significant deterrent to fraud and corruption. Ezeilo (2010).

Reactive Forensic:

They objective of this audit is to investigate cases of suspected fraud so as to prove or disprove the suspicious and if proven, the person involved is to be identified, the findings are to be supported by evidence, after which it is presented in an acceptable format in any subsequent discipline or criminal proceedings. Ezeilo (2010).

Due to the processes involved in reactive forensic audit, it is important therefore to keep in view the following:

i. Working relations with the investigating prosecuting agencies.

ii. Authorization and control of the audit investigation.

iii. Documentation of relevant information and safeguarding all prime records pertaining to the case.

iv. Rules of evidence on government admissibility or authentication of records.

v. Confidentiality of evidential document.

vi. Evaluation of the evidence to asses whether the case is sustainable.

vii. Legal advice where appropriate.

viii. Reporting the findings in a manner that needs legal requirements. Chatterji (2007).

FRAUD RISK MANAGEMENT

FRAUD RISK MANAGEMENT

Fraud risk management is a clinical process that requires constant application and effective maintenance. An effective fraud risk management provides an organization with tools to manage risk in a manner consistent with regulatory requirements as well as the entity’s needs and expectations. In other to achieve this, management is advised to identify their scope and objectives and set targets for improvement together with steps to achieving them. Ekeigwe (2010).

Ekeigwe (2010) also states that management is expected to develop a broad ranging program that encompasses control, deploys a strategy and process for implementing the new controls, and assesses the existing controls in connection to legal and regulatory frameworks, so as to prevent, detect and response to incidents of fraud or misconduct.

PRINICIPLES OF FRAUD RISK MANAGEMENT

The principles based approach effective for establishing an environment with fraud risk management was outlines by Ekeigwe (2010) to include:

1. Fraud risk management which should be in place, including a written policy to convey the expectation of the board of directors and senior management regarding managing fraud risk.
2. Fraud risk exposure that should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
3. Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
4. Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
5. A reporting process should be in place to solicit inputs on potentials fraud and a coordinated approach to investigation. Then correction action should be used to help ensure that potential fraud is addressed appropriately and timely.

FRAUD - Meaning, Element and Types

FRAUD

The term “fraud” is one which is used in variety of meanings. It is usually used as;

a. A tort at common law.
b. A name for false representation.
c. A name for such unfair dealings as it will induce a court of equity to refuse specific performance against the party who has been deceived by such fraud or in some cases, to grant rescission upon the complainant’s application.

According to Adeniji (2010), frauds refers to “an Intentional act by one or more individuals among management, employees, or third parties, which results in a misrepresentation of financial statements”. It may also involve,

• Manipulation, falsification or alteration of records or documents.
• Misappropriation of assets.
• Suppression or omission of the effects of transaction from records or documents.
• Recording of transactions without substance.
  Misapplication of accounting policies.

Adeniji (2010) further explains that among the various definitions of frauds, the most common is that “fraud is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general preposition in defining fraud, as it includes, surprise, lickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human knowing”.

Frauds is also defined “as the crime or offense not deliberately decreeing another in order to damage them usually to obtain property or services injustice”. Ekeigwe (2010).

Also Kano (2004), Opines that “frauds and forgery are jointly defined as irregularities involving the use of criminal detection to obtain unjust or illegal advantage”.

ELEMENTS OF FRAUD

All kinds of frauds including financial statement fraud are outcome of at least three (3) elements which include, pressure, opportunity and rationalization. These three elements make up what we call the fraud triangle.
1. Pressure or motive: it is the need for committing frauds.
2. Rationalization: The mindset of fraudster that justifies them to commit fraud.
3. Opportunity: The situation that enables frauds to occur and this often happens when internal control is weak or non-existent.

TYPES OF FRAUD

The different types of frauds which includes: Employee embezzlement, management frauds, investment scams, vendor frauds, customer frauds, miscellaneously frauds was categorized into three (3) broad headings by Keshi (2011), as internal fraud, external fraud and corruption or collusion.

Internal Fraud: This is the most common form of frauds found in organizations. The perpetrators of this kind of frauds are managers (i.e. top or middle management) and employees.

External Fraud: This is another form of frauds that is being perpetrated by those outside the organization, which may include customers or organized criminal.

Corruption or Collusion: This is one of the most difficult kind of frauds to recognize. It is frauds perpetrated within the corporation by an inside employee and an outsider.

The Nature and Concept of Public Enterprise

The Nature and Concept of Public Enterprise

Public enterprises have numerous definitions and there is no single generally acceptable definition of the concept. Sosna (1983) opined that there are many reasons why in developed capitalist countries, there is no single standard definition of public enterprises. Public enterprises were established at different periods, and each epoch naturally brought forth the types of public enterprises most clearly matching its own conditions.

It is therefore believed that the variation in definition are informed by the ideological, values, interests, dispositions and circumstances that brought public enterprises into existence. Whatever the controversy and the lack of uniformity might conjure up, we would however review the viewpoint of some scholars of public enterprises. For instance, Efange (1987) define public enterprises or parastatal as institutions or organizations which are owned by the state or in which the state holds a majority interest, whose activities are of a business in nature and which provide services or produce goods and have their own distinct management.

Obadan (2000), Obadan & Ayodele (1998) defined public enterprises as organizations whose primary functions is the production and sale of goods and/or services and in which government or other government controlled agencies have no ownership stake that is sufficient to ensure their control over the enterprises regardless of how actively that control is exercised.

The basic reason for establishing public enterprises in all economies has been to propel development. In the opinion of Obadan (2003), the case for public ownership has often been made on many grounds among which are: the persistence of monopoly power in many sectors ( meaning that certain market have the tendency to move towards monopoly power, especially when technological factors); freedom of government to pursue objectives relating to social equity which the competitive market would ignore, like employment and easy access to essential goods and services; capital formation particularly at early stages to develop Investment in infrastructure; lack of private incentives to engage in prospective economic ventures; certain goods that are of high social benefits are usually provided free or at a price below their cost and the private sector has no incentives to produce such goods hence the government must be responsible for their provision; the desire for the government to achieve redistribution by locating enterprises in certain sectors (areas) especially where private initiatives are low; and ideological motivation and the desire of some governments to gain national control over strategic sectors or over multi-national corporations whose interests may not coincide with those of the African countries or over key sectors for planning purposes.

Other factors that accelerated the growth of Nigeria’s public sector was the indigenization policy of 1972 as enacted by the (Nigerian Enterprises Promotion Decree). It was designed to control the commanding heights of the economy. The policy further provided the much needed legal basis for extensive government participation in the ownership and control of significant sectors of the economy. It also reinforced the increasing dominant of the public sector in the economy.

In spite of the impetus given to public enterprises especially in Nigeria some criticisms are leveled against them. Their problems are so enormous that even left the Nigerian public in a state of great disillusionment. These criticisms vary from lack of profitability and reliance on large government subsidies. Ogundipe (2002) once argued that between 1975 to 1999, government capital investments in public enterprises totaled about 43 billion Naira. In addition to equity investments, government gave subsidies of N11.5 billion to various state enterprises.

All these expenditures contributed in no small measure to increased government expenditures and deficits.

Similarly, public enterprises suffer from gross mismanagement and consequently resulted to inefficiency in the use productive capital, corruption and nepotism, which in turn weaken the ability of government to carry out its functions efficiently (World Bank, 1991). There are avalanche of literatures that point to the problems of public enterprises especially in Nigeria. They include, , Sanusi (2001), Obadan (2003), Jerome (2005).

TYPES OF BANK CREDIT

TYPES OF BANK CREDIT

The following are different types of bank credit:

1. LOAN AND ADVANCES
A) OVERDRAFTS: These are the most common and simplest forms of credit facilities. They are usually granted for working capital purposes and the amount outstanding is expected to fluctuate over the life of the facilities, depending on the borrower‟s working capital financing needs, at any material time.

Overdrafts permit the borrower to use those amounts required on a day to day basis, thus saving unnecessary interest charges. In accordance with general banking practice, overdrafts are repayable on demand and can be cancelled at the bank‟s option without prior notice to the borrower. The overdraft limit is usually communicated to the customer and this limit serves as the bank‟s reference point in all drawings by the beneficiary.

B) ADVANCES: An advance is a short-term credit which is granted for a definite period, usually between 30 and 180 days. They are usually granted for specific purposes, for example, payment of various collections, refinancing of maturing loans, project bridging finance, refinancing of letters of credit for project equipment imported etc. The exact maturity date of an advance is normally determined at the onset and this makes it possible for the project to have a lower interest charge on the advance due to the reduced risk (money rate and credit risk).

Short-term loans are also used in financing seasonal increases in working capital and also in temporary accommodations of a project capital expenditure needs, and other long-term commitments, pending final negotiation of long-term loan. Most times, short term loans are usually renewed at maturity. Banks predominantly extend substantial amounts of short-term loans to farming, manufacturing, small-scale project etc.

Short-term loans may be secured or unsecured. Banks extend secured loans to borrowers who have a high debt/equity ratio, or projects that have not established a record of satisfactory performance and stable earnings or generated enough sales revenue in relation to their capital. Large exposures are also often secured.

Unsecured loans, although disallowed by banking laws in Nigeria, are granted in exceptional cases to projects that are properly financed, have adequate capital and net worth, competent management, stable earnings, a record of prompt payment of obligations, and a bright future. Unsecured loans, however, often crystallize into bad debts in the Nigerian banking scene.

C) MEDIUM- TERM LOANS: These constitute important sources of intermediate funds for projects and businesses. Medium-term loans are usually granted for specific purposes such as investments, equipment financing, housing, share acquisitions, agricultural financing, construction etc.

A medium-terms loan is a facility with an original maturity of more than one year or a loan granted under a formal agreement (revolving credit or credits) on which the original maturity of the commitment is in excess of one year. Medium-term loans have maturities of between 1 and 5 years.

They are negotiated between a borrower and a lender and are most prevalent in industrial projects characterized by heavy fixed capital requirements. Most of the loans however are made to small projects and businesses which rely on these sources, due to their limited access to the capital market.

Medium-term loans provide flexibility for the user and are amortized in fixed instalments on a monthly, quarterly, semi-annual or even annual basis, as the case may be. The interest rates on this type of loan amongst other factors depend on the general level of interest rates prevailing in the market, the amount and maturity of the loan and the credit standing of the borrower. Generally, the interest rates is higher than in ordinary advances or short-term loans due to higher money and credit risks and the fact that it is less liquid.

Medium-term loans are usually supported by a loan agreement between the bank and the borrower. This agreement outlines the terms and conditions of the loan, and other important features such as:

1) Preamble which contains the parties to the loan and the purpose of the loan

2) Amount of loan

3) Tenor. The maturity of the loan is usually well specified.

4) Repayment schedule; term loans generally specify that a repayment schedule be in the form of an annuity.

5) Interest rate- this is usually specified and may range from fixed rates to floating rates

6) Security/ guarantee. There are usually specifications for collateral.
When a revolving credit agreement that does not require collaterals is converted into a term loan, the borrower may then have to secure the loan according to the conditions of the loan agreement.

7) Representations and warranties

8) Covenants of the borrower: This usually includes affirmative covenants, the negative covenant and other restrictive clauses. An example of a restrictive clause/negative clause are restrictions on the borrower from special actions such as increasing its dividend payments, making loans to its officers and /or directors and purchasing or leasing fixed assets etc.

9) Events of default/acceleration clause

10) Miscellaneous matters
Usually, a borrower is expected to execute series of promissory notes corresponding to each repayment date. Enforcement of repayment is thus facilitated and the parties tend to have a greater faith in the agreement

ADVANTAGES OF TERM LOANS
(i) Term loan affords the borrower the advantage of trading on its equity. This concept assumes that the profits on the borrowed funds exceed the cost of borrowing.

(ii) With a term loan, it is possible for the borrower to negotiate the provisions of the initial lending agreement directly with the lender.

D) LONG-TERM LOANS: Banks in Nigeria do not usually provide much of long-term loans. This is due to the nature of their deposit liabilities from where the loans are granted. Recently, however banks have been engaging in long-term lending through syndicated loan arrangements.

Long-term loans are usually provided by investment banks, development banks and various international lending agencies.

Long-term loans are granted for periods exceeding five years, and are usually provided for fixed capital requirements. They are amortized in fixed instalments like medium-term loans.

The interest rate on this type of loan is tied to market rates and usually is higher than other rates in the market, due to the higher risk exposures.

(2) SPECIAL CREDITS
These are special types of credit facilities extended by banks in favour of various projects and businesses. They are usually non-fund based and are classified as credit since they entail some risks on the part of the bank/financial institution providing the facility

(1) Public Works Bond: these are three types of public works bond.

(a) The Bid Bonds or Tender Bonds: The essence of bid bonds is to ensure that the party, to whom a project or contract has been awarded, will execute the contract successfully. The bid bond is called for the employer as soon as the contractor fails to accept the award. This is because failure to accept the terms of the contract may result in an additional cost of rewarding the contract to another contractor.

(b) Advance Payment Guarantees: most times, a bank is required to issue a guarantee on an advanced payment made to a contractor by the employer, prior to the commencement of the contract. The guarantee is in terms of the contractor‟s financial and technical standing.

(c) Performance bonds: banks issue this type of bond on behalf of their clients who have contracts. The bond provides a guarantee on the contractor‟s capability of handing the contract, his financial standing and credit rating.

(2) Customs and Excise Bonds: this type of bond is issued a by the bank to guarantee a third party ( usually a government organ) with regards to an importer‟s capability of making payment of customs duties (for imports) and excise duties ( for manufactured goods in Nigeria). As soon as the customer defaults, the bank would be held liable to pay the sum guaranteed.

(3) Bills of lading indemnities: A bill of lading is a quasi-negotiable document which confers title to goods. Banks usually issue a bill of lading indemnity to their customers, in cases where the goods imported into the country arrive before the importer (customer) receives the bill of lading. This indemnity issued will thus assist the customer in clearing the goods.
The bill of lading indemnifies the shipping company against any loss or subsequent claims on the ownership of the goods covered by the indemnity and usually the bank is primarily liable on the indemnity.

(3) DOCUMENTARY CREDITS
A documentary credit or letter of credit is a written commitment of one bank addressed to an identifiable party to pay the seller of goods or services, an agreed sum of money on condition that the seller produces documents evidencing that the goods have been shipped or that he has performed the services required of him. There are different types of documentary credits. These include: the revocable documentary credits, the irrevocable and confirmed credits. Others are revolving credits, red clause, „bank to bank‟ credit and stand-by letters of credit. For our purpose we shall concentrate on the following types.

a) Revocable Documentary Credit

b) Irrevocable, Unconfirmed Documentary Credit

c) Irrevocable Confirmed Documentary credit.

i. Revocable Documentary Credit: A revocable documentary credit allows the issuing bank to amend or cancel the credit without notice to the beneficiary (the seller) before he is paid.

ii. Irrevocable, Unconfirmed Documentary Credits: this represents a commitment by the issuing bank (usually the buyer‟s bank) to pay the seller, if the terms of the credit are met and it is usually not amended or cancelled without the seller‟s consent.

iii. Irrevocable and confirmed documentary credit: this type of documentary credit offers the best security for payment to the seller assuming he fulfils his part of the contract. In the arrangement, another bank (the confirming bank) commits itself to paying the seller, if all the conditions of the credit are fulfilled.

Documentary credits could also be categorized according to the terms of payment. Here, we could distinguish between sight credit, acceptance credits, deferred payment credit, red clause‟ credit and revolving credits.

(i) Sight credit- this is a situation where the beneficiary receives payment on presentation and examination of the documents.

(ii) Acceptance credit- In this type of credit, the beneficiary draws a time draft either on the issuing or confirming bank or on the buyer or another bank, as specified in the documentary credit. As soon as it is accepted by any of the parties above, the issuing and confirming bank guarantee payment of the instrument at maturity to any confide holder.

(iii) Deferred credit– in this form of credit, the issuing or confirming bank issues a written promise to make payment on due date. This contrasts with the acceptance credit since in the latter case; a draft is accepted upon presentation of properly confirmed documents. Here, there is an obvious advantage since the draft being a negotiable instrument, could be easily discounted.

(iv) “Red- clause” credit- this is a special type of advance credit. It authorizes the advising bank to advance a part of the credit amount to the beneficiary to enable him mobilize the merchandise.

(v) Revolving credit– this form of payment, arises where a buyer intends to place orders in excess of his requirements. The revolving credit is established stipulating intervals of delivery and thus guaranteeing payment of each delivery, assuming the terms of the credit are maintained.

The process of establishing a documentary credit involves two banks and two parties: the importer and exporter. It should be noted that banks adopt normal credit evaluation methods in granting these special credits. The basic requirements, most time, are the same as in normal loans and advances.

The two banks involved in documentary credit transactions consists of, first, the importers‟ bank also known as the opening (establishing) bank. There is also the confirming or notifying bank that is the exporter‟s bank.

REFERENCES

Bajcom, W. R. (1952). The ESUSU- A credit Institution of the Yoruba, “Journal of the Royal Auth, Institute LXXXII, I, PP 63-69.

Adekanye, f. (1986), The Element of Banking in Nigeria. U.K, Bedforddure, Gralam Burn.

Agene, C. E. (1995), the Principles of Modern Banking, Abuja, Gene Publications.

Ahmad, N.H., and Arih M. (2007), Multi-country study of Bank credit risk Determinants, International Journal of Banking and Finance, 5 (1), 135 – 152

Jhingan, M.L (2002), Macro Economic Theory: the Credit Creation 10th Edition, Delhi, Vrinda Publications (p) LTD.

SOURCES OF FUND IN THE HOSPITAL

SOURCES OF FUND IN THE HOSPITAL

It is thus important to look and examine the sources of income to a hospital since this will enable us to have a clear understanding of the systems. Since the items of income of a hospital are not similar to those of ordinary business entity.

These items are divided into two sub-heading, viz;
a) Medical fees
b) Non-medical fees.

MEDICAL FEES SOURCES OF FUND

These belong to the items of medical services, that is these income are those that relates to the main hospital business. They are as follows:

i. Admission fees: Admission fees are payable to the hospital when a patient is fully permitted to receive services from the hospital. This sum is always equal to all patients in the hospital.

ii. Diet fee: This income depends on the quality and quantity of diet the hospital is giving to the patient.

iii. Nursing services: Nursing services depends on the number of times the patient receives such services.

iv. Operating fees: This income depends on the nature of operation. Presently, in some hospitals the sum payable by patients ranges from ₦5000 and above.

v. Sterilization: This comes as a result of taking care of injuries and tendering it till the wound is healed.

vi. Card fees: In the form of admission fee, it is payable for treatment on this card recommendation is made by doctors.

vii. Open Health Operation fees: These incomes relates to outdoor operation services rendered by the hospitals to her patients.

viii. Physiotherapy: This income is generated as a result of treatment by means by exercise, massage, the use of light, heat, electricity and other natural forces.

ix. Casual collection fees: These fees are charges per head on collection of casualty. Example, motor accident victims who are unfortunate.

x. Storage of body: Where a patient dies at the hospital and the body is left for some days at the hospital, an amount is paid by the relatives of the decreased on collection of the body.

xi. Anti-Natal: This income is generated from the periodic check of pregnant women at the hospital during pregnancy.

xii. Lab-fee: For laboratory tests carried on by the laboratory scientist at the hospital to generate income.

xiii. Ultra-sound: Similar to lab fee, X-ray fee, etc.

NON-MEDICAL SOURCES OF FUND

These include other services which are indirectly related to the services of

a hospital. They include following fees:
1. Sale of forms: Hospitals sells forms to intending Nursing students and the money paid for this form are usually not refundable even where the applicant fails.
2. Grants: These may be from government for improvement of services and equipments in the hospitals. For instance, World Health Organisation (W.H.O) may through its agencies in the country decide to grant hospital some money for improving the services but this is usually to government owned hospitals.
3. Donations: These incomes are not always expected. It is a wilful gift from individuals, organisations, and government agencies to the hospitals. Example, government may donate a sum of money to the hospital.

COST BENEFIT ANALYSIS

COST BENEFIT ANALYSIS

The term cost benefit analysis as Broadway pointed out refers to the measurement of the economic benefits from any change in resources allocation. In the context of public finance, it most often refers to calculation of net special benefit arising from specific public expenditure such as road, irrigation or a disease control programme.

Nepworth (2000) defined cost benefit analyses as a technique for use in either investment appraisal or measuring the cost and benefit of the community adopting specified course of action.

The objective of cost benefit analysis is that it tries to take into account all the cost and benefits which will accrue from project.

Therefore, cost and benefit are defined in the widest sense and not only to narrow accounting definitions.

MANAGEMENT AUDIT

MANAGEMENT AUDIT

Management audit according to Auditing Guidelines, is an objective and independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives and policies. Its main aim is to identify existing and potential management weakness within an organisational and to recommend ways to rectify, these weakness.

Herbert suggests the following definitions:
a) Management auditing is the terms used for evaluating the efficiency and economy of a given operation.

b) It is distinct from program auditing which is used to evaluated the effectiveness of a given operation.

c) Management auditing could be described as performance auditing.

Washbrook (1999), gives a wider definitions as follows “Because of the importance of standards procedures and controlled organisations, there has been a tendency to extend the functions of internal audit departments, to cover the checking of many aspects which are neither financial nor connected with the assets of the company in the accounting sense.

The total examination of an organisation, or part of it include checks on the effectiveness of managers; their compliance with professional standard; the reliability of management data; the quality of performance of duties and recommendations for improvement. These are variously termed management audits”. A management audit would focus attention on the managers themselves.

The primary aim of management audit is to motivate management to take action which will lead to an increase in efficiency and decrease in expenses and also increase in profitability of an organisation through exist reduction.

Philip explained management audit as a systematic, comprehensive, critical and constructive examination and appraisal of the organisational structure, management practice and method conducted by an external auditor.

It involves a review of each and every aspect of management activities and its objective is to ascertain whether or not economic resources of an organisation are used by its management in the most economic way to produce the maximum possible result in the shortest possible time in accordance with its goal management audit contains management auditors finding and specific recommendation, its objective is to motivate management to increase in efficiency and profitability of the organisation.

REFERENCES

Ejiofor, P. (2002). Managing Government owned Companies. Enugu: Fourth Dimension Publishing.

Drury, C. (2002). Management and cost accounting. London: Thomson learning Publishers.

Copeland, R. N (2004). Management Accounting, New York: John Willey and Sons 1978

Bigg, and Davis (2000). Internal Auditing, 4th Edition. London, H. F. L Publishers.

Batty, J. (2003). Management Accounting, Lagos: Kate Publishing.

INTERNAL AUDITING

INTERNAL AUDITING

The growing recognition by the management of the advantages of good internal control system and the complexities of an adequate system of internal control in government and privately owned hospitals has led to the development of internal Auditing as a method or form of control over all controls.

Giles (2001) notes that emergency of the internal auditor as a specialist in internal control is the result of an evolutionary process that is similar in some ways to he evolution of independent auditing.

Internal auditing is an element of internal control system set up by the management of an organisation to examine, evaluate and report on accounting and other controls in operation.

However, Lucey (2002) described internal auditing as a review of operations and records, sometimes a continuous undertaken without an organisation by specially assigned staffs.

Internal audit is defined as an independent appraisal activity established within an organisation as a service to it. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls.

FEATURES OF INTERNAL AUDITING

From the above definitions, two main features of internal auditing emerge:

a) INDEPENDENCE: Although an internal audit department is part of an organisation, it should be independent of the line management whose sphere of authority it may audit. The department should therefore report to the board or to a special internal audit committee and not to the finance director.

The reason for this is best seen by thinking about what could happen if the internal audit department reported some kind of irregularity to a finance director without realizing that the finance director was actually involved.

b) APPRAISAL: Internal audit is concerned with the appraisal of work done by other people in the organisation, and internal auditors should not carryout any of the work themselves. The appraisal of operations provides a service to management, providing information on strengths and weakness throughout the organisation.

SCOPE AND OBJECTIVES OF INTERNAL AUDITING

the scope and objectives of internal audit are as follows:

I. Review of the accounting and internal control system: Management is responsible for the establishment of adequate accounting and internal control systems. Often, internal audit is assigned specific responsibility for reviewing the design of the systems, monitoring their operations and recommending improvements.

II. Examination of financial and operating information: This may include review of the means used to identify, measure, classify and report information and specific enquiry into individual items including detailed testing of transactions, balances and procedures.

III. Review of economy, efficiency and effectiveness: This review may include the non-financial controls of an organisation.

IV. Review of compliance: This review may cover compliance with laws, regulations and other external requirements and with internal policies and directives and other requirements including appropriate authorization of transactions.

V. Special investigation: One example is suspected frauds.

The essentials for effective internal auditing are as follows:

I. Independence: The internal auditors should have independence in terms of organisational status and personal objectivity which permits the proper performance of their duties.

II. Staffing and Training: The internal audit unit should be appropriately staffed in terms of numbers, grades, qualifications and experience, having regard to its responsibilities and objectives. Training should be a planned and continuing process at all levels.

III. Relationships: The internal auditors should seek to foster constructive working relationship and understanding with the management, external auditors, with any other review agencies and where one assets with audit committee.

IV. Due care: The internal auditors cannot be expected to give total assurance that control weakness or irregularities do not exist, but they should exercise due care in fulfilling their responsibilities.

V. Planning, controlling and recording: Like the external auditors, internal auditors should adequately plan, control and record their work. As a part of planning, the internal auditors should identify the whole range of systems within the organisation.

VI. Evaluation of internal control system: The internal auditors should identify and evaluate the organisations internal control system as a basis for reporting upon its adequacy and effectiveness.

Therefore, Nepworth (2000) opines that the most important concern of internal audit is to ensure that financial dealing of organisation are conducted in proper manner, that no fraud or misappropriation of funds or accounts occurs and that proper system of financial control including internal check arrangement, that is one part of the system automatically checking on another exists.

REFERENCES

Anderson, R. J. (1999). Federal Audit, concept and Techniques. Toronto: Pitman Publishing Company.

Bigg, and Davis (2000). Internal Auditing, 4th Edition. London, H. F. L Publishers.

Hermanson, E. S (2002). Accounting principle. Columbia Charika Publisher.

Nwoko, C. (2008). Internal Control in Business. Enugu: Abic Books Ltd.

INTERNAL CONTROL

INTERNAL CONTROL

The Auditing practices committee defines internal control system as the whole system of control, financial or otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management’s polices, safeguard the assets and secure as far as possible the completeness and accuracy of the records.

Control procedures which means those policies and procedures which management has established to achieve the entity’s specific goals and objectives. Specific control procedures include:
a) Reporting, reviewing and approving reconciliations.

b) Checking the arithmetical accuracy of records.

c) Maintaining and reviewing control accounts and trial balances.

d) Approving and controlling of documents.

e) Comparing and analysing the financial results with budgeted amounts.

Some of the features of internal control are as follows:

1. Segregation of duties: One of the prime means of expenditure control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction, segregation of duties reduces the risks of intentional manipulation or error, and increases he element of checking.
2. Physical: These internal controls are concerned mainly with the custody of assets and involve procedures and security measures designed to ensure that access to assets is limited to authorized personnel.
3. Authorization and Approval: All transactions and actions should require authorization or approval by an appropriate responsible person.
4. Supervision: Any internal control system should include the supervision by responsible officials of day-to-day transactions and the recording thereof.
5. Arithmetical and Accounting: These are controls within the recording function which check that the transactions to be recorded and processed have been authorized, that they are all included and that they are correctly recorded and accurately processed. Such controls include checking the arithmetical accuracy of the records, the maintenance and checking of totals, control accounts and accounting for documents.
6. Personnel: This is the procedures to ensure that personnel have capabilities commensurate with their responsibilities.
   John (2002) states that even basically honest employees may be tempted occasionally to steal assets or otherwise o take advantage of his/her position of authority to trust in the company.Guarding against dishonest and honest mistakes are the prime concern of expenditure control which can be expected through its accounting procedures.

An organisation whether profit or non-profit making needs to design, install and enforce concrete procedure and method so that its accounting system will be highly reliable.

It is management’s lack of attention to internal control that encourages expenditure to reach a very high level.

There is no substitute for good internal control system as a means of expenditure control.

RESPONSIBLITY FOR INTERNAL CONTROL

Willsmore (1999) attests, that responsibility for establishing and maintaining adequate internal control rests with the management. This attestation is supported by the CICA in Audit Technique study, internal control and procedure audit test where it states that “it is management which is responsible for safeguarding the assets, ensuring that accounting data is reliable, promoting operating efficiency and adherence to prescribed policies.

It points out that the internal control system should not be regarded as something installed purely to meet the auditor’s need, but should include the controls which the management considers necessary to discharge its responsibilities.

Willsmore, however notes that an auditor in making audit is to review the internal control system and check that which is in existence. As a result, he noted that the auditor may recommend modifications and improvements to the system but the entire responsibility for safeguarding the asset still rest on the shoulder of the management.

There are two approaches to the classification of internal control, vix:

a) That given by the Auditing Statement and Guidelines 3204. The guideline classified internal control by organisation, segregation of duties, physical control, authorization and approval, arithmetic and accounting, personnel supervision and management.

b) International standards on Auditing (ISA 400) classified the internal control by its objectives, Jurisdiction method and general nature.

REFERENCES

Hermanson, E. S (2002). Accounting principle. Columbia Charika Publisher.

Jack, C. R. (2004). Auditing Practices. London: Butter Worst Publisher.

Nwoko, C. (2008). Internal Control in Business. Enugu: Abic Books Ltd.

Ama, G. A. N (2001). Management and cost accounting: current theory and practice. Abia. Amasons publishers ventures.

OVERVIEW OF EXPENDITURE CONTROL

OVERVIEW OF EXPENDITURE CONTROL

Expenditure control involves the regulations, limitations of confinement to expenses to minimize over spending and ensure compliance with specified plans of the organisation. Expenditure control also means the management tools that guides and ensure that the organisational spending are in accordance with the policy plans and for the achievement of organisational goals and objectives.

For expenditure control to be effective, it must have a dual purpose, viz:
a) It must attempt to keep, misappropriation, inefficiency and other expenses under check.

b) It must allow for re-allocation of system of record which will establish accountability for expenses, the employment of current and concise accounting and statistical report to reveal their duties.

Expenditure control is also the regulation of cost of operating s business and is concerned with keeping the costs within acceptable limits. Expenditure control can be seen as an exercise in good managerial activities by avoiding wasteful use of valuable resources and encouraging efficiency and cost consciousness.

However, expenditure control is the process of ensuring that firms activities conform to its plan and that its objectives are achieved. There can be no control without plans and objectives, since these predetermine and specify the desirable behaviour and set out the procedure that should be followed by members of the organisation to ensure that a firm is operated in a desired manner. Expenditure control encompasses all the methods and procedures that direct employees towards achieving the organisational objectives.

Therefore, the aim of expenditure controls is to influence the employees behaviours in desirable ways in order to achieve the organisations goals and objectives and in order to increase profitability.

REFERENCES

Adeniji, A. A (2009). Cost accounting: a managerial approach. Lagos. El Today Ventures Limited publishers.

Ama, G. A. N (2001). Management and cost accounting: current theory and practice. Abia. Amasons publishers ventures.

Asika, S. D. (2001). Loss Prevention, control and concepts, London: Butter Worst Publisher.

Hermanson, E. S (2002). Accounting principle. Columbia Charika Publisher.

Howard, F. (2003). System Based Independent Audit. New Jersey: Prentice Hall Inc.

THE PROBLEM OF INVENTORY MANAGEMENT

The method to be used in inventory valuation has been the perennial problem that is prevalent with all organizations. Organizations maintain and keep adequate inventory for a number of reasons. Fundamentally, it may be economically impossible or unsound to have goods manufactured or supplied in a given system precisely at the time the demand for it occurs.

Without inventory, customers will have to wait until the orders were met from a source external to the client firm or such orders may be delayed until production has been undertaken. In most cases, customers do not wait for this delay in production or supply and what happens is that the customers looks for alternative source of supply which means the loss of that customer either temporarily or permanently and the loss of the profit on the sale with its spill over effect.

In some cases, organizations may deem it necessary to hold a good number of inventories when it is absolutely certain there is a likely possibility of an upward shift in material input or supply prices. The organization on the other hand may keep lower inventories when it anticipate a decrease in material or supply prices.

It is pertinent to indicate that in retail concerns, inventories are maintained in order to have various goods on display but still attract potential customers. There is this ascertain that varieties of goods on display to customers help to boost sales and profit. In practice, raw materials are purchased in large quantities in order to reduce cost associated with purchasing to obtain a favorable price, minimize handling and transportation cost. Inventory is of enormous economic benefits to organizations. However, the valuation of inventory has been a common problem in most organization.

According to Doug Brinlee (2006:379) he said that a successful business relies on many factors, one of which is a reliable inventory management system. Inventory management problems can interfere with a company profits and customer service. They can cost a business more money and lead to an excess of inventory over stock that is difficult to move. Most of these problems are usually due to poor inventory processes and out of date system. They are a number of problems that can cause havoc with inventory management. Some happen more frequently than others. Here are some of the more common problems with inventory system:

• Unqualified employees in charge of inventory.
• Using a measure of performance for their business that is too narrow.
• Unrealistic business plan for a business for the future.
• Not identifying shortage ahead of time.
• Too much “distressed stock” in inventory
• Items in stock getting misplaced
• Not keeping up with the rising price of raw materials, etc