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Friday, 24 June 2011

IA Function


Internal Audit System
Written by Administrator   
Monday, 04 August 2008 00:00
Internal auditing is a profession and activity involved in advising organizations regarding how to better achieve their objectives. Internal auditing involves the utilization of a systematic methodology for analyzing business processes or organizational problems and recommending solutions. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The operation of internal audit is based on the nature of the Company such as Listed Company, Joint Stock Company or Limited Company. We only shows the general system that widely apply over the World.

Purpose of the internal audit

To assist the Board of Directors and Managers in promoting sound operations of the company and reasonably ensuring the objectives listed below are achieved. At the same time, to make timely recommendations for improvements to ensure sustainable operating effectiveness of the internal control system and to provide a basis for review and correction for the system.

- Effectiveness and efficiency of operations,
- Reliability of financial reporting, and
- Compliance with applicable laws and regulations.


The organization of the internal audit
(Just for reference only, the organization of internal audit is depend on the Company's structure)
Internal audit department reports directly to the board of directors. The appointment or discharge of internal audit executives shall be approved by the board of directors.


Internal Audit’s Functionality

The scope of the Internal Audit includes inspecting and reviewing the appropriateness and the effectiveness of internal controls system in each department of the company, and estimating the efficiency and effectiveness of operations. To be more specific, the scope of the internal audit includes:

Inspecting the reliability and completeness of the financial and operating information.
Inspecting the current system to ensure the compliance of policies, plans, procedures, contracts, and laws.
Reviewing the securing of assets, and, if necessary, verifying the existence of the assets.
Evaluating whether resources are being used economically and efficiently.
Reviewing the operations and special projects to ensure their results are consistent with the specified goals.

The Targets of the Internal Audit include all business units and subsidiaries this company is responsible for. The staffs of the inspected unit should cooperate with the inspection closely.

The Method of the Internal Audit In principal the inspecting staff should go to the unit for on site inspection and request the inspected unit to submit documents, accounts, certificates, etc. for documental inspection.

The Internal Audit Work Process

The internal audit includes the planning of inspections, the examination and estimation of information, the communication of the result, and the tracking after inspection.
In consideration of the risk, the annual plan of the internal audit should set major inspecting points for each individual case and keep journals of the audit.
After the inspection comes to an end, communicate with the director of the inspected unit regarding the results; when necessary, acquire the improvement plan and the presumed date for completion. The inspecting staff should track the status of the improvement.
The inspection report and the tracking of abnormal issues should be reported to the Supervisors and the independent directors for review.
The Timing for the Internal Audit

Regular Internal Audit: To ensure that the internal control of the company is effectively carried out, the Internal Audit Unit should set up the annual plan of inspection and determine the time of inspection for each inspecting item before the end of each year according to the characteristics of the trading cycle, the frequency of transactions of the company, and the complexity of operations.

Irregular Internal Audit:To fully understand the current situation of the inspected unit, the Internal Audit Unit may set up inspecting items regarding the importance, the risk, the frequency of transactions, and the complication of operations of each activities of the trading cycle.

Project Internal AuditTo ensure the effective implementation of the internal control of the company, the inspecting staff should launch inspections based on the time and the themes determined by the senior directors of the company or the director of the Internal Audit Unit.

JOB DESCRIPTION FOR YOUR REF
Job description - Chief Audit Executive              - Click to download
Job description - Internal Audit Director             - Click to download
Job description - Internal Auditor Manager          - Click to download
Job description - Senior Internal Auditor             - Click to download
Last Updated ( Monday, 23 May 2011 11:59 )
 
Code of Ethics


Code of Ethics
Written by Administrator   
Monday, 23 May 2011 11:45
Principles
Internal auditors are expected to apply and uphold the following principles:
1. Integrity
The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment.
2. Objectivity
Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments
3. Confidentiality
Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so.
4. Competency
Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services.

Rules of Conduct

1. Integrity
Internal auditors:
1.1. Shall perform their work with honesty, diligence, and responsibility.
1.2. Shall observe the law and make disclosures expected by the law and the profession.
1.3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization.
1.4. Shall respect and contribute to the legitimate and ethical objectives of the organization.

2. Objectivity

Internal auditors:
2.1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.
2.2. Shall not accept anything that may impair or be presumed to impair their professional judgment.
2.3. Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.

3. Confidentiality

Internal auditors:
3.1. Shall be prudent in the use and protection of information acquired in the course of their duties.
3.2. Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization.
4. Competency
Internal auditors:
4.1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience.
4.2. Shall perform internal audit services in accordance with the International Standards for the Professional Practice of Internal Auditing.
4.3. Shall continually improve their proficiency and the effectiveness and quality of their services.
 
FR - Investment Ratio
Written by Administrator   
Thursday, 21 August 2008 18:36
NPV - Net Present Value

Net present value (NPV) or net present worth (NPW) is defined as the total present value (PV) of a
time series of cash flows. It is a standard method for using the time value of money to appraise
long-term projects. Used for capital budgeting, and widely throughout economics, it measures
the excess or shortfall of cash flows, in present value terms, once financing charges are met.

How to calculate
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed.
Therefore NPV is the sum of all terms Ct*(1+r)t, where

t - the time of the cash flow
r - the discount rate (the rate of return that could be earned on an investment in the financial markets
with similar risk.)
Ct - the net cash flow (the amount of cash, inflow minus outflow) at time t (for educational purposes,
C0 is commonly placed to the left of the sum to emphasize its role as the initial investment).

Decision Making

If...It means... Then...
NPV >0 the investment would add value to the firm the project may be accepted
NPV < 0 the investment would subtract value from the firm the project should be rejected
NPV = 0 the investment would neither gain nor lose value for the firm We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.


IRR - Internal Rate of Return
The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they
should make investments. It is an indicator of the efficiency of an investment, as opposed to net
present value (NPV), which indicates value or magnitude.

How to calculate
Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows
from the net present value as a function of the rate of return. A rate of return for which this function
is zero is an internal rate of return.
NPV =∑(Ct*(1+r)t = 0

Decision Making
A project is a good investment proposition if its IRR is greater than the rate of return that could be
earned by alternate investments (investing in other projects, buying bonds, even putting the
money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including
an appropriate risk premium.
Last Updated ( Monday, 25 August 2008 14:20 )
FR - Profitability Ratios
Monday, 23 June 2008 13:52
Ratios are a way to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency, and debt load of your business. They are used to measure the relationship between 2 or more components of the financial statements and have greater meaning when the results are compared to industry standards for businesses of similar size and activity

Profitability ratios: how much profit is being generated
· Earnings per share · Net profit margin · Return on shareholders' equity · Return on total assets· Coverage ratio

Earnings per share
Calculation: ( net income - preferred dividends ) / number of common shares

Measures the after-tax earnings generated for each share of common stock. Earnings Per Share does not apply to preferred shareholders as they receive dividends before any dividends are made to common shareholders. Preferred dividends are subtracted from net income to calculate the amount available to common shareholders.

Example:
Earnings per share : $ 4.64
Indicates the number of dollars of income have been earned for each share of common stock. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity


Net profit margin
Calculation
: net profit after taxes / net sales

Also called the Return on Sales Ratio, it shows the after-tax profit (net income) generated by each sales dollar by measuring the percentage of sales revenue retained by the company after operating expenses, creditor interest expenses, and income taxes have been paid.
Example: Net profit margin : $ 20.70
Indicates the number of profit dollars generated for each $100 in sales. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity


Return on shareholders' equity
Calculation
: ( net income for the year - taxes - interest ) / shareholders' equity

Measures the rate of return the shareholders receive on their investment in your business. Net Income for the Year is after taxes and interest because the shareholders are only entitled to the balance.

Example: Return on shareholders' equity : $ 0.45
Indicates the dollar amount of after-tax and after-interest profit generated for each $1 of equity. This result can positive or negative, depending on the industry standard for companies of similar size and activity.


Return on total assets
Calculation
: income from operations / average total assets

Measures the efficiency of assets used to generate income by the amount of profit generated for every $100 invested in assets. Income from Operations excludes any expenses such as income taxes and financing charges. Average Total Assets are used due to the variation in the amount of assets used by the business. Average Total Assets = Average Current Assets + Average Fixed Assets.
Example: Return on total assets : 37.16
A higher ratio result than industry standards usually indicates an efficient use of assets. There are several factors to consider before drawing conclusions from this ratio such as seasonal variability in sales and whether assets are bought or leased


Coverage ratio
Calculation: profit before interest and taxes / annual interest and bank charges

Also known as the Number of Times Interest Earned Ratio, it measures the business' capacity to generate enough income to pay the interest on its loans.
Example: Coverage ratio : 12.84
This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. Long-term investors seek assurance that the business in which they are investing can sufficiently cover its interest requirements by a comfortable margin. Therefore, a larger value for the Coverage Ratio is preferred as it indicates a limited risk to term lenders. A lower value may indicate that the debt load is too high for profitability and that the business may not be able to meet all of its obligations.
Last Updated ( Tuesday, 29 July 2008 06:19 )
 
FR - Operation Ratios
Written by Administrator   
Monday, 23 June 2008 13:52
Ratios are a way to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency, and debt load of your business. They are used to measure the relationship between 2 or more components of the financial statements and have greater meaning when the results are compared to industry standards for businesses of similar size and activity.
Operations ratios: measure the effectiveness of internal operations
· Accounts receivable turnover · Asset utilization · Average collection period · Average days payable · Days of sale in inventory · Fixed asset utilization · Inventory turnover · Sales per employee
Accounts receivable turnover 

Calculation: net credit sales / average accounts receivable
Measures how liquid accounts receivable is for the year. Average Accounts Receivable is the average of the opening and closing balances for Accounts Receivable.

Example: Accounts receivable turnover : 21.53

Indicates the number of times receivables were turned over during the year. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. A higher turnover rate generally indicates less investment in accounts receivable because customers are paying more quickly


Asset utilizationCalculation: net sales / total assets

Measures the number of sales dollars earned for each dollar invested in assets.
Example: Asset utilization : 0.92

Indicates the dollar amount of sales generated by each $1 of assets. This result can be considered positive or negative, depending on the industry standard for companies of similar size and activity. A low ratio compared to other businesses in the same industry can indicate an over-investment in or inefficient use of assets compared to the competition. The amount of fixed assets should also be considered, particularly if the fixed assets are older and have been recorded at historic costs. A higher ratio value than the industry standard can indicate an efficient use of resources favourable to making profits, or an over-use of production capacity. Over-use of production capacity has the benefit of short-term profits, but can result in the accelerated wear and tear of production equipment, decreasing future profitability when equipment needs to be replaced


Average collection period

Calculation
: (days in the period * average accounts receivable) / net credit sales

Measures the average number of days customers take to pay their bills, indicating the effectiveness of credit and collection policies of the business. This ratio also determines if the credit terms are realistic. The Days in the Period is the number of days in the measurement period, normally 365. Average Accounts Receivable is the average of the opening and closing balances of Accounts Receivable for the measurement period.

Example:
Average collection period : 0.33 day(s)
This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. A high value can indicate a collection problem. A low value usually indicates good management of collections but it could also signal an overly tight credit policy limiting sales and profits.


Average days payable
Calculation
: ( days in the period * average accounts payable ) / purchases on credit

Measures the average number of days it takes to pay suppliers. The Days in the Period is the number of days in the measurement period, normally 365. Average Accounts Payable is the average of the opening and closing balances of Accounts Payable for the measurement period.

Example:
Average days payable : 3.62 If the accounts payable period is longer than the collection period, defined by the company's creditors, this may be an indication of ineffective payment procedures or a poor cash position. It may also place creditor relations and the credit rating of the business in jeopardy. If shorter, the firm is not maximizing the benefits of buying on credit, although it will be meeting suppliers' payment terms


Days of sales in inventory
Calculation
: days in the period * average inventory / cost of goods sold

Also called Days of Inventory Sales, this ratio indicates the possible number of days of sales with the inventory on hand. It is used to determine whether there is too great an investment in inventory. The Days in the Period is the number of days in the measurement period, normally 365. Average Inventory is the average of the opening and closing balances of inventory for the measurement period.
Example: Days of sales in inventory : 0.25 day(s)
Tells you the approximate number of days that can be handled with existing inventory. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. It is important to note that this ratio varies depending on the type of business. For perishable goods, the value should be low; for durable goods, it can be higher


Fixed asset utilization
Calculation
: net sales / average net fixed assets

Also called the Sales to Fixed Assets Ratio, it measures the number of sales dollars earned for each dollar of investment in fixed assets. This ratio is normally used in concert with the Asset Utilization Ratio. Average Net Fixed Assets = average of the opening and closing balances of fixed assets.

Example:
Fixed asset utilization : 1.67
Indicates the number of dollars of net sales are generated by each $100 of fixed assets. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. A low ratio compared to other companies in the same industry can indicate an over-investment in or inefficient use of fixed assets. A higher ratio than the industry standard can indicate the following: an efficient use of resources, favourable to making profits; an over-use of production capacity; or the reliance on older fixed assets that need to be replaced. Over-use of production capacity has the benefit of short-term profits but can also result in the accelerated wear and tear of production equipment, decreasing future profitability when equipment needs to be replaced


Inventory turnover
Calculation
: cost of goods sold / average inventory

Measures the number of times inventory has been turned over (sold and replaced) during the year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management. This ratio is important because gross profit is earned each time inventory is turned over.
Example: Inventory turnover : 16.21
This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. A high turnover rate is an indication of good inventory management as the appropriate amount of inventory is being purchased to meet demand. High turnovers are also a good indicator that the business is less likely to suffer problems carrying inventories of products that may become obsolete (such as fashion items), are seasonal (such as snow shovels), or that deteriorate (such as groceries). It is important to note that this ratio varies according to the type of business. For perishable goods, the turnover rate should be high; for durable goods, it can be lower. A major variance from industry standards may indicate an inventory surplus resulting from a poor purchasing or marketing policy.


Sales per employee
Calculation
: sales for the year / average number of employees

Measures the level of sales generated per employee. Average Number of Employees is used as the number of employees can change during the year according to business needs.

Sales per employee : 36,497.85

Indicates the approximate dollar value of sales generated per employee for the year. This result can be considered positive or negative, depending on the industry standard for companies of similar size and activity, and the costs attributed to making the sales
 
 
Last Updated ( Tuesday, 29 July 2008 06:19 )
 
FR - Liquidity Ratios
Written by Administrator   
Monday, 30 June 2008 00:00
Ratios are a way to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency, and debt load of your business. They are used to measure the relationship between 2 or more components of the financial statements and have greater meaning when the results are compared to industry standards for businesses of similar size and activity.

Liquidity ratios: determine the capacity of the business to meet current obligations 
          
· Current ratio

            
· Inventory to net working capital

            
· Quick ratio

Current ratio

Calculation: current assets / current liabilities
Also called the Working Capital Ratio, it measures the extent to which current assets are available to meet current liabilities (due within the next 12 months). The Current Ratio indicates whether the business has ample working capital i.e. the excess of current liabilities over current assets used to meet short-term obligations, quickly take advantage of opportunities, and qualify for favourable credit terms.

Example: Current ratio : 3.50
A Current Ratio of 1.0 or greater is considered acceptable for most businesses. Most analysts agree that other factors need to be considered before drawing conclusions from the Current Ratio such as how quickly current assets can be converted into cash, and the credit terms extended by suppliers and to customers. A high ratio (greater than 2.0) indicates excessive current assets in the form of inventory, and underemployed capital. A low ratio (less than 1.0) indicates difficulty to meet short-term financial obligations, and the inability to take advantage of opportunities requiring quick cash

Inventory to net working capital
Calculation: inventory / (current assets - current liabilities)
Indicates if too high a proportion of current working capital is in inventory. Because inventory is a less liquid resource than cash, too high a level of inventory can indicate the inability to turn working capital into cash to meet short-term obligations.
Example: Inventory to net working capital : 2.69 %

Indicates what percentage of Net Working Capital is in inventory. This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. A negative value is a sign that the company may have difficulties meeting short term financial obligations


Quick ratio
Calculation: quick assets / current liabilities
Also called the Acid Test Ratio or the Cash Ratio, it indicates the company's ability to pay off the immediate demands of creditors using its most liquid and current assets; these can be converted quickly into cash, temporary investments, and marketable securities. It gives a more realistic picture of a business's ability to repay current obligations than the Current Ratio as it excludes inventories and prepaid items for which cash cannot be obtained immediately. This ratio is usually used as a supplement to the Current Ratio.
Example: Quick ratio : 1.83
Indicates the number dollars of quick assets available to pay each dollar of current liabilities. Generally, a Quick Ratio of 1.0 or greater is considered adequate to ensure a company's ability to pay its current obligations. A value of less than 1.0 signals a problem in meeting short-term obligations
Last Updated ( Tuesday, 29 July 2008 06:13 )
FR - Leverage Ratios
Written by Administrator   
Monday, 23 June 2008 13:45
Ratios are a way to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency, and debt load of your business. They are used to measure the relationship between 2 or more components of the financial statements and have greater meaning when the results are compared to industrial standard for businesses of similar size and activity.
Leverage ratios: examine how assets of the business are financed
· Debt-to-asset ratio
·
Debt-to-equity ratio

Debt-to-asset ratio
Calculation: liabilities / assets
Also known as Debt Asset Ratio, it measures the extent to which the acquisition of assets has been financed by creditors.
Example: Debt-to-asset ratio : 140.02 %
This result may be considered positive or negative, depending on the industry standard for companies of similar size and activity. For creditors, a lower Debt-to-Asset Ratio is preferred as it means shareholders have contributed a large portion of the funds to the business, and thus creditors are more likely to be paid

Debt-to-equity ratio
Calculation: total liabilities / shareholders' equity
Measures management's reliance on creditor financing as well as the business's indebtedness compared to the amount invested by its owners. This ratio indicates the amount of liabilities the business has for every dollar of shareholders' equity. Because this ratio is a good indicator of a business's capacity to repay its creditors, it is considered very important by most term lenders
Example: Debt-to-equity ratio : 3.50
The Debt-to-Equity proportions are decided by management and thus there is no "ideal" ratio value. The reliance on creditor financing needs to be analyzed in light of other factors such as: the historical trend of this ratio for the business, industry standards for companies of similar size and activity, and whether the company is in the start-up or established phase. Term lenders prefer a lower debt-to-equity ratio as it indicates a lower reliance on creditors and therefore a greater capacity for the business to repay its creditors