Topic 5: The Internal Audit

The Nature of an Internal Audit

• identifies a firm's strengths and weaknesses in functional areas.

• goes along with —— factors and clear vision/mission, guide the setting of objectives and strategies to leverage strengths and address weaknesses.

Key Internal Forces

It helps firms formulate, implement, and evaluate strategies to gain and maintain competitive advantage.

The Process of Performing an Internal Audit

• involves gathering and prioritizing info on all major business functions to identify key strengths and weaknesses

The Resource-Based View (RBV)

researchers emphasize the importance of the internal-audit part of the strategic- management process by comparing it to the external audit.

Organizational culture

• is the behavior pattern a company develops to handle internal and external challenges.

• It influences strategic planning by shaping how people think, act, and decide.

• A strong culture can be a key strength, while a poor one can be a major weakness.

• It is hard to change, but it affects all areas of the business and must align with strategy.

Function of Management

• this consist of five basic activities: planning, organizing, motivating, staffing, and controlling.

Planning

• is the essential bridge between the present and the future that increases the likelihood of achieving desired results.

• it is the start of the process by which an individual or business may turn empty dreams into achievements.

Organizing

• aims to create coordinated effort by clearly defining tasks and authority

• It answers: Who does what? and Who reports to whom?

Motivating

• is the process of influencing people to accomplish specific objectives

• why some people work hard, and others do not.

Staffing

• also known as HR management

• involves managing the people side of an organization

• Includes: recruiting, training, evaluating, promoting, disciplining, and more.

• Also handles employee care and union relations.

Controlling

• ensures that actual performance matches planned goals.

• Involves monitoring, evaluating, and correcting performance.

• All managers do it, and it's vital for strategy evaluation.

4 Steps of Controlling

• Establish performance standards

• Measure performance (individual & organizational)

• Compare actual vs. planned performance

• Take corrective actions if needed

Management Audit Checklist of Questions

• is a checklist of questions helps identify strengths and weaknesses in business functions.

• no equals potential weakness, yes equals potential strength

Marketing

• an be described as the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services.

7 basic functions of marketing

• Customer analysis

• Selling

• Product/service planning

• Pricing

• Distribution

• Marketing research

• Cost/benefit analysis

Customer Analysis

• the examination and evaluation of consumer needs, desires, and wants— involves administering customer surveys, analyzing consumer information, evaluating market, etc.

Selling

rests on the ability of an organization to sell some product or service.

Product and Service Planning

Involves test marketing, positioning, warranties, packaging, features, and customer service.

Pricing

Influenced by consumers, governments, suppliers, distributors, and competitors.

Distribution

includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing.

Marketing Research

is the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services.

Cost/Benefit Analysis

involves assessing the costs, benefits, and risks associated with marketing decisions

Three steps to perform a cost/benefit analysis

(1) compute the total costs associated with a decision,

(2) estimate the total benefits from the decision, and

(3) compare the total costs with the total benefits.

Finance and Accounting

is often considered the single-best measure of a firm’s competitive position and overall attractiveness to investors.

Finance/Accounting Functions

According to James Van Horne, the functions of —— comprise three decisions: the investment decision, the financing decision, and the dividend decision.

Financial ratio analysis

is the most widely used method for determining an organization’s strengths and weaknesses in the investment, financing, and dividend areas.

Financial Ratios

• are computed from an organization’s income statement and balance sheet — reflect performance at a specific point in time.

• Best used when compared over time and against benchmarks.

Breakeven Point

can be defined as the quantity of units that a firm must sell for its total revenues (TR) to equal its total costs (TC)

Production/Operations

• consists of all those activities that transform inputs into goods and services.

• deals with inputs, transformations, and outputs that vary across industries and markets.

Research and Development

• is a key area for identifying internal strengths and weaknesses.

• Crucial for firms using a product development strategy.

• it investments aim to:

  • Create new products

  • Improve product quality

  • Enhance manufacturing efficiency

Management Information Systems (MIS)

• is the core of business operations—it links all functions and supports decision-making.

• It helps assess internal strengths and weaknesses during an internal audit.

• pulls data from internal functions (marketing, finance, HR, etc.) and external factors (economic, political, tech, etc.).

Value Chain Analysis (VCA)

helps firms analyze costs tied to each activity, from raw materials to customer service.

Benchmarking

• used to determine whether a firm’s value chain analysis is competitive compared to those of rivals

• Helps firms match or improve areas where competitors have cost, service, or operational advantages.

Internal Factor Evaluation Matrix (IFE) Matrix

• is a strategic tool that summarizes key internal strengths and weaknesses across business functions.

• It helps in strategy formulation by showing areas of advantage and concern.