BUDGET CONTROL

Budgetary control aims to measure how efficient the budget has been
executed. To do this, it is necessary to carry out a periodic comparative analysis in
order to detect compliance with the budget in the different functional areas, find out
the causes and look for possible corrective measures for significant variations.

This comparison allows us not only to realize whether the company remains
within the direction it has drawn, but also to constantly modify forecasts based on
recent experience.

This process requires periodic execution reports provided by department

heads using the appropriate formats to compile information.

It is the process through which the operational efficiency of the company

previously established through the budget can be measured, and whose purpose is
to establish the existence of variations between execution and what was previously
planned. The budgeted periods correspond to accounting periods. It is important to
first determine the optimal budget period and then make the accounting phase
correspond to it. The period currently adopted is one month.

Budget control is an administrative rather than an accounting instrument,

however, the budget process makes use of the accounting system established in a
business. A clear understanding of the accounting process, and the nature of a
business's income and expenses, is of great benefit to those engaged in budget
preparation. For these reasons, the accountant and auditor is an important
participant in the budget operation.

The budget control technique is nothing more than the set of paths and
resources that the financial statement analyst uses to plan, coordinate and dictate
measures to control all the operations and functions of a given company, in order
to obtain the maximum performance.

The fundamental purpose of financial statement analysis is to compare actual

results with those planned; When making the comparison, the following must be
taken into account:

 Make comparisons of actual results with estimates

 Study and evaluation of variations
 Communication of results.

The rules for efficient budget control are:

 Clear specification of the company's goal

 The predefined goal must be based on achievable situations
 You must have the support, collaboration and trust of the directors
 There must be an adequate organization that allows defining responsibility and
authority
 The budget must be approved before starting the execution period
 It must be flexible, so that it can adapt to changing circumstances that arise.
 There must be an accounting system that is in accordance with the budget
system, that is, the accounting system is reliable, accurate, truthful and timely.
 Efficient internal control
 Effective internal communication
 Troubleshooting

The control must be selective, since it represents time and money, which is why it
is recommended that it be done by sampling, focusing on the most important items.

CONTROL PROCESS
  It is only natural to think that control tends to ensure the achievement of
planned objectives and as such has some stages:

 Identify the program being worked on

 Determine the goals that were programmed for the period
 Measure program results
 Analyze the variations
 Take corrective actions if goals deviate from what was planned.

It is important that in each department or functional area there are:

 Standards for comparison

 Clearly identified risk areas
 Both actual and budgeted information
 Internal audit as an advisory function and as a supervisory activity.

CONTROL OF INCOME AND EXPENSES BUDGET

For a company that produces goods, it is important to develop an adequate

sales plan that provides basic information for the control of sales, distribution costs
and other related items.

Control in the sales function should be considered as a general activity that

includes the quantity to be sold, sales revenue, advertising and promotion
expenses, and other distribution expenses.

For a service company, it is also important to develop a sales plan for the service,
which is closely linked to advertising, which would be part of the advertising
expenses. Here, control of what is real with what is budgeted is very important
since it allows the commercial policy of the service company to be adjusted and
thus prepare it in conditions of probable accuracy that are even better for the
budgets of the following year.

Service companies as such do not have inventory and if they do have it, it is
of small proportions. In general, their production is frequently intangible and at the
same time difficult to define. For example, an advertising company's product is to
promote its client, for this he uses various physical resources, billboards, time on
television, radio, but as such what he produces is something intangible. Law firms
are service-providing organizations that produce tangible products, such as legal
documents.

Service companies commonly employ very significant amounts of labor.

Frequently, your inventory accounts are usually a supply warehouse, where the
basic items used in the provision of the service are stored. Service companies may
have work-in-process accounts, but typically do not have finished goods
warehouse accounts since their products are generally delivered immediately to
their customers. Your workers convert inputs, including their own efforts, into
finished goods, and these inputs require a cost. Comparatively to the production in
process of a company dedicated to manufacturing, organizations dedicated to the
provision of professional services may have a certain amount of work pending
billing which will consist of the costs incurred for accounts receivable.

CASH BUDGET CONTROL

The company's financial executive is directly responsible for the cash situation.
Actual collections and payments will be somewhat different from those provided for
in the annual profit plan, this difference may be the result of:

 A variation in factors affecting cash

 Sudden and unexpected circumstances that influence operations
 Lack of cash control.

It is essential that Management is fully informed of the likely cash situation as far in
advance as possible. Cash control includes procedures to maintain up-to-date data
on the cash situation.

VARIATIONS IN THE BUDGET

It includes the comparison of two types of data: the budgeted and the actual,
taking the budgeted data as a reference point, since it is understood that these
were taken as measures of efficiency. The actual and budgeted data must be
compared at least month by month in order to make the necessary correctives.
Consider that the variation is not important, what is important is the cause that
originated them.

The analysis of variations involves a mathematical analysis of two groups of

data, in order to obtain an idea of the causes that motivated a variation. This is a
quantity such as the base, standard or reference point. The analysis of variations
has vast application in the area of financial information. Frequently, it is applied in
the following situations:

 Investigation of variations between the actual results of the current period and
the actual results of a previous period. The previous period is considered as
the base.
 Investigation of variations between actual results and standard costs. The
standard cost is used as the basis.
 Investigation of variations between actual results and planned or budget goals,
reflected in the profit plan. Planned, or budget, goals are used as the basis.

ANALYSIS OF SIGNIFICANT VARIATIONS

There are numerous ways to study or investigate variations to determine the
causes that caused them. Some of the main methods are the following:

 Meetings and talks with managers and supervisors of the areas or responsibility
centers, as well as with other employees of the specific responsibility center in
question.
 Analysis of the work condition, including work flow, coordination of activities,
effectiveness of supervision and other prevailing circumstances.
 direct observation
 On-site research, carried out by line managers
 Investigations by advisory groups (carefully specified as to responsibilities)
 Internal audits.

The analysis of the significant variations can be summarized in the following items:
Income from the sale of the product or provision of the service
The raw materials or supplies necessary for the provision of the service
Labor or salaries
Indirect or operational expenses, which include distribution, financial and
administrative expenses.
ISA 220 requires the review of audit work through documentation. This does
not imply the need for each paper to show evidence of the review, however, it
means documenting the work performed, who reviewed it, and when.

In analytical procedures, comparisons and relationships are used to

determine whether account balances or other data are reasonable. An example is
comparing the percentage of gross profit margin in the current year with the
previous one. Analytical procedures are widely used in practice, and their use has
increased with the availability of computers to perform calculations. The Auditing
Standards Committee has concluded that analytical procedures are so important
that they are required during the planning and completion phases of all audits.
Analytical procedures can only be used for different purposes in an audit. The
purposes will be discussed below.

Understanding the client's activity and business. Auditors must obtain knowledge
about the client's business and line of business as part of planning an audit. By
performing analytical procedures in which unaudited information from the current
year is compared to information from previous years, changes can be detected.
These changes may represent important trends or specific events, all of which
influence audit planning. For example, a decrease in gross margin percentages
over time may indicate increasing competition in the company's market area and
the need to more carefully consider inventory pricing during the audit. Likewise, an
increase in the fixed asset balance could indicate a major acquisition that needs to
be reviewed.

Unusual fluctuations. Unusual fluctuations occur when important differences are

not expected but exist, or when important differences are expected but do not
exist. In any case, one of the possible reasons for an unusual fluctuation is the
presence of an error due to accounting irregularity. Thus, if an unusual fluctuation
is large, the auditor must determine the reason for its presence and be satisfied
that its cause was a valid economic event and not an error or irregularity.

This aspect of analytical procedures is commonly known as direction of attention,

because it results in more detailed procedures in specific audit areas where errors
or irregularities might be found.

Questioning is obtaining written or verbal information from the client in response to

the auditor's questions. Although much evidence is obtained from the client
through interrogations, it generally cannot be considered conclusive because it
does not come from an independent source and may be biased in favor of the
client. Therefore, when the auditor obtains evidence through this means, it is
necessary to obtain more verification evidence through other procedures. As an
example, when the auditor obtains information about the client's method of
recording and controlling accounting transactions, the auditor usually begins by
asking the client how the internal control structure works. The auditor then
performs audit tests using documents and observations to determine whether
transactions are recorded (integrity objective) and authorized (existence objective)
as indicated.

Re performance. As the term indicates, re-performance involves re-verifying a

sample of the calculations and information transfers that the client makes during
the period being audited. Rechecking the calculations consists of checking the
client's arithmetic precision.

INTERNAL AUDIT IN THE BUDGET AREA

The budget is a formal statement of plans for a future period, generally expressed
in monetary units, the budget is only one part of strategic planning, since it sets out
the objectives of the administration in quantified form; therefore it is subject to
examination, investigation and evaluation by internal or external auditors.

Below are some concepts and definitions that the auditor will have to know for his
evaluation to be satisfactory, although the internal auditor is not directly related to
all the decisions that the administration projects, he must familiarize himself for his
timely intervention when necessary. .

business mission
Describe the reason for a business. It consists of defining the organization's
current and future framework of action, keeping in mind the products or services it
distributes or provides.

External diagnosis
It consists of the identification of a series of external factors, in themselves
uncontrollable, that affect the future both at the national and regional levels and of
the organization itself. It includes the analysis of the environment as a whole,
including past experiences, state provisions, creditors, suppliers, shareholders and
customers.

Internal diagnosis
It consists of the identification of the factors that underlie the organization and
whose proper management allows it to compete favorably in the market. This must
be done by management.

Strategic planning
In strategic planning, the organization's opportunities and threats for the future are
fundamentally systematically identified.

THE AUDIT PROGRAM

According to the proposed objectives of how an organization should seek the

efficient use of the resources it has available, emphasis is placed on the budget
control evaluation program.

The importance of evaluating the budget and operational plans lies in the fact that
budgets play an important role within administrative tools, since with them, it is
about anticipating events, minimizing risk, guiding the company towards a better
future and consider the economic and human resources necessary to achieve the
organization's purposes. That is, before proceeding, the goals and the budget
required to achieve them are known. Given its importance, it is then necessary to
evaluate the quality of the different components that make up the system, since the
process would not be complete if an audit is not carried out that allows feedback.
THE PARTICIPATION OF THE INTERNAL AUDITOR IN BUDGET CONTROL

The world of commerce is an axis in which the needs for the provision of
services and final consumer goods revolve, which complement the production of
other goods, together with the services necessary to maintain that production.
These needs are valued in monetary terms for the purposes of statistics,
production trends and, above all, to have reliable financial information for decision
making. The commercial relationships between one company and another vary
according to the nature of the business of each of them and change according to
the specialization that each of them has; For example, one entity may specialize in
the production of food while another has as its main activity the provision of
professional services. Business activities involve daily between a high volume of
transactions. Without adequate controls to ensure proper recording of
transactions, the resulting financial information may be unreliable and weaken
management's ability to make decisions.

As one of the results of the globalization of markets, information systems

require specific companies that provide services to third parties, a term known as
“Outsourcing” for the processing and administration of financial information. These
entities are in charge of registering the operations and fulfilling the obligations that
result from the commercial negotiations carried out by the companies that support
them.
hire The responsibility that each entity transfers to this type of company varies
according to the need of each of them. Service providing companies can be hired
for the registration and control of specific areas such as the registration of
purchases and sales, payment of taxes and inventory management or be
contracted to be in charge of the registration of all accounting operations and to the
generation of reports that show the performance and financial situation of the
business, as well as its ability to generate monetary flows and, in some cases,
financial analysis.