Wednesday, September 30, 2009

MATERIALITY AND AUDIT

Materiality is a concept which is of huge importance in the Audit of an organization. An item which appears in the Financial Statements of an organization can be termed as material if the omission of it from the Financial Statements results in some serious distortion. Likewise, if the same item is mis-stated and that also causes some serious fallacy then such an item is termed as Material.
Materiality is normally the element which governs the overall depth of the audit. Although audit is carried on the basis of a sample of the whole data, but which things are to be looked into depends on their level of materiality. Similarly, the extent of scrutiny of the item is also governed by this element.
To sum it into a few words, it's all about the significance of the item on the overall Financial Statements. If the impact is likely to be significant then we must surely check in sufficient detail.

Budgets - An Overview

Budgeting involves setting out a plan of action which serves as a yardstick to measure the future performance of a business. Secondly it also helps motivate the staff by setting some targets for them, so they strive harder and the organization benefits from it. The outcome of the entire budgeting exercise depends on how it is implemented within the organization.

A Top-down approach is one where the top-management of the company create the budget and impose it on the lower managers and staff. Such a budget might not have the desired effect. On the contrary a Participative Budget approach involves the managers of all different functions to actively participate and provide their input into the budgeting process. Because of their participation they naturally own the budget and are motivated to achieve the targets set.

However, some times the managers involved in the budget preparation process intentionally set mediocre targets. This is called Padding the Budget. The managers in such a situation set only what can be achieved with an average performance.

Budgets should be ideally challenging but still realistic so that the organization can grow larger and at the same time the managers remain motivated to work towards the organizational objectives.