INTERNAL DYNAMICS AND STRATEGIC MANAGEMENT:
ANALYZING ORGANIZATIONAL STRENGTHS AND WEAKNESSES
ARIZONA STATE UNIVERSITY
WPC 480 - STRATEGIC MANAGEMENT
WEEK 2
A. Learning Outcomes:
The orientation of learning outcomes at the fourth meeting is that students can observe
and analyze the situation of the organization, so that they can design business strategies and
their implementation.
B. Material:
1. Strategy Management Process:
There are four processes in strategic management, namely:
a. Analyzing the state of
b. Strategizing vs. implementation
c. external threats and opportunities
d. Strengths and Weaknesses from within
The description of the process in strategic management is as follows:
a. Analyzing the state of:
Analyzing state is studying the situation with strength (strenght), weaknesses
(weaknesses), opportunities, and threats which are abbreviated as SWOT (Morden, (2016). In
developing a strategy, it begins by studying the situation that exists internally and the external
situation so that it can affect the state of a more competitive company.
b. Strategizing vs. Implementation:
In developing a strategy, it is necessary to have good planning and decision making so
that in making a goal and can develop a more strategic plan (Dobson, et, al., 2009). In the use
of a managerial and organizational tool that aims to direct resources so as to achieve more
strategic results, this is the implementation of strategy.
c. External threats and opportunities:
All characteristics that exist outside the environment/external and whose existence can
hinder the development of the company to achieve its predetermined strategic goals are a
threat (Morden, (2016). Characteristics that exist outside the environment/external whose
existence has something that can help the company achieve its strategic goals are threats
(Morden, 2016) organization in achieving a predetermined strategic goal is an opportunity.
d. Strengths and Weaknesses from within:
Strengths are positive characteristics in the internal environment that the company can
use to achieve its strategic performance objectives. Weaknesses are negative characters in the
internal environment whose existence can hinder or slow down the performance of the
organization.
Eight strategic management processes (Harrison & John, 2013):
a. Formulate a strategy
b. Analyzing the external environment
c. Identify mission, goals & strategies
d. Analyzing organizational resources
e. Identify opportunities and threats
f. Identifying strengths and weaknesses
g. Implementing the strategy
h. Evaluate results-
2. Strategy Formulation:
Strategy formulation is a process of preparing a plan that will be implemented in the
future so that it can determine the goals, vision and mission, and finances of an organization,
so that it can design strategies that will be carried out in order to achieve goals in order to
provide the best customer value. Rao, et, al. (2004) said "there is a mutually supportive
attachment between Organizational Structure & Corporate Culture, Technology, Individual
Roles, Organizational Structure and Management Processes influenced by the External
Technological Environment and External Socio-Economic Environment in the methodology
of forming Strategy Formulation".
Actions that companies take to achieve goals (Haberberg & Rieple, 2001):
a. Identify the external and internal environment that will be used as a market by the
company for the future. Determine the mission in order to achieve the set vision.
b. Analyze the existing environment in order to find out the weaknesses, strengths,
opportunities and threats that exist so that later the company can face them.
c. Formulate the things that are important to measure success (key succes factors).
d. Set targets, identify, evaluate strategies and formulate strategies in order to measure the
success of goals. The strategist must analyze the options available to the company in
light of the resources it has based on the facts at hand, determine several desirable
strategy options among the options available in accordance with the mission set by the
organization, set the most important strategy and long-term goals to achieve the most
desirable wishes, and set annual targets and short-term strategies in accordance with
long-term goals.
3. Internal Environment:
The internal environment includes elements of the business owned in a company:
resources, organizational structure, and culture in the company. Strengths and weaknesses are
two variables that exist in the company.
Analyzing the environment aims for a management to be able to respond to various
issues and be able to react appropriately about the state of the environment which can change
at any time influence on the company. The internal environment in the company needs to
know both its strengths and weaknesses, including the relationship between functions,
management, marketing, finance, production, research and development, computer systems,
and human resources owned by the company.
Another internal factor of the company is the culture that exists in an organization,
including (Harrison & John, 2013):
a. Treat human beings in accordance with their dignity and uphold the values of moral
ethics and the profession.
b. Help develop education in the community.
c. Science is developed continuously and has the responsibility to make a learning culture
and continuous quality improvement as a philosophy of life.
d. Help develop science regardless of religion and ethnicity for the benefit and welfare of
mankind.
In order to understand the competitiveness of the company, it is necessary to analyze the
internal environment based on the internal situation of the company. By fully controlling the
factors that exist within the company, the existing weaknesses can be immediately corrected.
Porter states ("Internal analysis known as the value chain that positions the company on a
generic strategy matrix and finds competitive advantages in the company through core
competency analysis"). In order to reach the market, the main and supporting activities must
support the company. Where the main activities, including functions:
a. Operation:
It is all the activities that a company undertakes in order to change from incoming to
final output, which includes machining, assembling, testing, packing, and maintaining
equipment.
b. Services:
Which includes training, installation, supply of spare parts, maintenance and repair.
c. Marketing and Sales:
Facilities provided to consumers so that consumers can buy products, through
advertising and promotion, pricing, sales, and distribution channels.
d. Inward Logistics:
It is an activity carried out by the company for receiving and storing information such as
warehouses, inventory or delivery schedules.
e. Logistics Out:
It is an activity carried out by the company for storage, collection, and distribution of
products to consumers.
The company's supporting functions include:
a. Company Infrastructure:
General management, quality control, and information systems about finance and
planning. To support all value chain activities, a complete infrastructure is needed so
that it can help companies to excel in competition.
b. Human Resource Management:
All activities related to recruiting, training, developing and assessing employees.
c. Procurement:
Are all the rules regarding how to buy with those who supply goods between companies
d. Technology Development:
Includes machines, knowledge I skills, procedures and systems.
A company's core competence relies on its expertise and assets, which are the most
important components in order to compete with excellence. Prahalad illustrates "core
competencies as the supporting roots of a tree whose branches are core products and the chain
is the business". Core competencies can represent the unity of assets and technology so that
the company can form a more optimal value for the company and for consumers who position
themselves over competitors, proactive anticipation of the company and the ability to expand
the market.
4. External Environment:
The collection of various conditions of the macro-external environment, either directly
or indirectly so that it can affect the situation in a company is called the environment (Chan-
Olmsted, 2006). There are three main group sectors that exist in the general environment,
including technology, government and socio-economics. Each environmental sector has
various sub-factors that interact with each other and become a force that can affect strategic
management when making a decision.
a. Socio-economic Sector:
It has a lot of influence when determining the amount of goods demanded and the
amount of budget in order to produce goods that will be issued by the company. The speed of
achieving a goal can be influenced by the climate, social environment and conditions of the
company (Harrison & John, 2013).
b. Economic Conditions:
To increase the success of a company's strategy, it is necessary to be observant and
meticulous in observing the current economic conditions and accuracy is needed in predicting
situations and conditions (Harrison & John, 2013). Where economic condition factors include:
1) Monetary and fiscal policy will affect the amount of taxes, interest rates, balance sheet
payments and volume balance of trade between countries.
2) Stages that occur in the business cycle (depression, recession, recovery, and prosperity).
3) The rate of inflation and deflation for certain commodities will affect companies
especially when determining prices and employee wages.
c. Natural conditions:
Natural conditions cannot be ignored when planning a business strategy even though it
is difficult to predict (Harrison & John, 2013).
d. Social Conditions:
It can be a threat or an opportunity for the company, among others:
1) The success of the family planning (KB) program in regulating population growth has
had an impact on the mindset of the community, where the understanding of a "small
happy and prosperous family" has changed the concept of "many children many
fortunes".
2) The level of formal education in the community has increased as the population growth
rate has been successful and has had a positive effect on reducing illiteracy in the
community, leading to different attitudes and perspectives in the community about
working life and improved quality of life.
e. Technology Sector:
The rapid development of technology, especially in information technology, encourages
the emergence of many opportunities in running businesses and businesses to achieve
organizational goals, but can be a serious threat to the sustainability of products / goods
already circulating / existing (Harrison & John, 2013). Products from a technology that can be
used as a breakthrough so that it can create threats as well as opportunities in business
activities, which include: developing genetic techniques, utilizing solar power, transistors and
computers. The development of technology greatly affects the rotation of life and the creation
of a product. Life cycle, fixed goods can determine the accurate time to introduce
modifications to existing products and new products. So it is very necessary to have an
environmental scanning activity so that products in the market can be maintained. In addition,
the rapid development of technology will affect how to correctly choose the ability of the
sales force to serve the market and the distribution method to be chosen. To anticipate or
respond quickly and slowly to changing technology is a function of the company's receptive
level, the availability of a budget to conduct research and development and the creativity of
the company's human resources.
f. Government Sector:
Government involvement in everything is unavoidable because the government has
control tools through various monetary or fiscal policies that have been established through
government regulations, laws or others that are quite effective in influencing business
dynamics and of course has authority in trade regulations, labor use and product supply
control (Harrison & John, 2013). In the way of introducing goods from producers to
consumers, the role of the government is very dominant, which can create threats or
opportunities for the business continuity of the company. Something that might be considered
as a business opportunity from the government sector because it can be utilized as a tool in
influencing socio-economic dynamics where the government is also a large market for many
products where in this case the government has a role to protect from unfair practices in
various business activities that arise from outside besides that the government also actually
has an interest in the existence of domestic economic activity and industrial growth.
5. Strategy implementation:
Strategy Implementation is all the activities and selection of things needed to carry out a
strategic plan and the process of several policies that have been decided so that the strategy is
transformed into action, developing budgets and programs. Although only considering its
implementation after the strategy is formulated, strategic management the key to success is in
implementation which is like two sides of a coin (Harrison & John, 2013).
6. Organizing Action:
Those who formulate a company's strategy are likely to be fewer than those who are
involved in organizing in implementing the strategy (Burgelman, et, al., 2008). Many
companies or corporations are engaged in a multi-industry field where those who implement
the strategy are people within the organization. Strategic Business Units (SBUs) or divisional
directors and vice presidents in the field of functional in implementing all plans work with
subordinates in detail and specifically by size according to the smaller factories, units and
departments under their leadership so that operational managers can provide first-line
supervision, it can work well if every employee must be included in the process when
implementing strategies at the business unit level, functional and at the corporate level.
Many people play an important role in a corporation that determines the successful
implementation of strategy implementation, but only a few are involved in jointly developing
corporate strategy, so they can easily refuse to carry out and prepare the data needed to
formulate strategic planning. If there is a change in strategy, mission, goals, and other
important policies in the company, there is no change in strategy, mission, goals, and other
important policies in the company. If the plan is communicated transparently, well, and
clearly to all operational managers, their resistance to participation will become more visible.
Operational managers will expect to be able to influence top management to return to the old
way and abandon the new way that is planned and already running (David, et, al., 2013). In
order to avoid the bad possibility of this happening, it is possible that managers will be more
involved at the middle level in all processes, in the implementation process or when
formulating it in order to achieve maximum performance.
7. What to do:
Divisional and functional managers must be able to cooperate with their fellow
managers to develop programs, budgets, procedures and cooperate among various divisions
and functional areas so as to create and maintain the specific competencies of the company
properly.
8. Develop Programs, Budgets and Procedures
a. Program:
A program has a goal in order to take action on the strategy. For example "Ajax
Continental" which prefers to buy "Jones surplus" retail stores rather than building their own.
In order for the newly purchased store to be integrated into the company, it was necessary to
develop a new program, including:
1) To transfer new stores into his command by running a restructuring program so that
reporting can be tiered. Store leaders report to regional leaders, regional leaders report
to goods leaders, and then goods leaders report to the vice president as head of
marketing.
2) Conduct promotions or advertisements.
3) Conducted training for new store managers in collaboration with Jones Surplus
managers.
4) Carried out the development of reporting procedures "integrating Jones Surplus stores in
the Ajax Continental accounting system".
5) Modernized the store and prepared for its official opening.
b. Budget:
The impracticality of an ideal strategy is likely to will known after program Specific
implementations are funded in detail. Where budget planning is the corporation's final check
on the feasibility of its chosen strategy. Budgeting begins after the program is developed.
c. Procedure:
The development of standard operating procedures should be done after the budget and
corporate plans are approved. They should be specifically detailed to refine the corporate
programs of activities to be carried out. The operating procedures that "Ajax Corporation"
should develop after acquiring "Jones Surplus" retail stores include: merchandise selection,
inventory ordering, pricing, credit shopping facilities, customer relations, customer complaint
handling, warehouse storage distribution, payment limits, store promotions, as well as
promotions and periodic employee promotions. Doing so can ensure that the daily operations
of the stores will be stable and consistent among the stores (the same standard of service
operations at each store).
9. Strategy Evaluation:
When a strategy is not functioning properly managers must know and evaluate the
strategy which means an effort is made to obtain information because the final stage in
strategic management is to evaluate the strategy (David, et, al., 2013). In the future, all
existing strategies can be modified because internal and external factors can change. To
evaluate the strategy there are three basic activities, namely: measuring performance,
reviewing internal and external factors and making corrections.
The process of strategic management produces decisions that have long-term and
significant effects (Hitt, et, al., 2016). If in determining the decisions taken in the strategy is
not correct, it will be difficult to fix it and can result in losses. Most strategic planning states
its agreement to assess a strategy is very important for the survival of the organization before
a potential problem becomes critical, so timely evaluation can provide a warning to
management. However, too much strategy evaluation can be counterproductive and costly
because strategy evaluation is a process that requires a lot of time and effort. Complex and
sensitive, but it is important to evaluate the strategy so that the achievement of the strategic
objectives that have been set can be ensured.
10. Surveillance:
The application of performance evaluation has been going on from the past until now,
especially in terms of supervision that utilizes the main financial information, so many
literature call it traditional. But even though it is still called traditional, this simple analysis is
very important to still do because all the information contained in the financial statements is
an important and necessary source of information.
11. Contemporary Measurement:
Experts who master strategic management continue to develop the concept of
measurement with business finance, which aims to provide a comprehensive picture of the
performance of the company's strategy for those authorized to make strategic decisions,
a. Measurements thatDrive Performance(Balanced Scorecard):
Professor at Harvard Business School (Robert S. Kaplan) and a management
consultant (Kaplan, et, al., 2001) argue that the existence of the "balanced scorecard
concept" to anticipate financial analysis in measuring performance that still has some
shortcomings in a company. The existing measurements on the balance scorecard not
only convey a comprehensive framework when interpreting the company's vision and
mission but also convey a comprehensive picture of business processes, human
resources and other important aspects. That the balance score or BSC can be useful as a
dashboard of company performance as mentioned by Kaplan and Norton so that
management can easily monitor. Around the beginning of 1992, the idea of BSC first
appeared when Kaplan and Norton wrote an article about Balance Scorecard "measures
that drives performance" in Harvard business review, which describes a fresh idea about
how to measure the performance of an organization. Financial measures relied on by
companies in general, such as company revenue or return on investment are good, but
according to Kaplan and Norton this method is not enough because it is still difficult,
especially in terms of operational aspects. The company's management expects that with
the measurements made Balance scorecard can have a complete positive effect on the
overall behavior of employees and managers. So Balance scorcecard is a series of quick
but comprehensive ways of measuring by management about the business where the
financial side is added by measuring operations during internal activity processes,
innovation, organizational development and customer satisfaction.
b. Measurement Assets lntengible and How to Create Enterprise Value (Strategy
Map):
The measurement that encourages a performance to continue to develop is a real
action, that human resources and other assets that are clearly visible must get
commensurate treatment (Kaplan, et, al., 2001). That the company must understand the
position and goals set, considering that all assets are interrelated and have an important
portion in each field. Norton said that intangible assets are important, which is a
hallmark of the strategic map that illustrates the success of a company for the increasing
role of intangible assets.
c. Market Value Added (MVA) and Economic Value added (EVA):
Steward and CO developed this concept from a management consulting firm.
How companies can measure and link company performance based on financial
performance (Kaplan, et, al., 2001). Companies need good assessments and tools in
order to see how companies create and maximize value with these considerations being
the basis for the creation of this model. Shortcomings associated with like-for-like
valuation and earnings per share include;
1) Overinvestment. The company over-invests, encourages vertical integration and
its strategy is based on profit and margin measurement only.
2) Excessive production. At the end of the one-year period in measuring still using
the traditional way related to funds per unit, in using funds makes the company
excessive in production.
3) Services economy. Business in the traditional way, not paying attention to
changes in the business environment only based on traditional financial
measurement tools. This way of doing business is based on partnerships,
services, outsourcing, and other innovative ways of doing business.
4) Making the wrong business decisions. What differentiates profit margins from
capital utilization is using less traditional financial measurement tools and
ignoring shareholder investments.
As the people who initiated the EVA concept, Stewar and Co. stated that
managers often face investment risks, but do not have accurate competence in resolving
them, especially in providing guaranteed profits. So the EVA method can be one of the
hopes in calculating and estimating how much profit return is obtained, as well as losses
(Dierks & Patel, 1997).
EVA = "(Rate of Return - cost of Capital) x Capital"
Measurement in the above way can make managers strive to increase the
company's confidence, because it has the opportunity to increase the activity value of a
business strategy that has been designed. By
Conceptually, EVA has the following steps:
1) Management can raise prices to compensate for the capital that has been used,
but still pay attention to the appropriateness of the value.
2) Increased capital investment and its corresponding capital surcharge are
expected to lead to better growth.
3) Reducing investment, managers must have the courage to make decisions to stop
activities that are not profitable / detrimental.
4) Reducing capital by maintaining the business dynamics needed to strengthen the
main business through prudent debt, calculating risks to be minimal, and looking
at opportunities in various other financial products so as to optimize capital.
Now EVA has become a tool for measuring the company's overall system, not just
a financial measurement tool.
d. Classic TOWS Analysis:
In 1982, University of San Francisco professor Heinz Weich introduced the
TOWS-K Analysis. In the process of formulating strategy, the matrix is placed as an
integral part as a tool to determine the success of a company that connects various
critical variables "threats (Threats) and opportunities (Opportunities)" derived from the
external business environment and "weaknesses (Weaknesses) and strengths
(Strengths)" built by management (Kaplan, et, al., 2001).
There are eight cells in the T0WS-K Matrix (the other 4 cells contain the strategic
implications and 4 cells contain an inventory of internal and business environment
(external) variables).
1) List of strengths (S) (Cell 1).
2) List of weaknesses (W) (cell 2).
3) List of odds (0) (cell 3).
4) List of threats (T) (cell 4).
5) A list of strategic choices that are alternatives for top management in improving
business based on the advantages and opportunities that exist in cells 1 and 2 (cell
5).
6) A list of strategic options that are alternatives for top management in improving
the business based on the advantages and opportunities that exist in cells 2 and 3
(cell 6).
7) A list of strategic options that are alternatives for top management in improving
the business based on the advantages and opportunities that exist in cells 1 and 4
(cell 7).
8) List of strategic options that are alternatives for top management in improving the
business based on the advantages and opportunities that exist in cells 1 and 4 (cell
8).
12. Stages of Matrix Preparation:
a. Management collects information on various internal strengths and weaknesses, which
often occur during the execution of tasks.
b. Determining current and possible future performance, which is considered to have a
significant effect can be known by management.
c. The choice of strategy formulated by management allows it to be implemented accurately
through the determination of a priority scale with a combination of indicators of
"strengths (S), weaknesses (W), opportunities (0), and threats (T)" that occur at this time.
C. Exercise:
As a learning evaluation, students are asked to be able to:
1. Explain the SWOT method as a tool for analyzing business situations/circumstances!
2. Create a business strategy for a company!
3. Describe the implementation stages of the business strategy created (point 2)!
AUDITING
A. Learning Outcomes:
The orientation of learning outcomes at the fifth meeting is that students understand the
theoretical concepts of auditing, so they know the stages of conducting an audit and
understand the preparation of audit reports.
B. Material:
1. Introduction:
An auditor is required to master information systems and computer-based audit
techniques, especially now that information systems are developing very quickly (Sarno,
2009). At first, the approach used a manual method and now it has begun to be abandoned, so
an auditor must be in accordance with the audit process and procedures that are utilized when
doing his work in the field. Changes that occur in company conditions or the environment, the
accounting system helps companies to be able to provide actual information. Auditors should
align the way of conducting audits with the information system at the client so that when
auditing can run more efficiently and more effectively (Sutabri, 2012).
2. Audit Definition:
Alvin A. Arens and James K. Loebbecke, state: "Auditing is the accumulation and
evaluation of evidence about information to determine and report on the degree of
correspondence between the information and established criteria. Auditing should be done by
a competent independent person" (Sutabri, 2012).
(Sutabri, 2012) argues: "A systematic process for objectively evaluating and obtaining
evidence regarding statements about an economic activity and event which aims to determine
the level of conformity between these statements and the criteria set, and convey the results to
interested users".
Factors to look out for during an audit:
a. Be independent and understand the measures used when collecting the materials needed
to support a final conclusion.
b. Use guidance in assessing the information required.
c. The timing of the audits must be clear.
d. In order for the audit objectives to be met, the evidence obtained must be of sufficient
quality and quantity.
3. Audit Type:
There are three types of audit groups, including :
a. Financial statement audit is an assessment of whether the financial statements in
presenting them are in accordance with the applicable provisions that have been
determined or not and carried out by internal or external auditors where the results are
given to interested external parties, including creditors, tax collectors, and shareholders
(Sutabri, 2012).
b. Compliance audit. It is an audit carried out by internal or external auditors and has the
aim of being able to assess whether what is being examined is in accordance with the
provisions set by the state with real conditions (Sutabri, 2012).
c. Operational audit. An examination of tangible evidence by examining the organization's
business activities with the aim of obtaining authentic evidence and empirical. Auditors
are expected to make objective observations and analyze in a comprehensive manner
specific operations.
Conceptually, the purpose of conducting an operational audit is to:
a. Reviewing performance, whether there is an increase, achievement of standards, or even
deviations that are detrimental to the company.
b. Mapping the state and possibility of growth (opportunity)
c. Obtain accurate information as a basis for policy setting and continued improvement
The results of an operational audit are provided to the person requesting the audit, and
usually that person is management and a third party.
4. Types of Auditors:
There are two types of auditors, namely:
a. External auditor. Is a person from outside the company who is independent or neutral to
the audited and to parties who have an interest in the auditee (users of financial
statements) (Sutabri, 2012).
b. Internal Auditor. Is a person who binds himself to the organization with the task of
examining all financial reports by tracing actual data and information. Internal audit is
responsible for the quality of financial statements, in order to become valid information
for related parties. Furthermore, the existence of internal audit helps companies create
healthy and correct governance, so that companies can grow and be free from harmful
fraudulent practices (Sutabri, 2012). Audit also helps control unscrupulous employees
who are suspected of committing irregularities / anomalies in their authority that harm the
company, both materially and non-materially.
Internal audits include:
1) Assess, measure, and encourage the implementation of quality management and internal
control, so that effectiveness is maintained and efficiency is realized and goals are
achieved.
2) Provide assurance of compliance by management with established policies, plans and
procedures.
3) Ensure the possibility of all forms of theft, fraud and misuse of assets owned by the
organization company that must be accounted for and protected.
4) Ensure reliable data management that has been developed by the organization.
5) Management provides an assessment of the quality of work in each section in carrying
out the mandate that has been given.
6) To increase efficiency and effectiveness, suggest operational improvements.
The role of the internal auditor can be summarized as:
1) Preventing fraudulent practices
2) Detecting fraudulent practices, and
3) Investigate fraudulent practices.
5. Information System Audit:
Audit is currently a must that is carried out so that the system can meet the requirements
of IT Governance. Information system audit is a way to test information systems in an
organization to detect risks from potential effects that may arise and to see the effectiveness of
the information system that is owned has accommodated the interests of the organization
(vision) (Prasetyosari, 2004).
a. IT Audit Methodology:
To carry out the audit Tl must collect some supporting evidence by reviewing
documentation, surveys, observations and. Interview. Computer Aided Auditing Technique
(CAAT) is an audit technique that uses computer assistance. Because usually auditors take
audit evidence in the form of electronic evidence / data, which is utilized in order to analyze
data, for example data on purchase transactions, sales, transactions, customer activities, and
others.
b. Basic steps of SI Audit:
In IT auditing, namely checking whether the computer system is running how it should.
Steps for the audit process, including:
1) Implement audits with strategies based on agreed control practices and risk
management.
2) Specify the steps used in detail for auditing.
3) Use evidence/data that is sufficient, relevant, useful and reliable.
4) Create a report with conclusions based on existing data and facts.
5) Review whether the objectives of the audit have been achieved.
6) Communicate audit results to interested parties.
7) Ensure that control practices and risk management have been implemented by the
organization.
Planning before conducting an audit must be done clearly and convey the purpose of the
audit (the method used to audit, the power of the auditor, and approval from high
management). Methodologies for conducting audits include:
1) Determine the audit object.
2) Establish audit objectives/goals.
3) Define the entire management process to be audited, both functions, systems, and
management itself.
4) Determine the location of the audit, identify the required human resources, and
determine the required documents.( Preaudit Planning)
5) Establish techniques, methods, and measurable steps in the audit, including establishing
audit instruments
6) Detailed examination and evaluation of the test results.
7) Communicate the details of each organization with management.
8) Determine the desired outcome of the audit process, so that it has benefits for the
company's progress. In addition, it becomes a strategic input in upper management
decision-making.
The contents of a structured audit report include:
1) Background/introduction, objectives/goals, audit scope, timing, and SOPs.
2) Description of audit results
3) The result of the audit. "Whether the procedures and controls are feasible or not".
4) Management response (recommendations).
5) Exit interview (between auditors and management to discuss findings, follow-up
recommendations, assuring the management team of the validity of the audit results).
6. Development with Information Systems Audit Approach:
For data processing, the development of information technology, software,
communication and network systems also has an impact on the developments made for the
audit approach. Watne, 1990 states "there are three approaches implemented by auditors when
examining client financial statements that already use Accounting Information Systems"
including:
a. Auditing Around The Computer. Auditors use this approach by using the computer used
by the company to be used as a Black Box. By using this method, the auditor only
checks around the computer if the output of the system is correct then the processing
can also be correct.
b. Auditing With The Computer. Automated audit activities where the computer is used as
a tool to assist the auditor for calculations, writing, comparisons, and more. The tool
used is "Generalized Audit Software", which is an audit program that is generally
applicable and used for various clients.
c. Auditing Through The Computer. This method describes that if a program in its
processing is well designed and also has good control aspects, then errors and
irregularities are unlikely to occur. Control of programs and processing by systems on
computers is emphasized, generally used to process data online which does not provide
an adequate audit trail.
7. Information System Audit Steps
Audits of Information Systems can be carried out in five stages (Watne, 1990):
a. General/preliminary examination
b. Systematic and detailed examination
c. Testing the truth
d. Testing relevance
e. General checkup
Here explanation in-depth about Audit on Information Systems:
a. General/preliminary examination:
The most principle audit code of ethics is basic knowledge of what is done during
an audit, including paying attention to the ethical values of an auditor, so as not to make
mistakes or indications of negligence that can harm the company (information defects).
An equally important part is the audit risk analysis which includes internal control.
Auditors must also try to understand in controlling the transactions that are being
processed by the application and identify important applications so that an auditor can
make a decision about whether the audit can be continued or the auditor resigns.
b. Detailed Examination:
To understand how to control, the auditor will try to obtain detailed information
so that later it can be applied to the client's computer system (Watne, 1990). What will
later be used as the basis for assessment is whether the application of the internal
control structure can be trusted. To determine the next step used as a basis is whether
the control is strong or not.
c. Testing Suitability:
Checks at this stage are carried out in more detail about transactions and account
balances. CAATT software is used to determine the information in data files and check
the integrity of data reliability (Watne, 1990).
d. Testing the Truth of Evidence:
"Davis at. all. 1981" which is done in testing the correctness of data by assessing
the quality of data, comparing data with physical calculations, identifying errors and
discrepancies in processing data, and confirming with sources outside the company
(Watne, 1990).
e. General Assessment of Test Results:
It is hoped that the auditor can provide an assessment of whether the evidence
obtained can support the audited information or not so that the results can be used in the
report as a basis for the auditor to prepare an assessment.
8. Principles in the Audit Report:
The medium used by the examiner when responding to the client is a statement about
the examiner or contact from the examiner, which must be understood by the user. If the test
report consists of (Martin, 1990):
a. The purpose and objectives of the IT implementation and customer management review, the
scope and management reference used as a reference for evaluating the IT management
applied to the customer, and the review methodology are the audit review procedures and
methods. Reports to support information provision.
A statement describing the results of the review:
a. Problem (describe the main problem the client is currently facing).
b. Findings (describes the audit evidence to support the conclusion of the matter.
c. Describe the standards, controls that customers need to implement).
d. Condition (explanation of cause and effect and current activities).
e. Risk (describes the potential and adverse effects of loss of control or non-
implementation).
f. Management response (describe management's comments and responses to the issues and
findings raised).
g. Recommendations (explanation of suggestions for improvement and implementation of
controls that need to be implemented in customer activities).
h. Information system audits are based on a risk-based approach
How to conduct an audit is by conducting interviews, observations and submitting
questionnaires.
"Information System Control Questionnaire"
Questionnaire I - "Information Technology Management Analysis, (Management
Awareness)".
Questionnaire II - "Information Technology Management Analysis, (Information Technology
Controls Diagnostic)".
9. Financial Audit Discussion:
a. Destination:
To examine all matters concerning material fairness, results of operations, financial
position, and financial flows in accordance with applicable accounting principles (Laudon &
Laudon, 2004).
The purpose of the audit can be done by :
1) Understand the responsibilities and objectives of audits
2) Report Financial divided into various stages
3) Understand management's assertions about financial statements
4) Understand general audit objectives for classes of transactions, accounts, and
disclosures
b. Management Responsibility:
Management responsibilities are used to model accounting policies, present financial
statements and for adequate internal control. A management must have better knowledge of
transactions, assets, liabilities and quality than auditors (Laudon & Laudon, 2004). Auditors
know the problems and internal controls that limited because the information is only obtained
during the audit.
c. Auditor Responsibilities:
An audit has the responsibility to make a plan and determine the timing of its
implementation in order to obtain certainty about whether the financial statements are correct
or still wrong due to errors or by fraud, the auditor is also responsible so that unauthorized
actions can be found (Watne, 1990). The definition of illegal action is a violation of law or
government regulations in addition to fraud.
Finding and reporting illegal actions is one of the auditor's responsibilities which has
three levels, including (Martin, 1990):
1) Gathering evidence if you do not believe there is an illegal act with indirect impact
2) Collection of evidence and other actions if it believes any unauthorized actions that
have a direct or indirect impact have occurred.
3) Auditors' actions if they become aware of illegal actions
d. A Cyclical Approach to Audit Sharing:
1) Usually sales/collection activities are audited first, as they are the most routine
activities. Later in the audit process, a related trace is carried out, which looks at
whether there are other activities that allow sales / distribution to occur, including banks
as a place to deposit money from the results of these activities.
2) Capital rotation and payments are the next activities to be audited, because they are
related to the company's money being rotated in and out. Generally includes
transactions, namely equipment, inventory, and purchase of goods / services.
3) Inventory and storage audit. This activity relates to goods that will be sold but are still
in the waiting process. In actual fact, inventory is the company's liquid capital, and is
very risky.
e. Objectives of transaction-related audits
1) Transactions that are recorded. The purpose is to know that the transaction has been
made.
2) All transactions are properly recorded and documented. The objective is that all
transactions are entered and recorded in the journal.
3) The accuracy of transactions is recorded with the aim that accurate information can be
known by superiors. So that there is inherent control and supervision over the
transaction process
4) The report displayed is the result of summarizing the transaction records and inputting
them into the master file correctly. It aims to find out the transaction information written
in the journal into the subsidiary ledger and into the general ledger whether there are no
errors.
5) Grouping-Transactions written in the client's journals have been properly grouped. This
aims to state whether transactions have been imported into the right accounts, and is the
auditor's counterpart to Management's classification assertion for transaction classes.
6) When a transaction occurs, it is mandatory to record the correct date or time. The goal is
to determine the transaction time for the assertion of cut off management.
f. Balance-related Examination Objectives:
1) Existence-The number recorded does exist
2) Existing quantities are written down
3) Accuracy-the amounts listed have been correctly stated
4) Classification of amounts listed in the client list has been classified appropriately
5) Transaction deadlines close to the balance sheet date have been recorded in the
appropriate period
6) The detailed account balances match the amounts in the corresponding master files
according to the ledger totals
7) Realized value-assets that have been included in the amount estimated to be realized.
8) Rights and obligations.
10. Human Resources (HR) Audit:
The role and benefits of HR (human resources) now and in the future to be better than in
the past, human resources must be proactive (Martin, 1990). It is expected that the role of
human resources can make a contribution that can increase the competitiveness of a company.
At the same time, the development of ethical issues, a diverse workforce, and global and
domestic competition can change the role of human resources. So the company needs to
evaluate existing human resource activities, make improvements and improve human resource
management intensively in accordance with business demands, this can be done through HR
Audit.
From the above opinion, it can be concluded that a human resource audit is a method
used to support the achievement of organizational goals and overall functional goals.
11. HR Audit Implementation:
An audit of the potential of human beings is expected to be able to make a strategic
contribution that can increase the competitiveness of the company and its workforce work
develops diversely in global and domestic competition (Olalla, et, al., 2002). For this reason,
the company must assess human resource activities and carry out improvements and
improvements in management in an intensive manner in accordance with business demands.
Examination of human resources (HR) is carried out systematically, which means that
the assessment and examination process is carried out in a logical manner and the application
of HR management principles that are planned, controlled, evaluated and the results are
carried out, so that it can help managers assess their employees in order to know that these
employees can perform responsible performance in accordance with their abilities, education,
rank, and position, employees (Olalla, et, al., 2002).
12. Audit Concept:
An auditor's audit conception must be able to plan a reliable concept and carry out
various relevant activities aimed at obtaining sufficient data so that later it can be used as
accurate information.
The concept of an activity that can be carried out by an auditor when carrying out an
audit with steps (Olalla, et, al., 2002):
a. Reviewing documents (desk study). Study the appropriate documents to conduct the
audit.
b. Observation. The unit being examined is observed by the auditor directly (condition of
work facilities, administrative systems, work environment and archives).
c. Asking for auditee explanations. The auditor asks for information about something
that is deemed necessary so that the data and information obtained is as needed with a
more open question technique (how, why and others).
d. Request a demonstration by the auditee. An auditor may ask the auditee to
demonstrate the activity being studied.
e. Comparing the actual situation with the standard or standard criteria that have been
set in the system.
f. Request transaction evidence. When encountering situations that deserve to be
suspected as audit findings, auditors must collect and obtain sufficient and appropriate
data so that they can perform follow-up.
g. Checking facilities and physical conditions
h. Carry out a cross check. The data obtained is compared with the reality in other units
in order to see any differences or similarities that need to be clarified.
i. Look at the auditee's records. contained in the archive system and the auditor
compares it with the explanation from the auditee.
j. Interviewing the auditee. Auditors interview designated employees to ask questions,
seek explanations, and test employee proficiency.
k. Provide a survey questionnaire. Asked the auditi to fill in the questionnaire that the
auditor had prepared.
l. Analyzing data. Auditors assess, process the information obtained and make
comparisons with applicable criteria.
There are usually three steps formally designed by the auditor, namely (Joyce, (2015):
a. At the opening of the meeting with the head and some staff of the unit to be audited, the
auditor explains the mechanism, timing, the draft audit that has been prepared and
introduces his team members.
b. Carry out audits.
c. Closing is held at the end to discuss and convey the results of the audit in the form of
conclusions which contain factual and significant information for follow-up with time
limits.
13. HR Audit Design:
An important step of the activity
audit. Every audit plan uses questions (what, why, who, where, when and how). Auditors
should at least have a plan that includes (Olalla, et, al., 2002):
a. Destination
b. Scope
c. Object to be audited
d. Location planning Time
e. Preparing Yourself
f. Methods used
g. Form of Report format
Planning audit The can be outlined (Olalla, et, al., 2002):
a. Destination:
Auditing is an activity that aims to determine the value of a benefit. Certified
accountants ensure that they understand the purpose of the audit and do not deviate from
it. A personnel audit is not a goal, but a tool to achieve it. The purpose of conducting an
HR audit is to solve the problems your organization faces and to ensure that your
organization's goals can be achieved both functionally and overall. Human resources is
a tool that can help an organization's leaders to better fulfill their duties and
responsibilities as employees who provides assessment and direction from the
perspective of one of the organization's key foundations: human resources.
b. Audit Scope:
Human resource audits are so comprehensive that they cover all aspects of human
resource management, so the scope of the audit is the limitation of objects in the audit
design at one stage of the audit. If the auditor's attention is not limited, the audit process
will not be focused and his observations will not be optimal.
c. HR Audit Object (human resources):
Auditors need to understand which targets are appropriate and inappropriate for
in-depth audits and which are unnecessary so that time and effort are not wasted and the
results are in accordance with the problems that are happening in the organization. For
example, asking leaders about employees who work overtime, overtime work
procedures, checking attendance, checking documents for calculating overtime hours,
and conducting interviews directly with overtime work to assess the volume of work
that is overtime.
d. Time Allocation:
Because time is limited, an auditor must use his time as efficiently as possible so
that the task can be completed so as not to interfere with the auditee's routine
operational activities and also the longer the time used for the audit, the more it will
cost, because auditing is an expensive activity, so an auditor must use the time as well
as possible.
e. Self-preparation:
An auditor before conducting an assessment must prepare himself as in the saying
"if an auditor conducts an audit without preparation, he will leave the audit arena
without honor".
Human resource audits are very sensitive because they relate to the work of others who
will have to convey work deficiencies to the organization being assessed. There are three
dimensions of challenges faced by a human resource auditor, including:
1) Problems with himself
2) Issues related to the assessed and
3) Problems with the human resources audit process.
For a successful audit, physical preparation should also be considered, as audits are
highly interactive. Auditors need to have the emotional intelligence and skills to deal
decisively with different levels of the organization and members of different levels. Self-
esteem.
f. Audit method/method:
An audit is a job that requires accuracy, broad insight, and many disciplines, because
the approaches and methods that will be carried out in order to obtain information must be
well designed. Auditors need to conduct surveys, for example by using questionnaires or
interviews with several groups of employees who have been selected as sample respondents.
Audit method is an approach to obtain factual, relevant and significant data and
information.
g. Report Format:
Creating a personnel examination report includes a wide range of in-depth knowledge of
various disciplines such as logic, art, psychology, communication science, and linguistics, as
well as matters related to examination reports.
This audit report is so important that auditors need to know the format of the audit
report it produces before conducting a personnel audit. This allows the auditor to produce a
report similar to the one that follows immediately after the audit process is completed: It is
smooth, impressive, heavy, important and gives the impression that it is professional.
14. Conduct HR Audit:
Auditors have the authority to gain access to the necessary information by
communicating activities with various techniques and approaches, such as (Olalla, et, al.,
2002):
a. Making observations:
Auditors can start carrying out their duties by observing organizational activities
or making direct observations in HR management (human resources), so that auditors
can obtain and collect data / information and immediately find out whether there are
indications of fraud that need deep attention.
b. Ask for Explanation:
In order to obtain the required information, the auditor can freely ask or request
explanations from the auditee about the objects within the scope of the audit, all
explanations that are deemed necessary to extract information.
c. Conduct interview with Auditee:
Auditors can conduct interviews with several people in the unit being audited to
get explanations, straighten out problems and ask questions to get information/data.
d. Conducting Surveys:
Auditors can conduct surveys with questionnaires to check, for example, the
effectiveness of communication, about job satisfaction, leadership issues and so on.
e. Assessing Data, information and Facts:
Auditors evaluate the data and information obtained so that they can draw
conclusions. B. Auditors whose mission is to audit a technology transfer program aimed
at preparing local workers to replace foreign workers in the field of industrial plant
engineering.
f. Making conclusions:
Data and information that has been obtained and collected during the audit
process, then the data is processed into information from which conclusions can be
made, either positive or there are no problems that need to be followed up or significant
conclusions that need to be followed up.
15. HR Audit Report:
A skill is needed to compile a report on the results of an HR (human resources) audit,
there are four things that need to be considered when making an HR (human resources) audit
report (Nutley, 2000):
a. Essence:
A good audit report must contain complete information including:
1) Factual information, in a report the data included is the truth according to the
situation accompanied by existing evidence in accordance with reality.
2) Significant information is information that has weight or important value to be
followed up.
3) Relevant information is information related to the organization or HR management
perspective (Human Resources). lnformation that needs to be included in the
preparation of the HR audit report (human resources) so that it can be said to be
complete or sufficient report describes the problems that are being assessed by the
auditor. There are at least seven things that need to be included in the human
resources audit report:
a) Policy, an audit report needs to mention the procedural policy that is used as a
reference for the auditor's assessment of audit findings which in his
assessment is a problem that deviates significantly from the policy not in
accordance with the company's strategy, not in accordance with policies,
violating applicable laws and regulations or not relevant to the actual situation
and conditions.
b) Location, an audit report must mention in detail and clearly the location /
work unit where there is a problem, for example, fraud when paying wages at
a branch office.
c) Activity, an audit report must clearly detail an activity that has been identified
and needs attention, for example, fictitious salary payments to 3 people who
have left the company.
d) Evidence, an audit report must mention objective evidence in order to
strengthen the findings, for example mentioning the relevant document
numbers and attaching documents.
e) Scale of criticality, in order to give an idea of how important the problems
found by the auditor are.
f) Recommendation, in the end, in each audit report, the auditor provides
recommendations that are submitted to the auditee so that the problems that
have been found can be resolved with a specified time limit to make
improvements.
b. Systematics, Reports that are prepared in accordance with logical thinking
make it easier for auditors to compile and auditees also easily understand the
contents of the audit report when reading (Thomson & Mabey, 1994).
The systematics of the HR (human resources) audit report can be divided into three
main sections, namely:
1) Introduction
2) Core audit findings report
3) Cover
c. Form of Audit Report Human resources:
A human resources audit report can use a standardized form and can also use a free
narrative model that is set out in the audit procedures.
d. HR Audit Report Language (human resources):
The completed audit report is given to the head of the company and usually does not
have much time to read the report if it is written too much, so in the audit report, the head of
the company is given a copy of the report. Report writing should use sentences that are short,
clear and can be easily understood (Thomson & Mabey, 1994). For important points of the
report, you can bold or underline them so that the reader can pay special attention to the
marked part.
16. Case Study using SWOT Analysis in the Drinking Water Depot Industry:
From the SWOT Matrix above, there are four strategic steps, namely:
a. SO (Strengths-Opportunities); The strategies used are
1) Easy to manage business
2) Capital is not too big.
This situation can be utilized to opportunities, such as:
1) Water is a basic human need,
2) Wide market share,
3) Low price,
4) The lifestyle in society is practical,
5) People care about their health.
b. ST (Strengths-Threats)
The ease of managing a business can be utilized to overcome the lack of guidance from
related agencies.
c. WO Weaknesses-Opportunities),
There are five concentrations, namely
1) Water is a basic human need,
2) Wide market share,
3) Poor water quality in urban areas,
4) My affordable price, and
5) Many small industries are consumers.
d. WT (Weaknesses-Threats);
There are four things that require attention, namely:
1) Meet drinking water standards according to Health Office standards
2) Obtain a certificate.
3) Maintain cleanliness.
The owner is directly involved in the management of the business, to reduce the threat
of reduced public trust in the water depot industry.
C. Exercise:
As a learning evaluation, students are asked to be able to:
1. Explain the theoretical meaning of audit!
2. Describe the stages of an audit!
3. Explain what is reported in the audit report!
