2 MARKS

1. Meaning of management accounting.

Management accounting is designed for the management. It is concerned with the presentation of
accounting information in a manner which can assist the management in creation of policy and
decision making
The field of accounting that provides economic and financial information for managers and other
internal users is called management accounting
2. Definition of management accounting.
“Management Accounting is a system of collection and presentation of relevant economic
information relating to an enterprise for planning, controlling and decision making”
- The Institute of Cost and Works Accountants of India
3. Nature of management accounting.
 Recent origin
 Cause and effect analysis
 Inter disciplinary subject
 A science as well as an art
4. Meaning of management accountant.
Any person responsible for the supply of accounting information to management is known as
management accountant. Management accountant is also known as controller, chief accountant and
financial controller
5. Meaning of financial statements.
Financial statements are the summarized periodical reports which disclose the financial aspects of a
business such as operating results for a particular period and financial position on a particular date
6. Meaning of financial statement analysis and interpretation.
The process of critical evaluation of the financial information contained in the financial statements
in order to understand and make decisions regarding the operations of the firm is called financial
statement analysis
Analysis and interpretation of financial statement is the process of classification and arranging the
data found in the financial statements in such a way that relationship can be established between
component parts to obtain better understanding of business performance and position
7. Techniques of financial statement analysis.
 Comparative statements
 Common size statements
 Trend analysis
 Ratio analysis
 Cash flow analysis
 Fund flow analysis
 Cost-volume profit analysis
8. Meaning of ratio analysis.
Ratio analysis is the technique of computation of accounting ratios from the data derived from
financial statements and comparing those with idea or standard ratios, so as to ascertain the
financial soundness of an organization
9. Uses of ratio analysis.
 Utility to management
 Utility to shareholders
 Utility to investors
 Utility to creditors
 Utility to employees
 Utility to government
10. Meaning of cash flow statement.
 Cash flow statement is a statement which shows the sources of inflow and outflow of cash in a firm
during a particular period of time
11. Definition of cash flow statement.
“A statement which discloses the changes in cash position between the two periods. Along with the
changes in the cash position the cash flow statement also outlines the reasons for such inflows or
outflows of cash which in turn helps to analyze the functioning of a business”
- The Institute of Chartered Accountants of India
12. Meaning of management audit.
Management audit is a method of independent and systematic evaluation of management activities
at all levels of management to ascertain the functions, efficiency and achievement of management as
compared to the standards set by the company
13. Nature of management audit.
 To evaluate the efficiency of management
 To find variances
 To recommend suggestions for implementation
14. Need for management audit.
 To help for correction of plans, policies and procedures
 To aid for decision making
 Helps to get a loan
 Helps to increase profitability
15. Meaning of reports on management review and governance.
Reports on management review and governance are essential components for an organization. They
serve as a comprehensive evaluation of the effectiveness of management practices and governance
structures

5 MARKS
1. Significance or importance of management accounting.
i. Decision making
Management accounting provides relevant financial information which helps
management to make informed decisions about pricing, product development, resource
allocation and investment opportunities
ii. Performance evaluation
It helps in evaluating the performance of various departments, products, projects
or employees by comparing actual results with expected results. This evaluation aids in
identifying areas for improvement and making necessary adjustments to achieve
organizational goals
iii. Planning and forecasting
Management accounting helps in developing budgets and forecasts based on
historical data and market trends. This assists management in setting realistic goals, allocating
resources efficiently and planning for future growth and expansion
iv. Cost control
It helps in identifying and controlling costs within an organization by analyzing
cost behavior, identifying cost drivers and implementing cost saving measures. This is crucial
for improving profitability and competitiveness in the market
v. Strategic planning
Management accounting provides insight into the financial implications of
strategic decisions such as entering new markets, launching new products or investing in new
technologies. This helps in developing effective strategies that align with the organizational
goals and objectives
vi. Risk management
By analyzing financial data and trends, management accounting helps in
identifying potential risks and uncertainties that may impact the organization’s financial
 performance. This enables management to take proactive measures to mitigate risks and
ensure financial stability
vii. Performance measurement
It helps in measuring the performance of the organization as a whole and its
various departments and divisions. This enables management to identify areas of strength and
weakness and take corrective actions as needed
viii. Communication
Management accounting helps in communicating financial information
effectively to internal stakeholders such as managers and employees. It enables them to
understand the financial health of the organization and their role in achieving the goals
2. Scope of management accounting.
i. Financial accounting
Financial accounting is the most important part of accounting. Financial
accounting is the foundation for management accounting as it provides necessary information
for preparation of details and reports to be presented to the management
ii. Cost accounting
Management accounting includes cost accounting which involves recording,
analysis and allocation of costs within an organization. This helps managers to understand the
cost structure of organization and make informed decisions regarding pricing, product mix and
cost control
iii. Budgeting and forecasting
Management accountants are involved in preparing budgets and forecasts
for the organization. This involves estimating future revenues, expenses and cash flows to help
managers to plan and allocate resources effectively
iv. Performance measurement
Management accounting includes the development of performance
measures and Key Performance Indicators [KPI] to evaluate the performance of individuals,
departments and organization. This helps managers to assess performance against goals and
identify areas for improvement
v. Decision support
Management accountants provide decision support to managers by analyzing
data and providing relevant information for decision making. This can include evaluating
investment proposals, assessing financial impact of different options and conducting cost
benefit analysis
vi. Strategic planning
Management accounting is also involved in strategic planning. It helps
managers to develop long term plans and strategies for organization. This can involve
analyzing market trends, assessing competitive forces and evaluating financial implications of
strategic decisions
vii. Risk management
Management accountants are involved in identifying and managing risks
within the organization. This can include assessing financial risks such as exposure to foreign
exchange risk or interest rate risk and developing strategies to mitigate those risks
viii. Internal controls
Management accounting includes the design and implementation of internal
controls to ensure the accuracy and reliability of financial information. This helps to safeguard
the assets of an organization and ensure compliance with regulations
ix. Reporting
Management accountants are responsible for preparing various reports for
internal users including management reports and performance dashboards. These reports
provide valuable information for decision making and performance evaluation
3. Objectives or functions of management accounting.
i. Data feeding
 One of the specific objectives of management accounting is to provide the
necessary information to management
ii. Financial analysis and interpretation of accounting data
Management accounting analyzes and interprets the accounting data
meaningfully. It presents the accounting data in a non technical way so that it can be easily
understood by management
iii. Planning
Management accounting assists management in its function of planning. By giving
statements of past results and estimates of future, management accounting helps management
in setting goals, formulating policies, determining alternative courses of action and deciding
the programme of activities to be undertaken
iv. Coordinating
Management accounting coordinates the activities of different sections of the
undertaking through functional or departmental budgets or departmental reports
v. Control
Management accounting helps the management to control the performance of each
functional area of enterprise. This objective of management accounting is sought to be realized
through special techniques like budgetary control and standard costing
vi. Communicating
Management accounting communicates or reports to management. It keeps
the management fully informed about the latest position of concern, to enable management to
take proper and timely decisions
vii. Decision making
Helping management to increase the operational efficiency of an enterprise is
an important objective of management accounting. Meaningful information supplied by
management accounting to management helps the management to take right and speedy
managerial decisions and this would certainly lead to improvement in operational efficiency of
an enterprise
4. Advantages of management accounting.
i. Decision making
It provides information and analysis to support strategic decision making such as
pricing, product mix and capital investment decisions
ii. Performance evaluation
It helps to evaluate performance of different segments, departments or
products within an organization, enabling management to take corrective actions if needed
iii. Planning and forecasting
It assists in setting goals, budgets and forecasts based on historical
data and market trends. It also helps to improve resource allocation and efficiency
iv. Cost control
It helps to identify and control costs, improving cost efficiency and profitability
v. Risk management
It provides information to identify and manage risk such as market risks,
operational risks and financial risks
vi. Motivating employees
It provides performance metrics and targets that can motivate employees to
achieve organizational goals
vii. Facilitates communication
It helps in communicating financial information effectively to stakeholders
including investors, creditors and regulators
viii. Supports continuous improvement
It encourages continuous improvement by providing feedback on
performance and highlighting areas for improvement
5. Disadvantages of management accounting.
 i. Lack of specific procedure
Management accounting does not have any specific rules and principles to
follow. In the absence of any guidelines, this branch of accounting may provide inaccurate data
ii. Costly
The installation of a management accounting system requires huge expenses as they
need to hire a management accountant. Such high costs cannot be taken by small business
organizations
iii. Dependency
Management accounting is dependent on financial and cost accounting for various
data. The authenticity of information provided by management accounting completely
depends on accuracy of records maintained by cost and financial accounting
iv. Personal bias
This accounting branch is subject to personal bias and prejudices by
management. The effectiveness of management accounting may be affected by the
interpretation and analysis capability of individuals
v. Uncertain
Management accounting is related to future as it provides data for management and
planning of future activities. However, the future is uncertain and management accounting
may not provide effective results
vi. Provides only data
It only supplies data to management but does not provide any plan of action.
Management accounting cannot substitute the role of management and can only help them in
their role by providing required data
6. Role of management accountant.
i. Collection of information
The information used in management accounting is collected from a number
of sources, both inside and outside the business. Inside the business, information may have to
be collected from financial accountant, production department, purchase department, sales
department and costing department. The outside sources may be competitors, financial
statements, market, surveys, government policy decisions, share and stock exchanges. The
management accountant will first decide about the type of information required and then the
relevant source for it
ii. Evaluation of information
The next duty of management accountant after the collection of
information is to evaluate it. The whole information may not be needed at present.
Management accountant will distinguish between relevant and irrelevant information.
Management accountant will also assess the utility of information. Management accountant
will leave irrelevant details and management will be supplied only necessary information in a
systematic manner
iii. Interpretation of information
The interpretation of information is another task assigned to
management accountant. If information is supplied without interpretation, then its utility will
be much less. Management accountant gives facts and figures about various policies and
evaluates them in monetary terms. They are also expected to give their opinion about various
alternative courses of action so that it becomes easy for management to take decisions
iv. Reporting of information
Another duty of management accountant is to supply information to
management. They meet the informational needs of management. The information is supplied
wherever needed. This information helps the management to understand the implications of
various decisions and decisions will be more realistic when they are based on facts and figures
7. Functions of management accountant.
i. Planning for control
 Management accountant establishes, coordinates and maintains an integrated
plan for control of operations. Such a plan would provide cost standards, expense budgets,
sales forecasts, capital investment programmes and profit planning
ii. Reporting
Management accountant measures performance against given plans and standards.
The results of operations are interpreted to all levels of management. This function will include
installation of accounting and costing systems and recording of actual performance so as to
find out any deviations
iii. Evaluating
Management accountant should evaluate various policies and programmes. The
effectiveness of planning and procedures to attain the objectives of the organization will
depend upon the talent of management accountant
iv. Administration of tax
Management accountant is expected to report to government agencies
as required under different laws and to supervise all matters relating to taxes
v. Appraisal of external effects
Management accountant has to assess the effect of various economic and
fiscal policies of government and also to evaluate the impact of other external factors on the
attainment of organizational objectives
vi. Protection of assets
The protection of business assets is another function assigned to
management accountant. This function is performed through the maintenance of internal
controls, auditing and assuring proper insurance coverage of assets
8. Nature of financial statements.
i. Recorded facts
The term recorded facts means the facts that have been recorded in the
accounting books. Facts which have not been recorded in financial books are not depicted in
the financial statements. For example, fixed assets are shown at cost irrespective of their
market price since such price is not recorded in the books
ii. Accounting conventions
Accounting conventions imply certain fundamental accounting principles
which have been certified. For example, on account of convention of conservatism, provision is
made of expected losses but expected profits are ignored. This means that the real financial
position of the business may be much better than what has been shown by financial
statements
iii. Personal judgments
Personal judgments have also an important bearing on a financial
statement. For example, the choice of selecting a method of depreciation lies on the
accountant. Similarly, the mode of amortization of fictitious assets also depends on the
personal judgment of accountant
9. Limitations of financial statements.
i. Manipulation
Some business enterprises tend to manipulate the information contained in the
financial statements so as to cover up their bad or weak financial position. Thus, the analysis
based on such financial statements may be misleading due to manipulation
ii. Use of diverse procedures
There may be more than one way of treating a particular item and when
two different business enterprises adopt different accounting policies it becomes difficult to
make comparison between such enterprises. Results provided by comparing financial
statements of such business enterprises would be misleading
iii. Qualitative aspect ignored
The financial statements incorporate the information which can be
expressed in monetary terms. Thus, they fail to incorporate the transactions which cannot be
 converted into monetary terms. For example, a conflict between marketing manager and sales
manager cannot be recorded in the books of account due to its non monetary nature, but it will
certainly affect the functioning of the business and consequently profits may also suffer
iv. Historical
Financial statements are historical in nature as they record past events and facts.
Due to continuous changes in the demand of product, policies of the firm or government,
analysis based on past information does not serve any useful purpose and gives only
postmortem report
v. Price level changes
Figures contained in financial statements do not show the effects of
changes in price level. Price index in one year may differ from price index in other years. As a
result, misleading picture may be obtained by making a comparison of figures of past year with
current year figures
vi. Lack of regular data or information
Analysis of financial statements of a single year has limited uses. The
analysis assumes importance only when compared with financial statements relating to
different years or different firms
vii. Subjectivity and personal bias
Conclusions drawn from the analysis of figures given in financial statements
depend upon the personal ability and knowledge of an analyst. For example, the term ‘net
profit’ maybe interpreted by an analyst as net profit before tax, while another analyst may take
it as net profit after tax
10. Essentials of a good financial statement.
i. Understandability
Financial statements should be easily understandable by users. For this, the
information contained in these statements should be clear and simple
ii. Relevance
Financial statements must contain only relevant information. Then only the users
can evaluate past, present and future events and can take wise decisions
iii. Reliability and Accuracy
Financial statement should disclose information important to an
organization and belonging to that particular period. They should also be accurate which
means there should not be any error or misleading information
iv. Comparability
Financial statements should disclose information in such a way that the users can
compare the current year progress with that of previous year. Users must also be able to
compare the financial performance of reporting company with other companies
v. Completeness
The information contained in the financial statements should be complete in all
respects. This means all information should be shown in these statements. It further means
that the information shown in the financial statements should not mislead creditors, investors
and other users
11. Types of financial analysis.
I. On the basis of materials used
i. External analysis
This analysis is done by outsiders who do not have access to the detailed
internal accounting records of the business firm. These outsiders include investors, potential
investors, creditors, potential creditors, government agencies, credit agencies and general
public. For financial analysis, these external parties depend almost entirely on published
financial statement of a firm
ii. Internal analysis
The analysis conducted by persons who have access to the internal
accounting records of a business firm is known as internal analysis. Such an analysis can be
 performed by executives and employees of organization as well as government agencies
which have statutory powers. Financial analysis is done for the purpose of assessing
profitability of different activities and provides management with detailed information
II. On the basis of method of operation followed
i. Horizontal analysis
Horizontal analysis refers to the comparison of financial data of a company
for several years. The figures of various years are compared with standard or base year. A
base year is a year chosen as beginning point. This type of analysis is also called dynamic
analysis or trend analysis
ii. Vertical analysis
Vertical analysis refers to the study of relationship of various items in the
financial statements of one accounting period. In this type of analysis, the figures from
financial statements of a year are compared with a base selected from the same year
statement. It is also known as static analysis or structural analysis
III. On the basis of objectives
i. Short term analysis
It is an analysis which is mainly intended for measuring liquidity position,
working capital position, cash position, operational efficiency and profitability. The main
tool used for short term analysis is ratio analysis
ii. Long term analysis
It is an analysis which is mainly intended for determination of capital
structure, long term financial position and fixed assets. Its emphasis is on stability and
earning potentiality of the concern
IV. On the basis of entities involved
i. Cross sectional or inter firm analysis
It involves comparison of financial data of a firm with other firm
for the same period
ii. Time series or intra firm analysis
It involves study of performance of same firm over a time period
12. Limitations of ratio analysis.
i. Differences in accounting practices
The two firms can be compared with the help of accounting ratios
only if they follow the same accounting procedures. If they follow different accounting
methods and standards, any analysis based on such methods would be misleading
ii. Correctness of accounting data
Unless the analyst gets accurate accounting data, the accounting ratios
calculated by them is not reliable. Sometimes the financial figures shown in the financial
statements are affected by manipulation. In such cases, accounting ratios are of no use
iii. Absence of common standard
A common standard of comparison cannot be laid because
situations differ from firm to firm. Even the nature of industry differs from one to another
iv. Change in price level
Generally, the price level of various items will not remain constant over
a period of time. It will change from year to year. These changes in price levels make
comparison for various years difficult
v. Insufficient information
The ratio gives limited information about the business concern.
To make an analysis of various financial statements requires vast information which is
not supplied by ratio analysis. Therefore, ratio analysis can be used along with other
methods of analysis
vi. More importance to quantitative factors
Under ratio analysis, more importance is given to quantitative
analysis rather than qualitative analysis. Quality and quantity are the two faces of a single
 coin. Sometimes, the qualitative analysis becomes more important than the quantitative
analysis which is missing in ratio analysis
vii. Ratios are not substitutes
Ratios cannot substitute financial statements. Once the ratios are
separated from the financial statements information, they become meaningless
viii. Changes in price level
While analyzing ratios, if there are changes in price levels then the
analysis becomes invalid. Then the interpretation and report also becomes invalid
13. Merits of cash flow statement.
i. Cash management
One of the most important functions of management is to manage cash
resources in such a way that adequate cash is available to meet liabilities. A cash flow
statement enables the management to plan and coordinate financial operations efficiently
ii. Cash planning
The projected cash flow statement helps the management to determine the
likely inflow or outflow of cash from operations and the amount of cash required to be
raised from other sources to meet the future needs of business
iii. Movement of cash
Cash flow statement discloses the increase or decrease in cash and
reasons for the same
iv. Repayment of loan
The cash flow analysis helps the management in estimating the
possibility of repayment of long term debts which depends upon the availability of cash
v. Factual report of operations
Cash flow statement gives the exact figures of cash flow from
operations. The cash flow from operations is not subjected to manipulation. It gives more
reliable picture of results and operations than the profit and loss account. The amount of
profit can be easily changed by the amount of depreciation. Hence, the profit shown in the
profit and loss account may be unreliable
vi. Inter-firm comparison
Cash flow statement enhances the comparability of reported
performance by different enterprises because it eliminates the effects of using different
accounting treatments for the same transactions and events
vii. Cash budgeting
Cash flow statement is used as an indicator of the amount, timing and
certainty of future cash flows. It is helpful in preparing cash budgets
viii. Performance analysis
Comparison of budgeted cash flow statement and actual cash flow
statement will show the extent to which cash budget has been followed. It will disclose
the success of failure of management in managing cash resources
ix. Financial commitment
Cash flow statement gives an idea of the ability of the enterprise to
meet its short term commitments in time
x. Financial structure
Cash flow statement provides information of all investing and financing
cash transactions. It explains most of the changes in financial statements. It enables the
users to evaluate changes in net assets of an enterprise and its financial structure
14. Demerits of cash flow statement.
i. Misleading comparison
Cash flow statement does not measure the economic efficiency of
companies. Generally, a company with heavy capital investment will have more cash flow.
Hence, inter firm comparison of cash flow statement may be misleading
ii. Misleading conclusion
 Comparison of cash flow over a period of time can be misleading.
Increased cash flow need not always mean that the company is better
iii. Liquidity position
The cash balance as disclosed by cash flow statement may not represent
the real liquid position of business. The cash can be easily influenced by purchase and
sales policies, advance payments or postponing payments
iv. Non cash charges
Cash flow statement ignores non cash charges. Non cash charges will have
to be taken into account for judging the profitability of an enterprise
v. Not equal to income statement
Cash flow statement cannot be equated with income statement.
Income statement takes into account both cash as well as non cash items. Hence, net cash
flow does not necessarily mean net income of business
vi. Supplementary
Cash flow statement is only a supplement to funds flow statement. It
cannot replace income statement or funds flow statement as each one has its own
functions or purpose of preparation
15. Ind AS 7.
Indian Accounting Standard 7 states that an entity shall prepare a statement of cash flows in
accordance with the requirements of this standard and shall present it as an integral part of its
financial statements for each period for which financial statements are presented. The objective of
this standard is to provide the provision of information about the historical changes in cash and
cash equivalents of an entity by means of a statement of cash flows which classifies cash flows
during the period from operating, investing and financing activities. It provides guidance on the
format and presentation of cash flow statement. Entities are required to present cash flows from
operating, investing and financing activities using either the direct method or the indirect method.
The direct method reports major classes of gross cash receipts and payments, while indirect method
adjusts net profit or net loss for non cash items to derive cash flows. It encourages entities to
provide supplementary information that enhances the understanding of cash flow statement
16. Concept of cash and cash equivalent.
Cash includes cash in hand and demand deposits with banks. Demand deposits with banks are those
deposits which can be withdrawn without prior notice and penalty charges. Generally, long term
deposits are placed for a specific period in banks and those cannot be withdrawn without penalty.
Hence, it cannot be classified as cash.
Cash equivalents are short term i.e. either 3 months or less from the date of acquisition items.
Highly liquid investments that can be readily converted into known amounts of cash and which are
subject to an insignificant risk of changes in value is cash equivalent. They are held for the purpose
of meeting short term cash commitments rather than for investment or other purposes. Examples of
cash equivalents are treasury bills, short term government bonds, commercial papers and money
market funds
17. Classification of cash flows.
i. Operating activities
Operating activities are the principal revenue producing activities of an
enterprise. The amount of cash flows arising from operating activities is a key indicator of
the extent to which the operations of the enterprise have generated sufficient cash flows
to maintain the operating capabilities of an enterprise to pay dividends, repay loans and
make investments without recourse to external sources of financing. Examples are:
 Cash receipts from sale of goods and rendering of services
 Cash receipts from royalties, fees, commissions and other revenues
 Cash payment to suppliers for goods and services
 Cash payment to employees
 Cash receipts and refunds of income tax
 Cash receipts and payments arising from purchase and sale of trading securities
 ii. Investing activities
Investing activities are the acquisition and sale of long term assets and
other investments not included in cash equivalents. These long term assets and
investments are the resources intended to generate future income and cash flows.
Examples are:
 Cash payment to acquire fixed assets
 Cash payments to construct fixed assets
 Cash payments relating to capitalized research and development costs
 Cash receipts from disposal of fixed assets
 Cash payment to acquire shares and debt instruments of other enterprises
 Cash advances and loans made to third parties
 Interest, dividend and rent received
iii. Financing activities
Financing activities are activities that result in changes in the size
and composition of owner’s capital and borrowings of an enterprise. Examples are:
 Cash proceeds from issuing shares or other similar instruments
 Cash proceeds from issuing debentures, loans, notes, bonds and other short or long
term borrowings
 Cash repayments of amount borrowed
 Cash payment to redeem preference shares
 Payment of dividend and interest
18. Scope of management audit.
i. Evaluate efficiency of management
Management audit evaluates and appraises the efficiency of
management at all levels
ii. Implementation of principles and policies of management
Management audit reviews whether the principles and policies
formulated by management have been successfully implemented or not
iii. Find variances
It detects the variances in efficiency with the standards set by management
iv. Analyze the reasons for variances
Management audit analyzes the reasons for inefficiencies of
management for not fulfilling the targets
v. Recommend suggestions for implementation
It gives suggestions for improvement in the areas like production,
sales, purchase, finance, human resources and administration
19. Importance of management audit.
i. Evaluates efficiency of management
Management audit is a method of independent and systematic
evaluation of management activities at all levels of management to ascertain the
functions, efficiency and achievement of management as compared to the standards set
by the company
ii. Scrutiny of plans, policies and procedures
Management audit helps to determine how the management has
implemented their plans, policies and procedure to reach the organizational goals
iii. Helps for correction of plans, policies and procedures
Through management audit it is possible to change or
revise the plans, policies and procedures as per the needs of the company
iv. Aids for decision making
Management audit assesses the ability of managers to take important
decisions and helps them to rectify the defects
v. Helps to get loans
 Financial institutions who give huge loans to organizations are interested to
know the efficiency of management and profitability. Management audit certainly gives a
guide to them
vi. Helps to get subsidy
Before granting subsidy to government or to any entity, it is essential to
know the efficiency and functioning of management. Management audit helps in this
matter
vii. Helps to increase profitability
Management audit helps the management to increase profitability
by giving remedies to maximize the organization’s resources in an efficient way
20. Objectives of management audit.
i. Verifying the efficiency
Management audit aims to assess the efficiency at all levels of
management and implementation of policies
ii. Gives suggestions for increase in efficiency
Management audit highlights the efficiencies of
different areas and gives valuable suggestions and means to improve the efficiencies
iii. Assess the effectiveness of planning and policies
Management audit examines and evaluates the plans and
policies and judges whether planning and policies are properly implemented or not
iv. Helps to increase profitability
Management audit helps the management to increase profitability
by giving remedies to maximize the organization’s resources in an efficient way
v. Helps to coordinate activities
Management audit detects the inter relationship among activities,
evaluates authority and responsibility and gives valuable suggestions for improvement of
coordination among activities and employees
vi. Gives valuable advice
By scanning management efficiency and detecting weak points of
different levels of management, the management auditor gives valuable advice to the top
management regarding different policies and future course of action
21. Difference between financial audit and management audit.
FINANCIAL AUDIT MANAGEMENT AUDIT
 It is an act of examining and analyzing  It is a systematic evaluation of capabilities
company’s financial aspects of company’s management
 It evaluates only financial aspects of  It evaluates non financial aspects of
business business
 It is quantitative in nature  It is qualitative in nature
 It is conducted by external auditor  It is conducted by an employee of the
company or an independent consultant
 An audit of financial records is mandatory  Management audit are not mandatory
 Financial audit is conducted at the end of  Management audit is conducted at the end
each financial year of accounting period after the preparation
of financial statements
 Main objective is to ensure arithmetical  Main objective is to measure the
accuracy and fairness of books of accounts effectiveness, quality of decision making
of the company and executive performance of management
 It is useful for shareholders and investors  It is useful for top level management and
to know the financial position of the proprietors to measure the actual
company performance with predetermined standards
22. Steps involved in management audit.
i. Collection of information
Management auditors need information in order to appraise various
managerial aspects. Therefore, a questionnaire should be prepared to collect necessary
information. The questions should cover information about objectives, planning
 processes, control systems, procedures and functional areas. The questions should also
be framed to gather complete information about every relevant aspect of business
ii. Examination of information
The management auditors should carefully examine the
information in order to reach certain conclusions. The information should be studied
carefully to ascertain the real position of the organization
iii. Authentication of information
If the information is collected from various persons, it should
be authenticated by those supplying information
iv. Confirmation of information
The management auditors may also need to confirm the
information applied from different sources. This is important for reaching reliable
conclusions
v. Observation
The management auditors should observe whether certain activities can be
improved, preparing organization charts, flow charts and other useful insights
vi. Comparison of information
The information should be compared to objectives and standards set
earlier. This will reflect the actual performance of enterprise, which can help to assess the
comparative performance of the firm
23. Report of Board of Directors.
Financial reporting is required for businesses since it offers information on a company’s current
state as well as its compliance with financial, corporate social responsibility and accounting
requirements. At the conclusion of each financial year, public and private limited firms must
produce a financial document known as the Board of Directors Report under Companies Act 2013. It
is the report generated by the company’s Board of Directors and should be attached to each
financial statement. It describes the company’s financial situation.
A Board of Directors is a group of persons who represents shareholders. It is a governing body that
meets on a regular basis to establish business management and oversight regulations. Every public
corporation is required to have a board of directors.
Need for board of directors report:
 It promotes more corporate oneness
 It allows the shareholders to make educated decisions
 It assists the shareholders in understanding the company’s ability to develop and expand
 It helps to know whether the company’s finance are in excellent shape
 It helps to know how the firm is performing
24. Management Discussion and Analysis [MD&A].
Management Discussions and Analysis is the part of financial statements where the company’s
management discusses the company’s performance in the current year using qualitative and
quantitative measures to help the investor to realize the details that otherwise would not have been
available for analysis. It includes various topics, including Macro Economic Performance of the
industry, the company’s vision and strategy and some key financial indicators. The following are the
features:
 It is a section within a company’s annual report or quarterly filing where executives analyze
the company’s performance
 The section can also include a discussion of compliance, risks and future plans such as goals
and new projects
 The section are not audited and represent the thoughts and opinions of management
 Companies often use MD & A section to invoke confidence in investors by explaining how and
why future plans of company will be successful
 It helps the potential investors to understand the company’s financial fundamentals and
management’s thinking, beliefs and performance
25. Business responsibility report.
 A business responsibility report informs all stakeholders on a listed company’s adoption of
responsible business practices. This is crucial since many firms have received public financing, have
a public interest component and are obligated to make comprehensive disclosures on a regular
basis. Business Responsibility Report [BRR] is an essential aspect of corporate reporting in India
that goes beyond financial disclosures. It requires eligible companies to provide comprehensive
information about their environmental, social and governance practices, integrating responsibility
into their overall business strategy.
BRR is a defined framework for businesses to report on their efforts to adopt responsible business
practices. It is designed to provide fundamental information about the company’s performance and
procedures as well as information on concepts and core parts of BRR. The contents of BRR are:
 Section A : general information about the company
 Section B : financial details of the company
 Section C : other details
 Section D : business responsibility information
 Section E : NVG principle wise performance
26. Corporate governance report.
Corporate governance involves a commitment to principles and ethical business practices. It refers
to how an organization is handled. This covers its corporate and other structures, culture, policies
and how it interacts with different stakeholders. Timely and correct disclosure of information about
the company’s financial status, performance, ownership and governance is a critical component of
corporate governance. This helps the public to comprehend the organization’s structure, activities
and policies. As a result, the organization can attract investors while also increasing stakeholder
trust and confidence.
Corporate governance reporting is an ethical business process that represents how organizations
oversee their own actions, policies, procedures and choices as well as the impact of those actions on
their agents and stakeholders. These reports often include information on corporate governance
procedures, regulatory compliance, company and board performance, board makeup and the
organization’s effectiveness in adhering to good governance standards. It attempts to offer
shareholders with insight into how the firm conducts business specifically its model, structure,
activities and results.
In most of the big organizations, the Chief Compliance Officer [CCO] is in charge of governance and
compliance reporting. The CCO is in charge of developing companywide standards and procedures
to ensure that an organization’s governance and compliance programmes can effectively and
efficiently identify, prevent, detect and correct non compliance issues with relevant laws,
regulations, industry standards or company policies.
In smaller organizations or those without a compliance officer, the task for reporting may be given
to a member of the legal department or another trained employee. When selecting a manager to
oversee a compliance reporting team, it is crucial to look for someone who is knowledgeable about
the specific business activity being reviewed as well as the legislation governing the compliance
project
27. Secretarial audit report.
Secretarial audit is a compliance audit. It is a part of total compliance management in an
organization. It is an effective tool for corporate compliance management which helps to detect non
compliance and to take corrective measures.
The objectives are:
 To check and report on compliance of applicable laws and secretarial standards
 To point out non compliances and inadequate compliances
 To protect the interest of various stakeholders
 To avoid any unwanted legal actions and penalties by law
The following situations seek for a compulsory secretarial audit of a company records essentially
by a company secretary:

 For every government approved listed company

  For every public company having an annual turnover of 250 crore or more
 For every public company having paid up share capital of 50 crore or more
 For every private company legally recognized to be a subsidiary company of a public
company falling under the above class of companies

15 MARKS
1. Difference between financial accounting and management accounting.
POINT OF DIFFERENCE FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
Objective The objective is to record various The objective is to provide
transactions and to know the financial information to management for
position and to find out profit or loss formulating policies and plans
at the end of the financial year
Nature It is mainly concerned with historical It deals with projection of data
data for future
Subject matter It is concerned with assessing results It deals separately with
of business as a whole different units, departments
and cost centers
Legal compulsion The preparation of financial accounts The preparation of management
is mandatory accounts is not mandatory
Precision Under this, only actual figures are Under this, no emphasis is given
recorded with perfect accuracy and to actual figures and
precision approximate figures are
considered more useful
Reporting Financial reports are prepared not Management accounting
only for the benefit of concern but also reports are meant for internal
for outsiders use only
Description It records only those transactions It uses both monetary and non
which can be measured in monetary monetary information
terms
Quickness Reporting of financial accounting is Reporting of management
low and time consuming accounting is very quick
Accounting principles It is governed by GAAP and No set principles are followed
conventions
Period Financial accounts are prepared for a It supplies information from
particular period time to time during the whole
year
Publication Financial statements are published for Management accounting
the benefit of public statements are not published
Age It is several centuries old It has developed only in the last
few years
Standardization Highly standardized Not standardized
Audit It can be audited It cannot be audited

2. Difference between management accounting and cost accounting.

POINT OF DIFFERENCE COST ACCOUNTING MANAGEMENT ACCOUNTING
Object The object is to record the cost The object is to provide
of producing a product or information to management for
providing a service planning, coordinating, decision
making and control
Emergence It emerged mainly due to the It emerged due to limitations of
limitations of financial cost accounting
accounting
Scope Scope is limited as it deals with Scope is wide and it includes
cost ascertainment financial accounting, cost
accounting, budgeting and tax
planning
Nature It uses both past and present It is generally concerned with
figures the projection of figures for
 future
Data used Only quantitative aspect is Both quantitative and
recorded qualitative information is used
Interpretation It just reports cost data It not only reports financial and
cost data but also analysis and
interprets such data
Period It is generally concerned with It is concerned with planning
working out the year cost and working out future
operating statements operating statements of an
organization
Techniques It makes use of techniques like It makes use of not only these
standard costing, budgetary techniques but also other
control, marginal costing and techniques like ratio analysis,
uniform costing fund flow analysis and cash flow
analysis
Development The development of cost It has developed only in the last
accounting is related to few years
industrial revolution
Parties interested Both internal and external Mainly internal parties are
parties are interested in data interested in data
Principles followed Certain principles and No specific rules and
procedures are followed for procedures are followed
recording cost of different
products
Range of planning It is more concerned with short It is concerned with short term
term planning as well as long term planning
Installation It can be installed without It cannot be installed without an
having a system of management efficient cost accounting
accounting systems