Question

Budgets

1. What is “Incremental Budget”?

2. List and explain 2 pros and 2 cons of Incremental Budget?                    

According to the International Institute of Internal Auditors Glossary (2013),

Control is define as?   

3. The Internal Control Framework is made up of 5 interrelated elements.

4. List any 4 of these elements?

Answer 1

1. An incremental budget is a budget that is prepared on the basis of the previous year’s budget or the actual figures of the previous year with additional small changes being made keeping in mind the current budget period. It doesn’t bring about any large deviations year after year . Keeping the prior period as a base ensures that there is a reasonable allocation for the current period .This incremental budgeting is an important aspect of management accounting and it ensures that there is continuous flow of funds for the various departments without much of detailed analysis.

2. The advantages and disadvantages of incremental budget are as follows:

Advantages:

1. Easy to put into practice and the computations and calculations involved are not difficult to implement.
2. It can be effectively absorbed for multiple departments.
3. It makes it possible to have continuous flow of funds.
4. The effect of the changes adapted can be seen promptly
5. Makes it possible that there are no large deviations

Disadvantages:

1. There is hardly any innovation involved and doesn’t bring about a decrease in cost with respect to managers.
2. This incremental budgeting in fact leads to greater amounts being spent in the bargain to get favourable variances.
3. This incremental budgeting at times is far away from the actual situation or the reality as the basis on which they are developed are the previous year’s data and figures ans such a benchmark may not be that relevant with respect to the current situation.
4. The businesses end up functioning in a conservative manner.
5. The managers of the organization get too involved in the budgeting process and thereby end up spending in an unnecessary manner.

3. According to the International Institute of Internal Auditors Glossary (2013),Control is define as all the processes and the activities that are a part and aspect of the control framework which is specifically designed to implement and ensure that the risks are kept well within the acceptable limits taking into account the organisation’s risk appetite.

For an effective Internal control system to be in place and function effectively the following five components work towards the fulfillment of the organisation’s goals, mission , strategies and other related business objectives and goals. The Internal Control Framework is was designed to aid businesses in setting up , assessing and improving their internal control:

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring

4. Detailed listing of the FOUR elements:

Risk Assessment:

• Company level Objectives
• Process level Objectives
• Risk Identification and their Analysis
• Managing the Change

Control Activities:

• Policies and Procedures
• Security (Application security and Network security)
• Application Change Management
• Business Continuity or the Required Backups
• Outsourcing

Information and Communication:

• Quality of Information
• Effectiveness of Communication process

Monitoring:

• Continuous Monitoring
• Separate Evaluations
• Reporting Deficiencies