Monday, February 21, 2011

Grand Strategy Matrix

Based on four important elements of rapid market growth, slow market growth, strong competitive position, and weak competitive position, Grand Strategy Matrix has been emerged into a dominant tool in formulating cross-functional strategies. To simplify the job of identification and selection of best fitting strategy the elements of the Grand Strategy Matrix actually form a four quadrant Matrix where relevant organizations in the analysis are positioned. Instead of different organizations a firm with many divisions can plot its divisions across Grand Strategy Matrix for the sake of devising best suited strategy for each division.

The efficiency of the management greatly depends upon adoption of and pursuing the strategies consistent with the market and competitive position of the firm. For devising appropriate strategy management is required to reveal the firm’s competitive position and market place through a scientific analysis of its current position. Grand Strategy Matrix is there to simplify the job.

How to construct a Grand Strategy Matrix

In fact Grand Strategy Matrix represents two evaluative dimensions referred to as market growth and competitive position. Horizontal line shows market growth labeling rapid market growth at the upper front and slow market growth at the lower front whereas vertical line shows competitive position labeling strong competitive position at the right end and weak competitive position at the left end. Such a mechanism of Grand Strategy Matrix emerges into a four quadrant matrix where right strategies are enlisted in accordance with the characteristics or attributes of each quadrant firms.

A Model of Grand Strategy Matrix


Firm Attributes:
competitive position (weak)
        Market Growth (rapid)

·          Market development
·          Market penetration
·          Product development
·          Horizontal integration
·          Divestiture
·          Liquidation

Quadrant two

Firm Attributes:
competitive position (strong)
        Market Growth (rapid)

·          Market development
·          Market penetration
·          Product development
·          Forward integration
·          Backward integration
·          Horizontal integration
·          Related diversification

Quadrant one


Firm Attributes:
competitive position (weak)
        Market Growth (slow)

·          Retrenchment
·          Related diversification
·          Unrelated diversification
·          Divestiture
·          Liquidation

Quadrant three

Firm Attributes:
competitive position (strong)
        Market Growth (slow)

·          Related diversification
·          Unrelated diversification
·          Joint ventures

Quadrant four


The above model of Grand Strategy Matrix represents four quadrants.

First quadrant

The first quadrant refers to the firms or divisions with strong competitive base and operating in fast moving growth markets. Such firms or divisions are better to adopt and pursue strategies such as market development, market penetration, product development etc. The idea behind is to focus and make the current competitive base stronger. In case such firms possess readily available resources they can move on to integration strategies but should never be at the cost of diverting attention from current strong competitive base.

Second quadrant

Quadrant two firms are attributed with weak competitive advantage but operating in fast growing market. The suitable strategies for such firms are to develop the products, markets, and to penetrate into the markets. To achieve the competitive advantage or becoming market leader quadrant two firms can go into horizontal integration subject to availability of resources. However if these firms foresee a tough competitive environment and faster market growth than the growth of the firm, the better option is to go into divestiture of some divisions or liquidation altogether and change the business.

Third quadrant

Firms falling under quadrant three are characterized with weak competitive position and slow growth market. Such firms need a major overhaul and more ideally should go into liquidation, retrenchment, and divestiture. Changing the business is a better option.

Fourth quadrant

Although competitive position of quadrant four firms is strong but can not ensure larger revenues due to slow moving markets. Such firms are better to go into related or unrelated integration in order to create a vast market for products and services. In some cases joint venture with other firms can bestow such firms with significant benefits.

Sunday, February 20, 2011

Audit Risk and Materiality

Audit Risk

An entity operates in an environment where number of risk factors exists due to type of industry, regulatory environment, size of the entity, competitive environment, state of the economy, and complexity of operations. Such risks may or may not effect the preparation of financial statements. The auditor is concerned with those risks only which can effect the financial statements in either way. It is a matter of fact that auditor obtains reasonable assurance through applying various audit techniques that the financial statements depict true and fair view of the financial affairs of the firm under the prevailing financial reporting framework. However the concept of reasonable assurance demonstrates that there is a risk that auditor may express an opinion which is inappropriate in the sense that financial statements are materially misstated and auditor opinion goes contrary to it. Such a risk is known as audit risk.

The main focus of the auditor remains towards planning and performing audit by designing procedures to obtain sufficient audit evidence for forming an appropriate audit opinion in order to reduce audit risk to an acceptably low level. This strategy is consistent with the audit objectives.


Not every audit risk matters to the auditor unless it is material or significant. It implies that any material misstatement which may remain undetected while performing audit procedures is actually the origin of audit risk. To limit the audit risk the auditor needs to assess the risk of material misstatement through performing extensive audit procedures before the commencement of audit and during the audit process. Such procedures include understanding the entity and its environment and designing the audit approach on professional judgments consistent with the entity’s operations and environment. The auditor needs to evaluate what can go wrong in such an atmosphere which can materially effect the preparation of financial statements.

Levels of risk of material misstatements

The auditor considers the risk of material misstatements at two levels. First at the overall financial statements level which means that the risk of material misstatement that relate through out to the financial statements and can potentially effect the preparation of financial statements and many assertions. Precisely speaking when auditor observe overall deficiencies in the internal control system which increase the circumstances of materially misstating the financial statements is referred to as overall level of the risk of material misstatements. The second level of risk of material misstatement relates to individual transactions and account balances which may result misstatement of particular item of the financial statements. To cover such risk the auditor is sought to obtain sufficient appropriate audit evidence in order to reduce the audit risk to acceptably low level.

Types of audit risk

Apparently following types of audit risks exist.

Inherent risk

Some accounts, assertions, or amounts are inherently vulnerable to material misstatements either individually or when combined with other misstatements in the instances when no special arrangements have been made in the internal control procedures keeping in view the specificity of such accounts, assertions, or amounts. Inherent risk is likely to prevail in complex calculations, estimations, assets and inventory valuations, foreign exchange transactions, and consolidation of subsidiary accounts.

Control risk

When auditor observe weaknesses or deficiencies in the internal control system giving rise to likely situations of non-prevention, non-detection, and non-correction of mistakes and errors on timely basis, such circumstances are known as control risk. It implies that ineffectiveness and inefficiency of the internal controls adopted by the management is the origin of control risk and requires in-depth procedures and detailed testing by the auditor in order to obtain reasonable assurance for forming an opinion of true and fair view.

Detection risk

Detection risk refers to the circumstances when auditor fails to detect any material misstatement despite extensively performing substantive procedures or audit methodologies. Detection risk can not be reduced to zero however it can be reduced to acceptably low level through effectiveness of audit procedure and its application.

Saturday, February 19, 2011

Management and Strategic Management


The management is well defined by Richard L. Daft that “Management is the attainment of organizational goals in an effective and efficient manner through planning, organizing, leading, and controlling organizational resource”.

This definition of management explains a wide-ranging meaning of management and bestows following functions in management:

  1. Formulation of plans for future
  2. Organizing the resources of the organization
  3. To lead the people of the organization
  4. Exercising the control over resources
  5. Performing the above tasks efficiently and effectively so that optimum resource utilization is ensured for the sake of achieving ultimate goals.

Another popular definition of management exits i.e. “The art of getting the things done through others”. The problem with definition is that it focuses attention towards administering the people only and ignores other resources. This definition is also misunderstood in the real world to exercise a bureaucratic control over the others. It conveys that the manager has the ultimate knowledge and he/she should get the work done from other in either way.

Strategic Management

Formally speaking strategic management is a mechanism of devising, executing, and appraising cross-functional decisions based on analysis of alternative strategies that enable an organization to achieve its objectives. It implies that strategic management works through integrating the activities of all functional segments of an organization in order to maximize the efficiency sought to accomplish the aims, goals, targets, objectives, and missions of an entity.

Academicians more often use the term strategic management whereas strategists from the business world usually refer it as strategic planning. The focus of strategic management or planning remains tomorrow with the aim to create new opportunities and take advantage of them accordingly through efficient resource management and curbing deficiencies.

Accounting and its Functions

In literature the formal definition of accounting is described as an art of recording, classifying, summarizing, and reporting of business transactions in order to express the operational performance in financial terms and financial position of an entity which may be a business enterprise or a non-profit organization. Many authors apprise accounting as a mechanism of principles, rules, standards, convention, and globally established broad-spectrum process of dealing with financial information related to the resources of an entity and their use in meeting the objectives set by the entity. It works in all types of organizations.

Primarily accounting interacts with such information related to business which is measurable in numbers or in financial or monetary term. The flow of accounting includes gathering, assimilating, quantifying, recording, evaluating, analyzing, and reporting the economic or financial information about an enterprise. It concerns with provision of reliable, useful, and concrete financial information in universally accepted and understandable format to enable the users of such information making better and informed decision.

Functions of Accounting

  • It serves as tool of efficient management and optimum use of the resources of an organization.
  • It accurately measures the claims or interests of various stakeholders against the resources of an organization.
  • It correctly assesses and determines the changes in the resources along with changes in the claims and interests on those resources.
  • It perfectly assigns the above changes to the relevant periods and appraises the performance of the individuals engaged in managing the resources.
  • It determines the fitness of an organization.
  • It discharges all the above obligations in monetary terms.

Friday, February 18, 2011

Rules of Debits and Credits

Fundamental notions the accounting structure is built upon are the rules of debits and credits which form part of preliminary studies of accountancy learners. Debits and credits are the ceremonial book keeping and accounting expressions used and followed extensively in accountancy literature as well as in practice. Primarily the accounts are classified into four components and each transaction is attributed as category of any one of them. Such elements are namely:
·         Assets ( further divided into fixed, current, and financial assets)
·         Liabilities ( subdivided  into equity, long term debts, and current liabilities)
·         Expenses ( mainly classified into cost of goods or service and operational expenditures)
·         Revenues ( sale of goods and services and other incomes)
The categories enlisted above are usually joined up as main accounts in the chart of account and are not used in debit and credit entry by themselves. What goes into debit or credit are usually the 3rd or 4th level account heads specified as sub-category of the assets, liabilities, expanses, and revenues. These sub-categories may be labeled or titled differently by every organization but are classified as type of main accounts according to the nature of each transaction almost unanimously every where.
The canons of debits and credits
Rule No. One
Debit               increase in assets
Credit             decrease in assets
Equipment bought for $500:
Debit               Equipment                             $500
Credit             Bank                                                   $500
Machinery sold for $ 250:
Debit               Bank                                        $250
Credit             Machinery                                             $250

Rule No. Two
Debit               decrease in liability
Credit             increase in liability
Bought material on credit for $1000:
Debit               Purchase Material                $1000
Credit             Accounts Payable                                        $1000
Merchant paid of by $ 500:
Debit               Accounts Payable                  $500
Credit             Bank                                                                 $500
Rule No. Three
Debit               increase in expense
Credit             decrease in expense
Paid salaries for $200:
Debit               Salary and wages expense                        $200
Credit             Bank                                                                           $200
Salaries wrongly paid over by $ 20:
Debit               Receivable from staff                                   $20
Credit             Salary and wages expense                                    $20
Rule No. Four
Debit               decrease in revenue
Credit             increase in revenue

Revenue earned for $1000:
Bank                                       $1000
Revenue                                            $1000
Supplies below standard valuing $50 returned back by the client and amount paid back:
Revenue                                               $50
Bank                                                                  $50

Another way of expressing rules of debit and credit
The same rules of debit and credit may be expressed differently through classification of the elements of accounts into three types of accounts which are:
1.    Nominal accounts which deal with revenues and expenses
Expenses are debited and incomes are credited
2.    Real accounts which deal with assets
Purchase of assets is debited and sale of assets is credited
3.    Personal accounts which deal with the parties
           Receiver is debited and giver is credited

Thursday, February 17, 2011

Contingency Theory in Management Accounting

Contingency theory in management accounting describes the situational factors and portrays that management accounting system is contingent upon such factors in reality. Situational factors or contingent factors vary organization to organization and it is impossible to describe and spell out the character of management accounting in the prevalence of each such factor. The circumstances in which the organizations move are distinctive in nature and largely effect the adoption, mechanism, and sophistication of management accounting system. These idiosyncratic circumstances or contingent factors are major contributors towards non-formation of universally acceptable effective management accounting system.  As situational factors are unique in nature and are unfeasible in reckoning and elucidation in isolation hence they can broadly be categorized in six foremost areas according to the dominant characteristics of such circumstances.

  • The external environment
  • Strategies and mission
  • Technology
  • Firm Interdependence
  • Business unit, firm and industry variables
  • Knowledge and observable factors

External environment

The differing traits of external environment surrounded by an organization effect management accounting systems to a greater extent and mold it towards prerequisite of exterior conditions. External environment can be uncertain or certain, static or dynamic, simple or complex, and turbulent or calm. Empirical studies suggest that organization with a stable and certain environment rely on financial performance measures particularly budgetary conformance and other type of monetary variables. The management accounting system does not require greater sophistication in such organizations and it works on presupposed targets expected to remain valid for ensuing performance appraisals. Pragmatic studies further reveal that greater decentralization, larger erudition, and availability of broad scope management accounting system attributes to the conditions of environmental uncertainty, complexity, and turbulence.

Strategies and mission

The adoption of varying corporate strategies and firms’ strategic mission also determine the level of management accounting system to be in place. The strategies may be low cost or differentiation, defending or prospecting, and harvesting or divesting. It is observed that with low cost and defending strategies the firms main focus remains towards standardized or limited product lines, lower costs, economies of scale, and ensuring operating efficiency through cost, quality, and service leadership. This focus, through undemanding management accounting information system, necessitates SOPs for employees designed to maximize efficiency and emphasizes on cost reduction and budget achievement to motivate them. On the other hand prospective and visionary firms with differentiation strategies and competing mission tend towards more participative decision-making process and reward employees and managers based on number of appraisal parameters including financial variables such as budgetary achievements and non financial variables such as product innovation, market development, and growth. The management accounting information systems in such organizations are relatively more advanced and sophisticated with greater devolution and employees’ participation.


The simplicity and complexity of management accounting information system heavily depend upon the classification of technology either for small batches, large batches, process production, or mass production. A relatively sophisticated management accounting information or control system requires high tech mechanism to perform complex tasks and for information flow in process production and mass production environments. The level of technology an organization is willing to set up demonstrates an outlook towards call for a sound management accounting information and control system.

Firm interdependence

The interdependencies within an organization are categorized as pooled, sequential, and reciprocal interdependencies. Pooled interdependencies prevail when different responsibility centers use common resources and share them collectively. The management accounting information system addresses towards protecting the unrelated managers from responsibilities of inefficiency costs associated with sharing the common pool of resources of which they can not be held accountable. It requires a complex management accounting control system to differentiate among related and unrelated responsibility centers. Contrarily where pooled interdependencies are low and role of responsibility centers is quite clear an unsophisticated management accounting system has been found through empirical studies.

Sequential interdependencies exist when output of one responsibility centre is the input of another. Whereas reciprocal interdependencies subsist when two or more responsibility centers depend upon inputs and outputs of each one and vice versa. Such interdependencies necessitate a multifarious management accounting system to assimilate the costs associated with each responsibility centre and transfer pricing mechanism among them.

Business unit, firm, and industry variables

The size and structure of the firm and the type of industry in which it operates has an obvious effect on the unfussiness and intricacy of the management accounting information and control system. Researches divulge that bigger organization have been found with more complex management accounting systems perhaps because such organization are capable of arranging and organizing required resources to develop a relatively compound and innovative kind of management accounting system.  Control systems have also been watched different in manufacturing organizations which operate largely on standard costs procedures and depend heavily on variance analysis and other advanced costing and controlling variables. However studies revealed majority in service sector with attributes of discretionary cost and responsibility centers and relatively unsophisticated management accounting and control systems.

Knowledge and observables factors

The areas falling under this category require a detailed description and deliberation on each one however in-depth analysis of these areas is out of the scope of this article. Nevertheless, as the four broad areas of study under the knowledge and observable factors are quite related to the contingency theory, therefore, it is appropriate to spell out them briefly here. The first relates to the types of control that are suitable in relation to the manufacturing or transformation process and ability to measure output. It explains the fitting of control type such as behavioral, output, or clan in a matrix form keeping in view the intensity of the ability to measure output and knowledge of transformation process. Similarly second area of study examines the appropriate type of performance assessment in relation to the extent to which cause and effect and uncertainty to the goals are well understood. Cause and effect usually referred to as task instrumentality means the ability to understand transformation process and measurement of output. Third area relates to programmability of the decisions which means the extent to which a decision is sufficiently well understood with respect to the outcome. It elucidates that how programmability of the decision affects the type of control to be used. The fourth and last area under knowledge and observable factors examine the relationship between management accounting information system and uncertainty about objectives and process.