How does the budgeting process serve as an internal control?
I would say that the budgeting process itself does not serve as a
control, but establishing a budget - defining for the future financial
period what the expected revenues and expenses should be - provides a
"yardstick" to allow recognition if the actual figures are out of line
with the budget. A budget provides a benchmark for people responsible
for each area to see if they are within their sales or expense
estimates for the period, and flags problem areas if they are not.
Internal control can then identify the problem - which may be an
error in the budgeted figure.
Obviously, this is not achieved by a budget that just says we will
have so much total sales and so much total expenses.
A budget should be built up from the bottom, based on previous period
figures with respect to future sales and related expenses, as detailed
as necessary. These are combined to a budget profit and loss
statement. Then the figures can be adjusted so that they meet the
overall requirement (20% more sales, for example), controlling that
other budget amounts are realistic in relation to each other (that
personnel expenses increase proportionately; etc.).
Okay? Myoarin |
