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CIA Part 1 - Question Bank 1-100

2015-11-10T15:21:00.001+03:00

CIA Exam Question Bank - Part 1

Questions 1 - 100

1. Which of the following is not true with regard to the internal audit charter?

a. It defines the authorities and responsibilities for the internal audit activity.

b. It specifies the minimum resources needed for the internal audit activity.

c. It provides a basis for evaluating the internal audit activity.

d. It should be approved by senior management and the board.

b. Correct. The internal audit manual and annual audit plan help in determining the resource requirements.

2. The function of internal auditing, as related to internal financial reports, would be to

a. Ensure compliance with reporting procedures.

b. Review the expenditure items and match each item with the expenses incurred.

c. Determine if there are any employees expending funds without authorization.

d. Identify inadequate controls that increase the likelihood of unauthorized expenditures.

d. Correct. Internal auditors are responsible for identifying inadequate controls, for appraising managerial effectiveness, and the pinpointing common risks.

3. The status of the internal audit activity should be free from the effects of irresponsible policy changes by management. The most effective way to assure that freedom is to

a. Have the internal audit charter approved by the board.

b. Adopt policies for the functioning of the internal audit activity.

c. Establish an audit committee as a subcommittee of the board.

d. Develop written policies and procedures to serve as standards of performance for the internal audit

activity.

a. Correct. The purpose, authority, and responsibility of the IAA should be formally defined in the charter, which is approved by management and the board.

4. As part of a company-sponsored award program, an internal auditor was offered an award of significant monetary value by a division in recognition of the cost savings that resulted from the auditor's recommendations. According to the International Professional Practices Framework (IPPF), what is the most appropriate action for the auditor to take?

a. Accept the gift since the engagement is already concluded and the report issued.

b. Accept the award under the condition that any proceeds go to charity.

c. Inform audit management and ask for direction on whether to accept the gift.

d. Decline the gift and advise the division manager's superior.

c. Correct. Even though the gift is of significant value, since it is part of a company-sponsored program, it might be acceptable for the internal auditor to accept the gift; however, in these cases, it is recommended for the internal auditor to first confirm the acceptance with the CAE.

5. If a department's operating standards are vague and thus subject to interpretation, an auditor should

a. Seek agreement with the departmental manager as to the criteria needed to measure operating performance.

b. Determine best practices in the area and use them as the standard.

c. Interpret the standards in their strictest sense because standards are otherwise only minimum measures of acceptance.

d. Omit any comments on standards and the department's performance in relationship to those standards, because such an analysis would be inappropriate.

a. Correct. Based on Implementation Standard 2210.A3, if control criteria are inadequate, then internal auditors must work with management to develop appropriate evaluation criteria.

6. In which of the following would an internal auditor potentially lack objectivity?

a. The internal auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major customer before it is implemented.

b. A former purchasing assistant performs a review of the internal controls over purchasing four months after being transferred to the internal audit activity (IAA).

c. An internal auditor recommends standards of control and performance measures for a contract with a service organization for a processing of payroll and employee benefits.

d. A payroll accounting employee assists an internal auditor in verifying the physical inventory of small motors.

b. Correct. According to the Standards, persons transferred to the internal audit activity (IAA) should

not be assigned to audit those activities they previously performed until a reasonable period of time

(at least one year) has elapsed.

7. Which of the following would not be considered a stated purpose of the IIA (as listed in the organization’s articles of incorporation)?

a. To cultivate, promote, and disseminate knowledge and information concerning internal auditing and subjects related to internal auditing.

b. To establish and maintain high standards of integrity, honor, and character among internal auditors.

c. To publish the technical journal, The Internal Auditor.

d. To promote social intercourse among the IIA’s members.

c. Correct. According to the articles of incorporation, the objectives of The IIA are: (1) to cultivate, promote, and disseminate knowledge and information concerning internal auditing and subjects related to internal auditing; (2) to establish and maintain high standards of integrity, honor, and character among internal auditors; (3) to promote social intercourse among its members; (4) to furnish information regarding internal auditing and the practice and methods thereof to its members, to other persons interested therein, and to the general public, and (5) to cause the publication of articles related to internal auditing and practices and methods thereof; and others (review all of the stated objectives). Publishing the technical journal, The Internal Auditor, is a method to promote the professionalism of internal auditing, but it is not a specific stated purpose.

8. An auditor’s objectivity could be compromised in all of the following situations except

a. A conflict of interest.

b. Auditee familiarity with auditor due to lack of rotation in assignment.

c. Auditor assumption of operational duties on a temporary basis.

d. Reliance on outside expert opinion when appropriate.

d. Correct. It is highly likely that an auditor at some time will have to rely on the opinion of an

outside expert.

9. An auditor, nearly finished with an engagement, discovers that the director of marketing has a gambling habit. The gambling issue is not directly related to the existing engagement and there is pressure to complete the current engagement. The auditor notes the problem and forwards the information to the chief audit executive but performs no further follow-up. The auditor's actions would

a. Be in violation of the IIA Code of Ethics for withholding meaningful information.

b. Be in violation of the Standards because the auditor did not properly follow up on a red flag that might indicate the existence of fraud.

c. Not be in violation of either the IIA Code of Ethics or Standards.

d. Both a and b.

c. Correct. There is no violation of either the Code of Ethics or the Standards.

10. Independence is most likely impaired by an internal auditor’s

a. Continuation on an engagement at a division for which (s)he will soon be responsible as the result of a

promotion.

b. Reduction of the scope of an engagement due to budget restrictions.

c. Participation on a task force that recommends standards for control of a new distribution system.

d. Review of a purchasing agent’s contract drafts prior to their execution.

a. Correct. When the IAA or individual internal auditor is responsible for, or management is

considering assigning, an operation that it might audit, the internal auditor’s independence and

objectivity may be impaired.

11. One of the purposes of the Standards for the International Professional Practice of Internal Auditing as

stated in the Introduction to the current version of the Standards is to

a. Encourage the professionalization of internal auditing.

b. Establish the independence of the internal audit activity and emphasize the objectivity of internal

auditing.

c. Encourage external auditors to make more extensive use of the work of internal auditors.

d. Establish the basis for evaluating internal auditing performance.

d. Correct. According to the IIA, the Standards are intended to: (1) State basic principles for the

practice of internal auditing; (2) Provide a framework for performing and promoting value added

internal audit activities; (3) Establish the basis for evaluating internal auditing performance; and (4)

Improve organizational processes and operations.

12. The Standards require that the chief audit executive (CAE) seek the approval of management and the

board of a formal, written internal audit charter. The purpose of the internal audit charter is to

a. Protect the internal auditing activity from outside influence.

b. Establish the purpose, authority, and responsibility of the internal auditing activity.

c. Define the internal auditor’s relationship with the external auditor.

d. Define the role of the chief audit executive as a member of the audit committee.

b. Correct. The purpose, authority and responsibility of the IAA must be formally defined in the

charter.

13. The best means for the internal auditing activity (IAA) to determine whether its goal of implementing

broader audit coverage of functional activities has been met is through

a. Accumulation of audit findings by auditable area.

b. Comparison of the audit plan to actual audit activity.

c. Surveys of management satisfaction with the internal audit activity.

d. Implementation of a quality assurance and improvement program.

d. Correct. Implementing a quality assurance and improvement program (QAIP) can assist the CAE in

determining whether the IAA’s audit coverage goals are being met. The QAIP evaluates and

analyzes the effectiveness and efficiency of IAA operations, which has to do with understanding

whether stated IAA goals and objectives are being achieved.

14. Quality program assessments may be performed internally or externally. A distinguishing feature of an

external assessment is its objective to

a. Provide independent assurance.

b. Set forth the recommendations for improvement.

c. Determine whether internal auditing services meet professional standards.

d. Identify tasks that can be performed better.

a. Correct. External assessments of an IAA should appraise and express an opinion as to the IAA’s

compliance with the Standards for the International Professional Practice of Internal Auditing and,

as appropriate, should include recommendations for improvement. External assessment should be

conducted at least once every five years (PA 1312-1).

15. During an engagement to evaluate the organization’s accounts payable function, an internal auditor

plans to confirm balances with suppliers. What is the source of authority for such contacts with units

outside the organization?

a. Internal audit activity policies and procedures.

b. The Standards.

c. The Code of Ethics.

d. The internal audit activity’s charter.

d. Correct. The purpose, authority and responsibility of the internal audit activity should be defined in

the charter. The charter should establish the internal audit activity’s position within the

organization; authorize access to records, personnel, and physical properties relevant to the

performance of engagements; and define the scope of internal audit activities (PA 1000-1).

16. External assessment of an internal audit activity is not likely to evaluate

a. The tools and techniques employed by the internal audit activity.

b. Detailed cost-benefit analysis of the internal audit activity.

c. Compliance with the Standards for the International Professional Practice of Internal Auditing.

d. Adherence to the internal audit activity’s charter.

b. Correct. The external assessment should consist of a broad scope of coverage that includes: (1)

Conformance with the Definition of Internal Auditing, Standards, The Code of Ethics and the internal

audit activity’s charter, plans, policies, procedures, practices, and applicable legislative and

regulatory requirements; (2) the expectations of the IAA expressed by the board, executive

management and operational managers; (3) the integration of the IAA into the organization’s

governance process, including the relationships between and among the key groups involved in the

process; (4) tools and techniques employed by the IAA; (5) the mix of knowledge, experience, and

disciplines within the staff, including staff focus on process improvement; and (6) the determination

as to whether or not the IAA adds value and improves the organization’s operations (PA 1312-

1.10). A detailed cost-benefit analysis of the IAA would not be part of the external assessment.

17. During an internal audit, the internal auditor should exercise due professional care. Due professional

care means that the internal auditor should consider

I. The extent of work needed to achieve the engagement’s objectives.

II. The relative complexity and materiality to which assurance procedures are applied.

III. The probability of significant errors, irregularities, or noncompliance.

IV. The engagement procedures necessary to ensure that all significant risks have been identified.

a. I and II only.

b. I, II and IV only.

c. I, II, III and IV.

d. I, II and III only.

d. Correct. Only items I, II and III are correct. The internal auditor can only provide reasonable

assurance that significant risks will be identified, not a guarantee.

18. Internal auditors need have an understanding with respect to which discipline?

a. Internal auditing procedures and techniques.

b. Accounting principles and techniques.

c. Management principles.

d. Marketing techniques.

c. Correct. The internal auditor needs to have an understanding of management principles.

19. If a department outside of the internal audit activity (IAA) is responsible for reviewing a function or

process, the internal auditor should

a. Consider the work of the other department when assessing the function or process.

b. Ignore the work of the other department and proceed with an independent audit.

c. Reduce the scope of the audit since the work has already been performed by the other department.

d. Yield the responsibility for assessing the function or process to the other department.

a. Correct. Review and testing of the other department’s procedures may reduce necessary audit

coverage of the function or process.

20. Independence from outside pressure is an important factor for the internal audit activity (IAA) to work

freely and objectively. Which of the following contributes to the internal auditor’s independence?

a. Management should assist the IAA by reviewing, revising and forwarding engagement communications

to the audit committee.

b. The IAA reports directly to the audit committee, without corroborating engagement communications

with management.

c. Ideally, the IAA functionally reports to the audit committee but reports to the chief operating officer on

all engagements relating to operations.

d. The accuracy of the engagement communications should be verified with management, and the IAA

should then report to management and the audit committee.

CIA Part 1 Mock Exam

d. Correct. Internal auditors should first discuss conclusions and recommendations with management

so management is able to verify the accuracy of the engagement communications. Final

engagement communications would then be sent to the audit committee.

21. The Standards require that internal auditors possess which of the following skills?

I. Internal auditors should understand human relations and be skilled in dealing with people.

II. Internal auditors should be able to recognize and evaluate the materiality and significance of deviations

from good business practices.

III. Internal auditors should be experts on subjects such as economics, commercial law, taxation, finance,

and information technology.

IV. Internal auditors should be skilled in oral and written communication.

a. I and II only.

b. I, II and III only.

c. I, II, III and IV.

d. I, II and IV only.

I. Correct. Internal auditors need to understand human relations and be skilled in dealing with

people.

II. Correct. Internal auditors need to be able to understand what constitutes materiality and

significance of deviations from good business practice.

IV. Correct. Internal auditors should be skilled in oral and written communication.

22. You were appointed the chief audit executive (CAE) of an organization one week ago. An engagement

client has come to you complaining vigorously that one of your internal auditors is taking up an

excessive amount of the client’s time on an engagement that seems to be lacking a clear purpose. In

handling this conflict with the client, you should consider

a. Promising the client that you will have the internal auditor finish the work within 1 week.

b. Whether existing procedures within the internal audit activity provide for proper planning and quality

assurance.

c. Presenting an immediate defense of the internal auditor based upon currently known facts.

d. Discounting what is said, but documenting the complaint.

b. Correct. In this situation the CAE would have a responsibility to review the existing procedures to

determine whether the IAA had provided for proper planning and quality assurance. Not doing so

would jeopardize the authority of the CAE.

23. According to the Standards, the internal audit activity’s goals should specify

a. Policies and procedures to guide the internal audit staff.

b. Engagement work schedules and activities to be reviewed.

c. Measurement criteria and target dates for completion.

d. Staffing plans and financial budgets.

c. Correct. The goals of the IAA should be capable of being accomplished within specified operating

plans and budgets and, to the extent possible, should be measurable. They should be accompanied

by measurement criteria and targeted dates of accomplishment.

24. Which of the following best describes an internal auditor’s purpose in reviewing the organization’s

existing risk management, control and governance processes?

a. To help determine the nature, timing, and extent of tests necessary to achieve engagement objectives.

b. To ensure that weaknesses in the internal control system are corrected.

c. To provide reasonable assurance that the processes will enable the organization’s objectives and goals

to be met efficiently and economically.

d. To determine whether the processes ensure that the accounting records are correct and that financial

statements are fairly stated.

c. Correct. As described by the IIA, the internal auditors’ primary purpose in reviewing an

organization’s existing risk management, control, and governance processes is to provide

reasonable assurance that these processes are functioning as intended and will enable the

organization’s objectives and goals to be met.

25. Periodic external assessments of an internal audit activity's quality assurance and improvement

program should be undertaken. On completion of such an assessment, a formal report or other

communication should be issued expressing an opinion as to the

a. Adequacy of internal control.

b. Effectiveness of the internal auditing coverage.

c. Conformance with the internal audit activity's charter.

d. Internal audit activity's compliance with the Standards.

d. Correct. The external assessment should consist of a broad scope of coverage that includes

conformance with the Definition of Internal Auditing; the Code of Ethics; and the Standards (PA

1312-1.10).

26. During review of a construction contract, the chief audit executive (CAE) suspects that a construction

company was given an unfair advantage in bidding on the contract. After learning that the chief

executive officer (CEO) of the company is a member of the construction company’s board of directors,

how should the CAE proceed?

a. Submit a draft report to senior management, excluding the CEO.

b. Contact the organization’s external auditors for assistance.

c. Obtain supporting documentation and present the finding to the chairperson of the audit committee.

d. Immediately notify the board of directors.

c. Correct. A draft of the proposed report on fraud or conflict of interest situations should be

submitted to the chairperson of the audit committee as a next step in light of the CEO’s position in

the company.

27. Of the following activities, which ones are within the scope of internal auditing?

I. To assess an operating department's effectiveness in achieving stated organizational goals.

II. To safeguard assets.

III. To evaluate controls over compliance with laws and regulations.

IV. To ascertain the extent to which objectives and goals have been established.

a. I and III only.

b. I and IV only.

c. I, III and IV only.

d. I, II and IV only.

I. Correct. Internal auditing should assess an operating department’s effectiveness in achieving its

stated goals.

III. Correct. Internal auditors should evaluate controls over compliance with laws and regulations.

IV. Correct. Internal auditors should ascertain the extent to which objectives and goals have been

established.

28. Which of the following represents the best governance structure?

Executive Management Board and Audit Committee Internal Auditing

a. Responsibility for risk Oversight role Advisory role

b. Oversight role Responsibility for risk Advisory role

c. Responsibility for risk Advisory role Oversight role

d. Oversight role Advisory role Responsibility for risk

a. Correct. Executive management is responsible for risk management, board and audit committee

provide an oversight function and internal auditor serve in the capacity of oversight and advisory

roles.

29. Assessments of the performance of the organization’s external auditors should

a. Be carried out only when the external auditor is appointed.

b. Not include any participation by the internal audit activity.

c. Include the internal audit activity only when the external auditor is appointed.

d. Include the internal audit activity at the time of the appointment and regularly thereafter.

d. Correct. Management and the board might request the IAA to participate in the performance of the

external auditor, and this may include assessment of the external auditor’s independence. In

addition, this assessment should be carried out at least annually.

30. A new chief audit executive (CAE) for a major retail company is questioning the audit activity’s

extensive use of store compliance testing, stating that the approach is not responsive to materiality

concepts. Which of the following statements are valid in response to the CAE’s claims?

I. Materiality is not based only on the size of individual stores; it is also based on the control structure

that affects the whole organization.

II. Any deviation from a prescribed control procedure is, by definition, material.

III. The only way to ensure that a material amount of the company’s control structure is reviewed is to

comprehensively audit all stores.

a. I only.

b. III only.

c. I and II only.

d. I, II and III.

I. Correct. Materiality is defined by the potential impact of an item on the organization and is not

limited to items that can be assessed only in qualitative terms.

31. Which of the following is the best means of aiding an internal audit activity (IAA) in determining

whether its goals are being met?

a. Having external auditors review and evaluate the work of the internal audit activity.

b. Having the board periodically review the quality of the internal audit activity's work.

c. Developing measurement criteria to accompany its goals.

d. Scheduling an external assessment every 3 years.

c. Correct. The goals of the IAA should be capable of being accomplished within specified operating

plans and budgets and, to the extent possible, should be measurable. They should be accompanied

by measurement criteria and targeted dates of accomplishment.

32. The interpretation related to quality assurance given by the Standards is that

a. The IAA is primarily measured against the Institute's Code of Ethics.

b. External assessments can provide senior management and the board with independent assurance about

the quality of the IAA.

c. Continual supervision is limited to the planning, examination, evaluation, communication, and follow-up

process.

d. Appropriate follow-up to an external assessment is the responsibility of the chief audit executive's

immediate supervisor.

b. Correct. External assessments of an internal audit activity appraise and express an opinion as to

the IAA’s compliance with the Standards of the Professional Practice of Internal Auditing and, as

appropriate, should include recommendations for improvement.

33. The consultative approach to internal auditing emphasizes

a. Participation with engagement clients to improve methods.

b. Imposition of corrective measures.

c. Fraud investigation.

d. Implementation of policies and procedures.

a. Correct. Consultation with the engagement client helps to facilitate good relations. This is

important since the engagement client will be more likely to accept recommendations.

34. As part of the process to improve internal auditor-engagement client relations, it is very important to

deal with how the internal audit activity is perceived. Certain types of attitudes in the work performed

will help create these perceptions. From a management perspective, which attitude is likely to be the

most conducive to a positive perception?

a. Interrogatory.

b. Investigative.

c. Consultative.

d. Objective.

c. Correct. A consultative attitude leads to two-way communication.

35. Procedures describing how the supervisory review of staff auditors will be accomplished should be fully

documented so that the internal audit activity will

a. Have a basis for promotions, pay raises, or disciplinary actions, if required.

b. Have substantiation of its quality program.

c. Comply with the Standards.

d. Have a consistent framework for evaluating staff performance.

d. Correct. The IAA's quality program should provide reasonable assurance that the internal auditing

work conforms to the Standards, the Code of Ethics, the IAA's charter, and other applicable

standards

36. An internal auditor often faces special problems when performing an engagement at a foreign

subsidiary. Which of the following statements is true with respect to the conduct of internal

international engagements?

a. The IIA Standards do apply outside the United States.

b. The internal auditor should determine whether managers are in compliance with local laws.

c. There may be justification for having different organizational policies in force in foreign branches.

d. All of the above are true.

37. The CAE of a fast growing software company wanted to promote the value added capabilities of internal

auditing within the company. In order to achieve this goal the CAE instituted several initiatives. Which

of the following initiatives would be considered appropriate?

I. The CAE promised that before the release of the final report, the auditor would review the findings with

the client manager.

II. The CAE also promised that if the client manager disagreed with the conclusions of the report, the final

report would contain the client manager’s disagreements.

III. The CAE promised the client manager that if control deficiencies were in fact found, internal auditing

has the capability to take care of the deficiencies.

a. I only

b. II and III only

c. I and II only

d. I, II and III

I. Correct. Internal auditing should review findings with the client before release of the final report.

II. Correct. If the client disagrees with the conclusion of the report then the final report should contain

any and all disagreements the client manager may have with the report.

38. During an engagement to evaluate the organization’s accounts payable function, an internal auditor

plans to confirm balances with suppliers. What is the source of authority for such contracts with units

outside the organization?

a. The internal audit activity policies and procedures.

b. The Standards.

c. The Code of Ethics.

d. The internal audit activity’s charter.

d. Correct. The charter is what gives the IAA the authority to confirm balances with suppliers

39. Internal auditors must distinguish carefully between a scope limitation and other limitations. Which of

the following is not considered a scope limitation?

a. The divisional manager of an engagement client has indicated that the division is in the process of

converting a major computer system and has indicated that the information systems portion of the

planned engagement will have to be postponed until next year.

b. The board reviews the engagement work schedule for the year and deletes an engagement that the

CAE thought was important to conduct.

c. The engagement client has indicated that certain customers cannot be contacted because the

organization is in the process of negotiating a long-term contract with the customers and do not want

to upset the customers.

d. None of the answers are correct.

b. Correct. The board has the right to delete an engagement from the annual IAA work schedule.

Therefore, this is not considered to be a scope limitation.

40. Which of the following combinations best illustrates a scope limitation and the appropriate response by

the CAE?

Nature of limitation Internal audit action

a. Engagement client limits scope based upon

proprietary information.

Report only to the controller

b. Engagement client will not provide access to

records needed for approved work schedule.

Report to the board.

c. Engagement client requests that the engagement

be delayed for 2 weeks to allow it to close its

books.

Report directly to the CEO and controller.

d. Engagement client will not allow internal auditor

to contact major customers as part of an

engagement to evaluate the efficiency of

operations.

No reporting is required because the

operational engagement concerns operational

efficiency.

b. Correct. This is the best combination. If the internal auditor does not have access to records then

this fact needs to be reported to the board.

41. Your organization has selected you to develop an IAA. Your approach will most likely be to hire

a. Internal auditors each of whom possesses all the skills required to handle all engagements.

b. Inexperienced personnel and train them the way the organization wants them trained.

c. Degreed accountants because most internal audit work is accounting related.

d. Internal auditors who collectively have the knowledge and skills needed to perform the responsibilities

of the IAA.

d. Correct. Collectively, the IAA should have necessary skills, knowledge and experience to carry out

its activities. The IAA may use both internal and external resources that are qualified in such

disciplines as accounting, tax, engineering, law, environmental, and IT.

42. The consultative approach to internal auditing emphasizes

a. Imposition of corrective measures.

b. Participation with engagement clients to improve methods.

c. Fraud investigation.

d. Implementation of policies and procedures.

b. Correct. Internal auditors need to maintain a satisfactory relationship with engagement clients. In

order to enhance this relationship, it is good policy to involve the client on all engagements.

Developing a positive relationship produces a more favorable environment for the engagement

effort.

43. An internal auditor issues a final report which had to do with evaluating the client’s procedures for

increasing the diversity of the organization’s work force. In this regard, the internal auditor made

several recommendations for changes in hiring and retaining practices. Regarding due professional

care, the internal auditor would conduct a follow up to ensure which of the following actions by the

client?

a. To ascertain whether the client has carried out the internal auditor’s recommendations.

b. To ascertain whether the organization is in line with the organization’s diversity policies.

c. To ascertain whether the client has considered the audit findings and has taken action to improve

diversity within the organization.

d. All of the following are true.

c. Correct. Exercise due professional care includes following up to see that the client has taken

appropriate action. This does not mean that the client has to implement every recommendation

submitted by the auditor but it is expected that the client would/should consider the

recommendations.

44. Which of the following persons might be considered when conducting a periodic external review of the

internal auditing activity (IAA) in an organization’s regional office?

I. An auditor from headquarters.

II. An internal audit “peer” from another organization’s IAA.

III. A tax consultant who has no audit experience but will review only technical matters related to tax

audits.

IV. An external chartered accountant with internal auditing experience who has been an external auditor of

the organization’s external financial reports.

a. I and II only.

b. II and III only.

c. I, II, III and IV.

d. I, II and IV only.

I. Correct. An auditor from the company’s headquarters could be part of the external review of an

organization’s regional office’s IAA.

II. Correct. An internal audit “peer” from another organization’s IAA could be part of the external

review of an organization’s regional office’s IAA.

IV. Correct. A chartered accountant with internal auditing experience and who had been an external

auditor of the organization’s external financial reports could be part of the external review of an

organization’s regional office’s IAA.

45. The IIA Standards require internal auditors to have the knowledge, skills and disciplines essential to

performing an audit. Which of the following is true considering the level of knowledge or skill required

by the Standards? Internal auditors must

I. Be proficient in the application of auditing standards and procedures to specific situations without

extensive recourse to technical research and assistance.

II. Be proficient in accounting principles when auditing the financial records and reports of the

organization.

III. Be proficient in applying knowledge of accounting and computerized information systems to specific or

potential problems.

a. I only.

b. I and II only.

c. II and III only.

d. I, II and III.

I. Correct. Internal auditors have to be proficient in applying the Standards.

II. Correct. Internal auditors must be proficient in accounting principles if auditing an organization’s

financial statements.

46. A CIA, working as the purchasing director, signs a contract to procure a large order from the supplier

with the best price, quality, and performance. Shortly after signing the contract, the supplier presents

the CIA with a gift of significant monetary value. Which of the following statements regarding the

acceptance of the gift is correct?

a. Acceptance of the gift would be prohibited only if it were non-customary.

b. Acceptance of the gift would violate the IIA Code of Ethics and would be prohibited from a CIA.

c. Since the CIA is not acting as an internal auditor, acceptance of the gift would be governed only by the

organization’s code of conduct.

d. Since the contract was signed before the gift was offered, acceptance of the gift would not violate either

the IIA Code of Ethics or the organization’s code of conduct.

b. Correct. As long as the individual has the CIA designation, then he or she should be guided by the

profession’s Code of Ethics in addition to the organization’s code of conduct. Rule of conduct 2.2

precludes such gifts because it could be presumed to have influenced the individual’s decision.

47. A review of an organization’s code of conduct revealed that it contained comprehensive guidelines

designed to inspire high levels of ethical behavior. The review also revealed that employees were

knowledgeable of its provisions. However, some employees still did not comply with the code. What

element should a code of conduct contain to enhance its effectiveness?

a. Periodic review and acknowledgment by all employees.

b. Employee involvement in its development.

c. Public knowledge of its contents and purpose.

d. Provisions for disciplinary action in the event of violations.

d. Correct. Provisions for disciplinary action in the event of violations would be the most affect

method to deter employees from conducting misconduct.

48. Which of the following statements is not appropriate to include in a manufacturer’s conflict of interest

policy? An employee shall not

a. Accept money, gifts, or services from a customer.

b. Participate (directly or indirectly) in the management of a public agency.

c. Borrow from or lend money to vendors.

d. Use organizational information for private purposes.

b. Correct. A person has the right to participate in the management of a public agency (a government

agency). Thus, it would not be included in a manufacture’s conflict of interest policy.

49. An internal auditor, during the course of evaluating the policies & procedures for capitalizing fixed

assets, uncovered some information that indicated that management had capitalized some general

maintenance costs that should have been expensed. The amount is considered to be material. If the

internal auditor failed to disclose this information to senior management or the Audit Committee, the

internal auditor would be in violation of which rule of conduct?

a. Integrity.

b. Objectivity.

c. Confidentiality.

d. Competence.

b. Correct. The internal auditor would be in violation of the objectivity rule of conduct. According to

rule 2.3, internal auditors shall disclose all material facts known to them, that if not disclosed, may

distort the reporting of activities under review. In this case, capitalizing general maintenance cost

would distort the financial statements.

50. Which of the following concurrent occupations could appear to subvert the ethical behavior of an

internal auditor?

a. Internal auditor and a well-known charitable organization’s local in-house chairperson.

b. Internal auditor and part-time business insurance broker.

c. Internal auditor and adjunct faculty member of a local business college that educates potential

employees.

d. Internal auditor and landlord of multiple housing that publicly advertise for tenants in a local

community newspaper listing monthly rental fees.

b. Correct. According to the Code, an “Internal auditor shall not participate in any activity or

relationship that may impair or be presumed to impair their unbiased assessment.” Thus, an

internal auditor and part-time business broker would be considered to be incompatible.

51. Which of the following is not implied by the definition of control?

a. Measurement of progress toward goals.

b. Uncovering of deviations from plans.

c. Assignment of responsibility for deviations.

d. Indication of the need for corrective action.

c. Correct. The basic process of control is to set objectives, measure performance and take corrective

action is deficiencies are found. Assigning responsibility is not part of the controlling function.

52. Which of the following different types of controls is often difficult to evaluate because it may lack

established criteria or standards?

a. Operating controls.

b. Financial controls.

c. Directive controls.

d. Preventive controls.

a. Correct. Operating controls are those applicable to production and support activities. In some

cases, an operating activity, like customer service, or security, is difficult to measure because there

is no set control standard.

53. Which of the following operating controls relate to the organizing function?

a. Formal procedures for selecting potential suppliers.

b. Procedures providing for clear levels of purchase order approvals based on the value of the requisition.

c. Written objectives and goals for the department.

d. Timely materials reporting to buyers.

b. Correct. Organizing is the intentional design and structuring of tasks and roles to accomplish

organizational goals. An organizational arrangement whereby purchases of greater value require

authorization at higher management levels is an example of an organizational control.

54. Controls should be designed to ensure that

a. Operations are performed efficiently.

b. Management’s plans have not been circumvented by worker collusion.

c. The IAA’s guidance and oversight of management’s performance is accomplished economically and

efficiently.

d. Management’s planning, organizing, and directing processes are properly evaluated.

a. Correct. The purpose of the control process is to support people of the organization in the

management of risks and the achievement of its established and communicated objectives. Control

processes are expected to ensure that operations are performed efficiently and achieve established

objectives (PA 2130).

55. Enterprise risk management

a. Guarantees achievement of organizational objectives.

b. Requires establishment of risk and control activities by internal auditors.

c. Involves the identification of events with negative impacts on organizational objectives.

d. Includes selection of the best risk response for the organization.

c. Correct. ERM is a process affected by entity’s board, management, and other personnel, applied in

strategy setting and across the enterprise, designed to identify potential events that may affect the

entity and manage risk to be within its risk appetite, to provide reasonable assurance regarding the

achievement of objectives.

56. Requests for purchases beyond those initially budgeted must be approved by the marketing manager.

This procedure

I. Should provide for the most efficient allocation of scarce organizational resources.

II. Is a detective control procedure.

III. Is unnecessary because each product manager is evaluated on profits generated.

a. I only.

b. III only.

c. II and III only.

d. I, II, III.

I. Correct. The marketing manager is high enough in the organization to coordinate this allocation.

57. Which of the following control procedures does an internal auditor expect to find during an engagement

to evaluate risk management and insurance?

a. Periodic internal review of the in-force list to evaluate the adequacy of insurance coverage.

b. Required approval of all new insurance policies by the organization’s CEO.

c. Policy of repetitive standard journal entries to record insurance expense.

d. Cutoff procedures with regard to insurance expense reporting.

a. Correct. Periodically reviewing the adequacy of the insurance policy is a risk assessment function.

Insurance coverage should be sufficient to ensure that the relevant assessed risks are managed in

accordance with the entity’s risk appetite.

58. Management can best strengthen internal control over the custody of inventory stored in an off-site

warehouse by implementing

a. Reconciliations of transfer slips to/from the warehouse in inventory records.

b. Increases in insurance coverage.

c. Regular reconciliation of physical inventories to accounting records.

d. Regular confirmation of the amount on hand with the custodian of the warehouse.

c. Correct. The best control would be to reconcile inventory on hand at the off-site warehouse with

the company’s accounting records. Discrepancies would be investigated.

59. Which of the following describes a control weakness?

a. Purchasing procedures are well designed and are followed unless otherwise directed by the purchasing

director.

b. Prenumbered blank purchase orders are secured within the purchasing department.

c. Normal operational purchases fall in the range from US $500 to US $1,000 with two signatures required

for purchases over US $1,000.

d. The purchasing agent invests in a publicly traded mutual fund that lists the stock of one of the

organization’s suppliers in its portfolio.

a. Correct. Management override of controls is considered to be a control weakness.

60. An internal auditor is conducting an audit of the use of corporate credit cards. Which of the following

are major audit concerns regarding the use of credit cards?

I. Segregation of duties is insufficient.

II. The purchasing function is impaired.

III. Cards may be used for personal benefit.

IV. The company is required to make one large payment instead of many small ones.

a. I and III only.

b. II and IV only.

c. III only.

d. I, II, III, and IV.

I. Correct. Cardholders effectively approve and execute purchasing transactions. Therefore, there is a

lack of segregation of duties.

III. Correct. In the absence of effective monitoring, cards could easily be used for personal benefit.

61. Which of the following are true concerning responsibility for maintaining a sound system of internal

control?

I. The board of directors are responsible for the company’s system of internal control.

II. The role of management is to implement board policies on risk and control.

III. All employees have some responsibility for internal control as part of their accountability for achieving

objectives.

IV. Internal auditing has the primary responsibility to establish and maintain the internal control system.

a. I and II only.

b. I, II and III only.

c. II, III and IV only.

d. I, II, III and IV.

I. Correct. The board is ultimately responsible for the company’s system of internal control.

II. Correct. The board delegates authority and responsibility to management to implement board

policies on risk and control.

III. Correct. All employees do have some responsibly to make sure that controls are operating as they

should.

62. A control likely to prevent purchasing agents from favoring specific suppliers is

a. Requiring management's review of a monthly report of the totals spent by each buyer.

b. Requiring buyers to adhere to detailed material specifications.

c. Rotating buyer assignments periodically.

d. Monitoring the number of orders placed by each buyer.

c. Correct. Periodic rotation of buyer assignments will limit the opportunity for any buyer to show

favoritism to a particular supplier.

63. The results of an audit of cash controls indicated that the bookkeeper signed expense checks and

reconciled the checking account. If the cash account reconciliations were current and no cash shortages

were found, an internal auditor should conclude that the system of internal controls over

a. Recording of cash receipts is adequate.

b. Accounting for cash is inadequate.

c. Reconciliations of the cash account are adequate.

d. Physical safeguards of cash are adequate.

b. Correct. The bookkeeper should not sign the checks and reconcile the checking account. These

functions should be segregated. Therefore, the accounting for cash is inadequate.

64. Which of the following exemplifies an inherent limitation of internal control?

a. A controller makes and records cash deposits.

b. A security guard allows a warehouse employee to remove company property from the premises without

authorization.

c. The company sells to customers on credit without proper credit approval.

d. An employee who is unable to read is assigned custody of the company’s tape library and run manuals.

CIA Part 1 Mock Exam

b. Correct. This is an example of collusion, where the security guard let the employee steal company

property. Collusion is an inherent limitation of internal control because no matter how tight controls

are, if two or more people get together to circumvent the control, controls aren’t going to work.

65. Which of the following controls would help an organization from ordering quantities in excess of the

organization's needs?

I. User department supervisor reviews all purchase requisitions prior to submitting them to the purchasing

department.

II. Automatic reorder by the purchasing department when low inventory is indicated by the system.

III. A policy requiring the accounts payable department to match the receiving report with the vendor’s

invoice.

a. I only.

b. I and II only.

c. I and III only.

d. I, II and III.

I. Correct. Supervisory review at the originating department level is one means of control over the

number of items ordered.

66. The receiving department maintains a purchase orders file. Purchase orders are kept in the file until

goods are received. The main purpose of this control function is meant to ensure that

a. Received goods are released to the appropriate department in a timely manner.

b. Only approved shipments are accepted.

c. Goods are accurately counted upon receipt.

d. Goods are not stolen or lost after receipt.

b. Correct. A shipment should be rejected if it is not documented by a purchase order in the open file.

67. The cash receipts function should be separated from the related record-keeping function in an

organization to

a. Physically safeguard the cash receipts.

b. Establish accountability when cash is first received.

c. Prevent paying cash disbursements from cash receipts.

d. Minimize undetected misappropriations of cash receipts.

a. Correct. The purpose of separating the functions is to prevent theft of the cash receipts.

68. Which of the following is an example of an effectiveness measure?

a. The rate of absenteeism.

b. The goal of becoming a leading manufacturer.

c. The number of insurance claims processed per day.

d. The rate of customer complaints.

b. Correct. Effectiveness has to do with meeting goals.

69. Budgets are generally classified as both planning documents and control devices. An important

difference between the budget planning information needed and the budget control information needed

is that planning information is more

a. Likely to be generated using external data.

b. Detailed.

c. Likely to be quantifiable.

d. Likely to be more accurate.

a. Correct. Because planning is impacted more strongly by the organization's environment, the

planning information is more likely to be generated using external data.

70. Appropriate internal control for a multinational corporation's branch office that has a monetary transfer

unit requires that

a. The individual who initiates wire transfers not reconcile the bank statement.

b. The branch manager receives all wire transfers.

c. Foreign currency rates are computed separately by two different employees.

d. Corporate management approves the hiring of monetary transfer unit employees.

a. Correct. Independent reconciliation of bank accounts is necessary for good internal control.

71. The following are steps in a typical control process.

1) Select the times or points at which to collect information about the activities that are being

measured and controlled.

2) Set the standards.

3) Observe the process, or collect the samples.

4) Report any significant deviations or problems.

5) Review and revise the standards.

6) Record the information that was collected.

7) Implement whatever corrections to the system or processes are necessary.

8) Evaluate if the performance is satisfactory.

What is the correct order of these steps?

a. 2, 1, 6, 3, 8, 7, 4, 5.

b. 1, 2, 3, 6, 5, 7, 8, 4.

c. 2, 1, 3, 6, 8, 4, 7, 5.

d. 1, 3, 2, 6, 7, 5, 8, 4.

The correct order is:

1. Set the standards.

2. Select the times or points.

3. Observe the process.

4. Record the information.

5. Compare and measure the results against the standard.

6. Evaluate if performance is satisfactory.

7. Report any significant deviations.

8. Implement whatever corrections are necessary.

9. Follow-up to see if the corrections are effective.

10. Review and revise the standards.

72. A warehouse employee of a retail company was able to conceal the theft of items of inventory by

entering adjustments to the computer-based perpetual inventory records indicating that the items had

been damaged or lost. The control that would have prevented the adjustments from being recorded is

a. Including a check digit in the inventory part number.

b. Requiring separate authorization for input of adjustment transactions.

c. Including a parity check on the inventory part number.

d. Providing an edit check for the validity of the inventory part number.

b. Correct. All adjusting transactions have to have proper segregation of duties. This means that the

warehouse employee having custody of inventory should not have authority to initiate or process

entries to the inventory records.

73. Which of the following internal control procedures would minimize the misuse of corporate credit cards?

a. Establishing a restrictive policy regarding the issuance of the cards.

b. Reviewing the continued need for each card periodically.

c. Reconciling the company's monthly credit card statements with cardholder charge slips.

d. Subjecting credit card charges to the same controls applied to other expenses.

d. Correct. Credit card expenses should be subjected to the same controls used in processing similar

expense reports for currency. In this way, per diems and authorization limits would be reviewed.

Use the following information to answer questions 74 and 75.

The following information applies to an organization’s project. The numbers in the table are the expected

times (in days) to perform each activity in the project.

Activity Time (days)

Immediate

Predecessor

AB 6 None

AC 5 None

BE 6 AB

CD 2 AC

CE 5 AC

DF 6 CD

EF 2 CE

74. The expected time to complete the project is

a. 13 days.

b. 11 days.

c. 14 days.

d. 18 days.

75. The process of adding resources to shorten selected activity times on the critical path in project

scheduling is called

a. Crashing.

b. The Delphi technique.

c. ABC analysis.

d. A branch-and-bound solution.

76. A bank is designing an on-the-job training program for its branch managers. The bank would like to

design the program so that participants can complete it as quickly as possible. The training program

requires that certain activities be completed before others. For example, a participant cannot make

credit loan decisions without first having obtained experience in the loan department. An appropriate

scheduling technique for this training program is

a. PERT/CPM.

b. Linear programming.

c. Queuing theory.

d. Sensitivity analysis.

a. Correct. PERT/CPM is a network technique for scheduling interrelated time series activities and

identifying any critical paths in the series of activities. The critical path is the longest path through

the network.

77. A Gantt chart

a. Shows the critical path for a project.

b. Is used for determining an optimal product mix.

c. Shows only the activities along the critical path of a network.

d. Does not necessarily show the critical path through a network.

d. Correct. A Gantt or bar chart is sometimes used in conjunction with PERT or CPM to show the

progress of a special project. Time is shown on the horizontal axis, the length of a bar equals the

length of an activity, and shading indicates the degree of completion. However, the Gantt chart is

not as sophisticated as PERT or CPM in that it does not reflect the relationships among the activities

or define a critical path.

78. Customer checks are received on a daily basis. What controls should be in place to safeguard against

theft of the checks.

a. Establishing a separate post office box for customer payments.

b. Forwarding all checks to the cashier upon receipt.

c. Requiring a specific mail clerk to list and endorse each check.

d. Providing bonding protection for mail clerks.

c. Correct. Requiring an authorized mail clerk to list and endorse each check is the strongest control

procedure.

79. Which of the following activities performed by a payroll clerk is a control weakness rather than a control

strength?

a. Has custody of check signature stamp machine.

b. Prepares the payroll register.

c. Forwards the payroll register to the chief accountant for approval.

d. Draws the paychecks on a separate payroll checking account.

a. Correct. In this case there is a segregation of duties issue. The payroll clerk should not have

custody of the check signature stamp.

80. Which of the following observations made during a preliminary survey of a local department store’s

disbursement cycle reflects a control strength?

a. Individual department managers use prenumbered forms to order merchandize from vendors.

b. The receiving department is given a copy of the purchase order complete with a description of goods,

quantity ordered, and extended price for all merchandize ordered.

c. The treasurer prepares checks/EFT for suppliers based on vouchers prepared by the accounts payable

department.

d. Individual department managers are responsible for the movement of merchandize from the receiving

dock to storage or sales areas as appropriate.

c. Correct. This is control strength. The treasure should prepare checks/EFT based on vouchers

prepared by the accounts payable department.

81. Which of the following situations would cause an internal auditor to question the adequacy of controls

over a purchasing function?

a. The original and one copy of the purchase order are mailed to the vendor. The copy on which the

vendor acknowledges acceptance is returned to the purchasing department.

b. Receiving reports are forwarded to purchasing where they are matched with the purchase orders and

send to accounts payable.

c. The accounts payable section prepares documentation for payments.

d. Unpaid voucher files and perpetual inventory records are independently maintained.

b. Correct. This is a control weakness. The receiving reports are forwarded to accounts payable

department, where they are matched the purchase order.

82. Which of the following are elements of the control environment as described by COSO’s internal control

framework?

a. Commitment to competence, strategic planning, and management philosophy.

b. Integrity and ethical values, assigning authority, and maintaining backup facilities.

c. Risk assessment, monitoring, and organizational structure.

d. Management’s philosophy, organizational structure, and commitment to competence.

CIA Part 1 Mock Exam

d. Correct. The control environment includes the attitude and actions of the board and management

regarding the significance of control within the organization. According to COSO, the control

environment includes the following seven elements:

• Integrity and ethical values.

• Commitment to competence.

• Human resource policies and practices.

• Assigning authority and responsibility.

• Management’s philosophy and operating style.

• Board of directors or audit committee.

• Organizational structure.

83. Which of the following best describes an auditor's responsibility after noting some indicators of fraud?

a. Expand activities to determine whether an investigation is warranted.

b. Report the possibility of fraud to top management and ask how to proceed.

c. Consult with external legal counsel to determine the course of action to be taken.

d. Report the matter to the audit committee and request funding for outside specialists to help investigate

the possible fraud.

The following information is for questions 84 and 85.

The manager of a production line has the authority to order and receive replacement parts for all machinery

that require periodic maintenance. The internal auditor received an anonymous tip that the manager ordered

substantially more parts than were necessary from a family member in the parts supply business. The

unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the

parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier,

and the money was divided between the manager and the family member.

a. Correct. If an internal auditor notes that there is a possibility of fraud, then the internal auditor

needs to expand activities to determine whether an investigation is warranted.

84. Which of the following internal controls would have most likely prevented this fraud from occurring?

a. Establishing predefined spending levels for all vendors during the bidding process.

b. Segregating the receiving function from the authorization of parts purchases.

c. Comparing the bill of lading for replacement parts to the approved purchase order.

d. Using the company’s inventory system to match quantities requested with quantities received.

b. Correct. Additional authorization would be the most likely choice in preventing the fraud.

85. Which of the following tests would best assist the auditor in deciding whether to investigate this

anonymous tip further?

a. Comparison of the current quarter’s maintenance expense with prior-period activity.

b. Physical inventory testing of replacement parts for existence and valuation.

c. Analysis of repair parts charged to maintenance to review the reasonableness of the number of items

replaced.

d. Review of a test sample of parts invoices for proper authorization and receipt.

c. Correct. An analysis of repair parts charged to maintenance would quantify the excessive number

of items and detect that abuse may be occurring.

86. Which of the following fraudulent entries is most likely to be made to conceal the theft of an asset?

a. Debit expenses, and credit the asset.

b. Debit the asset, and credit another asset account.

c. Debit revenue, and credit the asset.

d. Debit another asset account, and credit the asset.

a. Correct. Most fraud perpetrators would attempt to conceal their theft by charging it against an

expense account.

87. Which of the following would not be considered a condition that indicates a higher likelihood of fraud?

a. Management has delegated the authority to make purchases under a certain dollar limit to

subordinates.

b. An individual has held the same cash-handling job for an extended period without any rotation of

duties.

c. An individual handling marketable securities is responsible for making the purchases, recording the

purchases, and reporting any discrepancies and gains/losses to senior management.

d. The assignment of responsibility and accountability in the accounts receivable department is not clear.

a. Correct. This is an acceptable control procedure, which is aimed at limiting risk while promoting

efficiency. It is not, by itself, considered a condition that indicates a higher likelihood of fraud (a red

flag).

88. Which of the following statements is(are) true regarding the prevention of fraud?

I. The primary means of preventing fraud is through internal control established and maintained by

management.

II. Internal auditors are responsible for assisting in the prevention of fraud by examining and evaluating

the adequacy of the internal control system.

III. Internal auditors should assess the operating effectiveness of fraud-related communication systems.

a. I only.

b. II only.

c. I and II only.

d. I, II and III.

I. Correct. Fraud is best prevented when management establishes and maintains strong internal

controls.

II. Correct. Internal auditors are responsible for assisting management in the prevention and

detection of fraud.

III. Correct. Internal auditors should assess the operating effectiveness of fraud related communication

systems.

89. Internal auditors are more likely to detect fraud by developing and strengthening their ability to

a. Recognize and question changes that occur in organizations.

b. Interrogate fraud perpetrators to discover why fraud was committed.

c. Develop internal controls to prevent the occurrence of fraud.

d. Document computerized operating system programs.

a. Correct. The responsibility of internal auditors for detecting fraud include having sufficient

knowledge of fraud to be able to identify indicators that fraud may have been committed. Fraud

may be indicated by negative organizational changes; thus, recognizing and questioning changes

can help in the detection of fraud.

90. Which of the following best describes a preliminary survey?

a. A standardized questionnaire used to obtain an understanding of management objectives.

b. A statistical sample of key employee attitudes, skills, and knowledge.

c. A “walk-through” of the financial control system to identify risks and the controls that can address

those risks.

d. A process used to become familiar with activities and risks in order to identify areas for engagement

emphasis.

d. Correct. A preliminary survey is used to become familiar with the activities, risks and controls; to

identify areas for engagement emphasis; and to invite comments and suggestions from

engagement clients (PA 2210.A1-1.3). A preliminary survey might include the use of standard

questionnaires, statistical sampling, and a walk-through.

91. During a preliminary survey of the accounts receivable function, an internal auditor discovered a

potentially major control deficiency while preparing a flowchart. What immediate action should the

internal auditor take regarding the weakness?

a. Perform sufficient testing to determine its cause and effect.

b. Report it to the level of management responsible for corrective action.

c. Schedule a separate engagement to evaluate that segment of the accounts receivable function.

d. Highlight the weakness to ensure that procedures to test it are included in the engagement work

program.

d. Correct. The internal auditor would highlight the weakness to ensure that procedures to test it are

included in the engagement work program.

92. Which of the following would not aid in the effectiveness of the preliminary survey?

a. Read all relevant background information.

b. Identify the risk implicit in the areas under review.

c. Identify people who could provide additional and needed information.

d. Review the adequacy and effectiveness of controls.

CIA Part 1 Mock Exam

d. Correct. Reviewing the adequacy and effectiveness of controls is part of the fieldwork, which is

done after the planning stage.

93. Which of the following procedures is the least effective in gathering information about the nature of the

processing and potential problems?

a. Interview supervisors in the claims department to find out more about the procedures used, and the

rationale for the procedures, and obtain their observations about the nature and efficiency of

processing.

b. Send an electronic mail message to all clerical personnel detailing the alleged problems and request

them to respond.

c. Interview selected clerical employees in the claims department to find out more about the procedures

used, and the rationale for the procedures, and obtain their observations about the nature and

efficiency of processing.

d. Distribute a questionnaire to gain a greater understanding of the responsibilities for claims processing

and the control procedures utilized.

b. Correct. Sending emails to clerical staff is the least effective method of gathering information.

Emails are impersonal and the clerical staff might take offense to the alleged inefficiencies. Thus,

the responses back might not be as truthful had another method been used.

94. Many organizations use electronic funds transfer (EFT) to pay their vendors instead of issuing a check.

Regarding the risks associated with issuing checks, which of the following risk management techniques

does this represent?

a. Controlling.

b. Accepting.

c. Transferring.

d. Avoiding.

d. Correct. Risk responses include avoidance, acceptance, transferring and reduction (TARA). By

eliminating checks, the organization avoids all risk associated with them.

95. Risk appetite is the level of risk an organization is willing to pursue or retain or take. Factors that could

influence an organization’s risk appetite might include

a. Viewpoints of the major stakeholders.

b. The complexity of the organization’s accounting system.

c. External factors, such as changing economic considerations, changes in technology, changes in the

industry, etc.

d. All of the above.

d. Correct. The following are factors which could influence an organization’s risk appetite, including:

• The viewpoints of the major stakeholders, including the views of the company’s major shareholders,

bondholders, lenders, analyst and many others. Each stakeholder might have a different opinion as

to how much risk a company should take on.

• Accounting factors, such as the volume of transactions, the complexity of the accounting system,

changing rules and regulations.

• The opportunity for fraud to be committed.

• External factors, such as changing economic considerations, changes in industry, changes in

technology, etc.

• Governmental restrictions.

• Entity-level factors, such as the quality and quantity of hired personnel, quality for training courses,

changes in key personnel, etc.

96. In internal auditing sampling applications, there are four types of errors that may occur. These four

errors are divided into two categories of risks. These risks

a. Result directly from the chance that the sample obtained by the internal auditor is unrepresentative of

the population.

b. Can be decreased by using more reliable, albeit more expensive, audit procedures.

c. Have a magnitude based only on the economic consequences of incorrect sample-based conclusions.

d. Refer respectively to the risks that (1) internal controls will fail, and (2) the resultant error will go

undetected.

a. Correct. Sampling risk is the risk that the sample will not be representative of the population.

Alpha and Beta risk are types of risks inherent in the practice of sampling. Alpha risk will cause the

auditor to do additional and unnecessary work in coming to the correct conclusion. This makes the

audit less efficient. Beta risk will cause the auditor to come to the wrong conclusion. This reduces

audit effectiveness.

97. An auditor is conducting a survey of perceptions and beliefs of employees concerning an organization's

health-care plan. The best approach to selecting a sample would be to

a. Focus on people who are likely to respond so that a larger sample can be obtained.

b. Focus on managers and supervisors because they can also reflect the opinions of the people in their

departments.

c. Use stratified sampling where the strata are defined by marital and family status, age, and

salaried/hourly status.

d. Use monetary-unit sampling according to employee salaries.

c. Correct. Because different employees probably have different situations, needs, and experiences,

stratified sampling would best ensure that a representative sample would result.

The following information is for questions 98 and 99.

An internal auditor works for a car rental agency that operates a fleet of 75,000 vehicles in 1,000 cities

throughout North America. As a part of an operational audit, the auditor tested the impact of vehicle age on

the incidence of major repairs. A computer program showed that 20% of the fleet has been in service for

more than 12 months. A sample of 375 is drawn based on:

• Confidence level = 95%

• Expected rate of occurrence = 10%

• Precision = ±3%

98. If 30 of the vehicles tested had received major repairs after being in service for more than 12 months,

which is the sample rate of occurrence?

a. 8%.

b. 0.2%.

c. 2.5%

d. 20%.

a. Correct. The sample rate of occurrence is the proportion of items in a population that has a certain

characteristic or attribute of interest. The sample rate of occurrence is calculated by dividing the

number of items with major repairs by the sample population (30 ÷ 375). Therefore, the rate of

occurrence is 8%.

99. Assuming that all other factors remain constant, how would sample size and achieved precision be

affected by a change in confidence level from 95% to 99%?

a. Sample size would be smaller; achieved precision would be larger.

b. Both sample size and achieved precision would be larger.

c. Both sample size and achieved precision would be smaller.

d. Sample size would be larger; achieved precision would be smaller.

d. Correct. Because the confidence coefficient is a numerator, increasing the confidence coefficient

from 95% up to 99% will make the numerator value larger, thereby, sample size is larger. Also,

since sample size is a denominator when calculating precision, a smaller precision would result from

using a larger sample.

100. An auditor applying a discovery-sampling plan with a 5% risk of overreliance may conclude that there is

a. A 95% probability that the actual rate of occurrence in the population is less than the critical rate if only

one exception is found.

b. A 95% probability that the actual rate of occurrence in the population is less than the critical rate if no

exceptions are found.

c. A 95% probability that the actual rate of occurrence in the population is less than the critical rate if the

occurrence rate in the sample is less than the critical rate.

d. Greater than a 95% probability that the actual rate of occurrence in the population is less than the

critical rate if no exceptions are found.

b. Correct. Discovery sampling is when the auditor is looking for that one critical error or irregularity.

If no exceptions are found, the correct conclusion is that the occurrence rate is less than the critical

rate.

CISA Exam Mock (50 Question)

2015-05-04T11:39:00.001+03:00

1. A legacy payroll application is migrated to a new application. Which of the following stakeholders should be PRIMARILY responsible for reviewing and signing-off on the accuracy and completeness of the data before going live?
A. IS auditor
B. Database administrator
C. Project manager
D. Data owner

2. Upon receipt of the initial signed digital certificate the user will decrypt the certificate with the public key of the:
A. registration authority (RA).
B. certificate authority (CA).
C. certificate repository.
D. receiver.

3. An IS auditor discovers that devices connected to the network have not been included in a network diagram that had been used to develop the scope of the audit. The chief information officer (CIO) explains that the diagram is being updated and awaiting final approval. The IS auditor should FIRST:
A. expand the scope of the IS audit to include the devices that are not on the network diagram.
B. evaluate the impact of the undocumented devices on the audit scope.
C. note a control deficiency because the network diagram has not been updated.
D. plan follow-up audits of the undocumented devices.

4. In a small organization, developers may release emergency changes directly to production. Which of the following will BEST control the risk in this situation?
A. Approve and document the change the next business day.
B. Limit developer access to production to a specific time frame.
C. Obtain secondary approval before releasing to production.
D. Disable the compiler option in the production machine.

5. While reviewing the IT infrastructure, an IS auditor notices that storage resources are continuously being added. The IS auditor should:
A. recommend the use of disk mirroring.
B. review the adequacy of offsite storage.
C. review the capacity management process.
D. recommend the use of a compression algorithm.

6. During a compliance audit of a small bank, the IS auditor notes that both the IT and accounting functions are being performed by the same user of the financial system. Which of the following reviews conducted by a supervisor would represent the BEST compensating control?
A. Audit trails that show the date and time of the transaction.
B. A summary daily report with the total numbers and dollar amounts of each transaction.
C. User account administration.
D. Computer log files that show individual transactions in the financial system.

7. From a control perspective, the PRIMARY objective of classifying information assets is to:
A. establish guidelines for the level of access controls that should be assigned.
B. ensure access controls are assigned to all information assets.
C. assist management and auditors in risk assessment.
D. identify which assets need to be insured against losses.

8. To gain an understanding of the effectiveness of an organization's planning and management of investments in IT assets, an IS auditor should review the:
A. enterprise data model.
B. IT balanced scorecard (BSC).
C. IT organizational structure.
D. historical financial statements.

9. When using a universal storage bus (USB) flash drive to transport confidential corporate data to an offsite location, an effective control would be to:
A. carry the flash drive in a portable safe.
B. assure management that you will not lose the flash drive.
C. request that management deliver the flash drive by courier.
D. encrypt the folder containing the data with a strong key.

10. For a mission-critical application with a low recovery time objective (RTO), the IS auditor would recommend the use of which of the following recovery strategies?
A. Mobile site.
B. Redundant site.
C. Hot site.
D. Reciprocal agreements.

11. When reviewing IS strategies, an IS auditor can BEST assess whether IS strategy supports the organizations' business objectives by determining whether IS:
A. has all the personnel and equipment it needs.
B. plans are consistent with management strategy.
C. uses its equipment and personnel efficiently and effectively.
D. has sufficient excess capacity to respond to changing directions.

12. Which of the following system and data conversion strategies provides the GREATEST redundancy?
A. Direct cutover
B. Pilot study
C. Phased approach
D. Parallel run

13. Web and e-mail filtering tools are PRIMARILY valuable to an organization because they:
A. protect the organization from viruses and non-business materials.
B. maximize employee performance.
C. safeguard the organization’s image.
D. assist the organization in preventing legal issues.

14. The PRIMARY reason an IS auditor performs a functional walkthrough during the preliminary phase of an audit assignment is to:
A. understand the business process.
B. comply with auditing standards.
C. identify control weakness.
D. plan substantive testing.

15. An IS auditor discovers that the chief information officer (CIO) of an organization is using a wireless broadband modem utilizing global system for mobile communications (GSM) technology. This modem is being used to connect the CIO's laptop to the corporate virtual private network (VPN) when the CIO travels outside of the office. The IS auditor should:
A. do nothing since the inherent security features of GSM technology are appropriate.
B. recommend that the CIO stop using the laptop computer until encryption is enabled.
C. ensure that media access control (MAC) address filtering is enabled on the network so unauthorized wireless users cannot connect.
D. suggest that two-factor authentication be used over the wireless link to prevent unauthorized communications.

16. Which of the following is the BEST way for an IS auditor to determine the effectiveness of a security awareness and training program?
A. Review the security training program.
B. Ask the security administrator.
C. Interview a sample of employees.
D. Review the security reminders to employees.

17. After the merger of two organizations, multiple self-developed legacy applications from both companies are to be replaced by a new common platform. Which of the following would be the GREATEST risk?
A. Project management and progress reporting is combined in a project management office which is driven by external consultants.
B. The replacement effort consists of several independent projects without integrating the resource allocation in a portfolio management approach.
C. The resources of each of the organizations are inefficiently allocated while they are being familiarized with the other company's legacy systems.
D. The new platform will force the business areas of both organizations to change their work processes, which will result in extensive training needs.

18. An IS auditor discovers that some hard drives disposed of by an enterprise were not sanitized in a manner that would reasonably ensure the data could not be recovered. In addition, the enterprise does not have a written policy on data disposal. The IS auditor should FIRST:
A. draft an audit finding, and discuss it with the auditor in charge.
B. determine the sensitivity of the information on the hard drives.
C. discuss with the IT manager the best practice in data disposal.
D. develop an appropriate data disposal policy for the enterprise.

19. During a post implementation review of an enterprise resource management system, an IS auditor would MOST likely:
A. review access control configuration.
B. evaluate interface testing.
C. review detailed design documentation.
D. evaluate system testing.

20. An IS auditor is testing employee access to a large financial system. The IS auditor selected a sample from the current employee list provided by the auditee. Which of the following evidence is the MOST reliable to support the testing?
A. A spreadsheet provided by the system administrator.
B. Human resources (HR) documents signed by employees' managers.
C. A list of accounts with access levels generated by the system.
D. Observations performed onsite in the presence of a system administrator.

21. An IS auditor should recommend the use of library control software to provide reasonable assurance that:
A. program changes have been authorized.
B. only thoroughly tested programs are released.
C. modified programs are automatically moved to production.
D. source and executable code integrity is maintained.

22. By evaluating application development projects against the capability maturity model (CMM), an IS auditor should be able to verify that:
A. reliable products are guaranteed.
B. programmers' efficiency is improved.
C. security requirements are designed.
D. predictable software processes are followed.

23. Which of the following would be an indicator of the effectiveness of a computer security incident response team?
A. Financial impact per security incident.
B. Number of security vulnerabilities that were patched.
C. Percentage of business applications that are being protected.
D. Number of successful penetration tests.

24. To ensure an organization is complying with privacy requirements, an IS auditor should FIRST review:
A. the IT infrastructure.
B. organizational policies, standards and procedures.
C. legal and regulatory requirements.
D. adherence to organizational policies, standards and procedures.

25. IT operations for a large organization have been outsourced. An IS auditor reviewing the outsourced operation should be MOST concerned about which of the following findings?
A. The outsourcing contract does not cover disaster recovery for the outsourced IT operations.
B. The service provider does not have incident handling procedures.
C. Recently a corrupted database could not be recovered because of library management problems.
D. Incident logs are not being reviewed.

26. An IS auditor finds that an enterprise does not restrict the use, nor have a policy addressing the use, of universal serial bus (USB) storage devices. Which of the following would be MOST important for the IS auditor to recommend?
A. Implementing security software to prevent the use of USB ports for data transfer.
B. Introducing a policy to address the use of portable drives.
C. Implementing a virtual private network (VPN) solution to ensure encrypted sessions during transmission of data.
D. Disabling USB ports on all machines.

27. Which of the following is the MOST effective control for restricting access to unauthorized Internet sites in an organization?
A. Routing outbound Internet traffic through a content-filtering proxy server.
B. Routing inbound Internet traffic through a reverse proxy server.
C. Implementing a firewall with appropriate access rules.
D. Deploying client software utilities that block inappropriate content .

28. If a database is restored using before-image dumps, where should the process begin following an interruption?
A. Before the last transaction.
B. After the last transaction.
C. As the first transaction after the latest checkpoint.
D. As the last transaction before the latest checkpoint.

29. Corrective action has been taken by an auditee immediately after the identification of a reportable finding. The auditor should:
A. include the finding in the final report, because the IS auditor is responsible for an accurate report of all findings.
B. not include the finding in the final report, because the audit report should include only unresolved findings.
C. not include the finding in the final report, because corrective action can be verified by the IS auditor during the audit.
D. include the finding in the closing meeting for discussion purposes only.

30. An IS auditor identifies that reports on product profitability produced by an organization's finance and marketing departments give different results. Further investigation reveals that the product definition being used by the two departments is different. What should the IS auditor recommend?
A. User acceptance testing (UAT) occur for all reports before release into production.
B. Organizational data governance practices be put in place.
C. Standard software tools be used for report development.
D. Management sign-off on requirements for new reports.

31. Which of the following is the MOST important IS audit consideration when an organization outsources a customer credit review system to a third-party service provider? The provider:
A. meets or exceeds industry security standards.
B. agrees to be subject to external security reviews.
C. has a good market reputation for service and experience.
D. complies with security policies of the organization.

32. At the completion of a system development project, a postproject review should include which of the following?
A. Assessing risks that may lead to downtime after the production release.
B. Identifying lessons learned that may be applicable to future projects.
C. Verifying the controls in the delivered system are working.
D. Ensuring that test data are deleted.

33. To determine if unauthorized changes have been made to production code the BEST audit procedure is to:
A. examine the change control system records and trace them forward to object code files.
B. review access control permissions operating within the production program libraries.
C. examine object code to find instances of changes and trace them back to change control records.
D. review change approved designations established within the change control system.

34. Which of the following is an implementation risk within the process of decision support systems (DSSs)?
A. Management control
B. Semistructured dimensions
C. Inability to specify purpose and usage patterns
D. Changes in decision processes

35. Which of the following is the BEST way to satisfy a two-factor user authentication?
A. A smart card requiring the user's personal identification number (PIN).
B. User ID along with password.
C. Iris scanning plus fingerprint scanning.
D. A magnetic card requiring the user's PIN.

36. During an audit, an IS auditor notes that an organization's business continuity plan (BCP) does not adequately address information confidentiality during a recovery process. The IS auditor should recommend that the plan be modified to include:
A. the level of information security required when business recovery procedures are invoked.
B. information security roles and responsibilities in the crisis management structure.
C. information security resource requirements.
D. change management procedures for information security that could affect business continuity arrangements.

37. Which of the following is the MOST effective method for dealing with the spreading of a network worm that exploits vulnerability in a protocol?
A. Install the vendor's security fix for the vulnerability.
B. Block the protocol traffic in the perimeter firewall.
C. Block the protocol traffic between internal network segments.
D. Stop the service until an appropriate security fix is installed.

38. An IS auditor should use statistical sampling and not judgmental (nonstatistical) sampling, when
A. the probability of error must be objectively quantified.
B. the auditor wishes to avoid sampling risk.
C. generalized audit software is unavailable.
D. the tolerable error rate cannot be determined.

39. During the system testing phase of an application development project the IS auditor should review the:
A. conceptual design specifications.
B. vendor contract.
C. error reports.
D. program change requests.

40. After reviewing its business processes, a large organization is deploying a new web application based on a Voice-over IP (VoIP) technology. Which of the following is the MOST appropriate approach for implementing access control that will facilitate security management of the VoIP web application?
A. Fine-grained access control.
B. Role-based access control (RBAC).
C. Access control lists.
D. Network/service access control.

41. To optimize an organization's business contingency plan (BCP), an IS auditor should recommend conducting a business impact analysis (BIA) in order to determine:
A. the business processes that generate the most financial value for the organization and, therefore, must be recovered first.
B. the priorities and order for recovery to ensure alignment with the organization's business strategy.
C. the business processes that must be recovered following a disaster to ensure the organization's survival.
D. the priorities and order of recovery which will recover the greatest number of systems in the shortest time frame.

42. An audit charter should:
A. be dynamic and change often to coincide with the changing nature of technology and the audit profession.
B. clearly state audit objectives for, and the delegation of, authority to the maintenance and review of internal controls.
C. document the audit procedures designed to achieve the planned audit objectives.
D. outline the overall authority, scope and responsibilities of the audit function.

43. An IS auditor is conducting a postimplementation review of an enterprise's network. Which of the following findings would be of MOST concern?
A. Wireless personal digital assistants (PDAs) are not password-protected.
B. Default passwords are not changed when installing network devices.
C. An outbound web proxy does not exist.
D. All communication links do not utilize encryption.

44. The PRIMARY objective of performing a post incident review is that it presents an opportunity to:
A. improve internal control procedures.
B. harden the network to industry best practices.
C. highlight the importance of incident response management to management.
D. improve employee awareness of the incident response process.

45. When reviewing the procedures for the disposal of computers, which of the following should be the GREATEST concern for the IS auditor?
A. Hard disks are overwritten several times at the sector level, but are not reformatted before leaving the organization.
B. All files and folders on hard disks are separately deleted, and the hard disks are formatted before leaving the organization.
C. Hard disks are rendered unreadable by hole-punching through the platters at specific positions before leaving the organization.
D. The transport of hard disks is escorted by internal security staff to a nearby metal recycling company, where the hard disks are registered and then shredded.

46. An insurance company is using real customer data for testing purposes. What would be the IS auditor's BEST recommendation to secure this model?
A. Review the access rights.
B. Ensure that customer data are encrypted.
C. Perform data sanitization.
D. Ensure that only internal administrators can manage the database.

47. A project manager of a project that is scheduled to take 18 months to complete announces that the project is in a healthy financial position because, after six months, only one-sixth of the budget has been spent. The IS auditor should FIRST determine:
A. what amount of progress against schedule has been achieved.
B. if the project budget can be reduced.
C. if the project could be brought in ahead of schedule.
D. if the budget savings can be applied to increase the project scope.

48. While downloading software, a hash may be provided to:
A. ensure that the software comes from a genuine source.
B. ensure that the software is the correct revision number.
C. ensure that the software has not been modified.
D. serve as a license key for paid users of the software.

49. An IS auditor reviewing a new outsourcing contract with a service provider would be MOST concerned if which of the following was missing?:
A. A clause providing a “right to audit” service provider .
B. A clause defining penalty payments for poor performance.
C. Predefined service level report templates.
D. A clause regarding supplier limitation of liability.

50. The GREATEST advantage of using web services for the exchange of information between two systems is:
A. secure communications.
B. improved performance.
C. efficient interfacing.
D. enhanced documentation.

ERM

2015-04-30T17:23:00.002+03:00

The step provides a broad outline of the issues, concepts and outputs
associated with economic and financial analyses during the process of
developing a Strategic MSWM Plan. It is not a blueprint to be followed, nor is
it necessary to have an intimate knowledge of all its contents. It does,
however, provide guidance on the range of economic and financial tasks
necessary during the strategic planning process.
How to use this
step?
Guidance in this step has been structured into three
parts:
Part I: Strengthening the financial policy
framework
Part II: Economic evaluation of alternative
strategies
Part III: Financial assessment of the preferred
MSWM Strategic Plan
The linkages between the three components of this step
are illustrated in Figure 4D.1.
Part I focuses on key issues associated with
strengthening the financial policy framework of a
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 3
municipality. It provides guidance on how to improve
the overall financial sustainability of MSWM systems.
Part II covers the process of undertaking an economic
evaluation of strategy alternatives.. Economic
evaluation should be carried out in tandem with other
technical and environmental evaluations to assist in
the short-listing and selection of feasible options.
Once a preferred MSWM Strategic Plan has been
selected its long-term financial sustainability must be
assessed. Methodologies, tools and examples to guide
this assessment are presented in Part III.
How long will it
take to complete
Step 4D?
Issues covered in Step 4D will need to be addressed
during preparation of both the Strategy and Action
Plan (see Step 5 and Step 6). Work on strategy-level
issues is likely to take 6-9 months, with the Action Plan
requiring a further 6-9 months to complete.
Clearly, the process is often not quite so
straightforward as this, or the differences between the
parts quite so clear-cut. Some overlap is inevitable.
The essential aim should be to establish a
comprehensive framework for MSWM, and provide
timely feedback on the economic and financial viability
of strategic planning proposals at several key stages of
the planning process.
Who should use
this step?
Economics and finance specialists working on the
Strategic MSWM Plan. Where sufficient in house
expertise is not available, specialists may need to be
hired to work under the direction of the Working
Group.
Who else should
read Step 4D for
information?
Step 4D should also prove useful to any specialist with
interest in institutional/policy aspects of MSWM, and
to engineers specialising in technical aspects. By
reading this section, both of these groups will gain
more understanding about why the economist needs
certain data, and how economic information,
particularly in relation to demand, can feed into
technical design.
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 4
Figure 4D.1 Linkage between the Parts of Step 4D
What are the
typical outputs
of the financial
and economic
analysis?
Typical outputs from the analysis are likely to include the
following, normally appearing as sections of reports
prepared during project development.
For Part I: Policy Framework
• analysis of the existing financial policy and management
framework;
• proposals for improving the financial policy and
management framework, including establishing realistic
financial objectives, and an analysis of cost recovery
options
• an affordability analysis; and possibly
• a willingness to pay analysis;
For Part II and Part III: Economic and Financial Assessment
• economic evaluation of alternative strategies
(particularly cost benefit or cost effectiveness analysis);
• financial assessment of the preferred Strategic MSWM
Plan;
• an indicative investment plan (showing sources and
uses of investment finance);
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 5
When would
the services of
the economic
and financial
analyst be
required?
• an indicative recurrent funding plan for the Action Plan
(showing sources and uses of recurrent finance
consistent with cost recovery objectives);
• a sources and uses of funds statement (projected cash
flow analysis for the Action Plan during implementation
and initial years of operation);
• financial statements for the responsible municipal
authority; and
• proposals for physical and financial indicators to
measure performance during and after strategy
implementation.
The services of the economic and financial analyst are thus
required throughout the strategy planning process.
Namely:
• at the outset, to review existing financial arrangements;
• during the early stages to help develop an improved
financial management framework;
• during the early stages to assess affordability and the
demand for various options;
• during the early stages to analyse the appropriateness of
possible plant and equipment options;
• during the middle stages to help formulate and evaluate
alternative options;
• during the later stages to assess the financing
implications of the preferred option and to prepare a
financial assessment;
• during the final stages to assess the implications of
modifications to the preferred MSWM Strategic Plan;
and
• during the final stages to establish physical and financial
indicators by which to monitor performance during and
after strategy implementation.
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 6
4D.2 KEY MESSAGES OF THIS STEP
‘Key Messages’
Part I: Strengthening Financial Policy
1. Strengthening the current financial
management policy for MSWM
services requires the design of a
demand responsive set of services
which are affordable and which are
based on appropriate technology.
4. Responsibility and accountability
for service quality and costs must be
clearly focused within the
management structure. A unified
organisational structure should be
adopted with separate cost and
responsibility centres.
2. Increasing the cost-effectiveness of
existing services (‘doing more for
your money’) and identifying new
revenue sources are essential to
increase service quality and
coverage.
5. Thorough planning for
financing the recurrent costs of the
strategy must be given equal if not
greater weight than for financing
investment costs.
3. Service quality and costeffectiveness
can e improved only if
performance indicators are available
by which these can be measured.
Such performance indicators depend
on the existence of proper financial
and management accounting
systems.
6. The financial sustainability of
MSWM services depends on the
generation of sufficient revenue to
cover equipment replacement and other
long-term liabilities. A move from
cash to ‘accruals’ accounting is
essential.
‘Key Messages’
Parts II and III: Economic and Financial Assessment
1. Municipal decision-makers need to
be aware of the full economic and
financial costs and benefits of the
strategy and of its individual
components
4. The sensitivity of the
economic and financial analyses
to key assumptions should
always be examined
2. A cost benefit or cost effectiveness
analysis should be carried out to
identify the economically preferred
MSWM option. Environmental and
health benefits should be included
where possible.
5. A detailed financial analysis
should be carried out for the
preferred project
3. Undue optimism in each of the cost
and benefit estimates should be
avoided. All cost/benefit assumptions
should be made explicit
6. The Action Plan or project
must be financially sustainable
in the long term.
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 7
PART I: THE FINANCIAL POLICY FRAMEWORK
This part considers a number of financial policy issues that need to be addressed during
the MSWM Strategic Plan development process (see Step 5). The aim is to guide the
process of establishing and then strengthening the policy and management framework.
The following issues are covered:
• Features of the financial policy and management framework typically found in
existing MSWM services;
• Strengthening financial management and control;
• Strengthening cost recovery policy; and
• Taking a demand responsive approach to planning – looking at the issues of
affordability and willingness-to-pay
Begin to establish the financial objectives of the municipal authorities or
MSWM agency (including charging and cost recovery policy), taking into
account the demands of MSWM service customers.
4D.3 REVIEW OF EXISTING FINANCIAL POLICY AND MANAGEMENT ARRANGEMENTS
The responsibility for providing solid waste management services is usually an essential
function of municipal governments. How the services are actually provided varies from
city to city. In many cities, solid waste management services are provided by a city waste
department that is an integral part of the municipal administration. In others, the
services are provided by a wholly owned municipal enterprise operating to some extent
at arm’s length from the government. In others, although rarely, services are provided
by a fully autonomous enterprise (public or private) operating under contract to the
government. Each of these arrangements reflects a different level of sophistication in
terms of the financing and cost recovery arrangements typically found to be in place.
Where services are provided by a municipal waste department, funds tend to be
provided out of the normal municipal budgetary process. Domestic users may make a
contribution to the cost of providing the services – possibly through a local property tax
or a communal services tax – but the amount of funds raised through such mechanisms
does not usually relate directly to the cost of service. Under these circumstances the
waste department is in the position of having regularly (usually annually) to present its
budget request for the following period. This is then subject to municipal treasury
review, and a decision is made on the amount of funds to be allocated. The outcome
often reflects as much the budgetary circumstances of the municipal government at the
time, and the nature of competing claims on scarce resources, as it does the actual costs
involved in providing an efficient service. It can be an inefficient process, in which
service managers are continually struggling to attract a level of funds adequate to
provide the services. Service quality is often poor and costs high.
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 8
At the next level, where services are provided by a wholly owned municipal enterprise
operating (often ostensibly) at arm’s length, there is often a greater appreciation by
municipal authorities of the need for the enterprise to be allowed to operate on a
financially sustainable basis. In these circumstances – and the arrangements frequently
found in the countries of the former Soviet Union are examples – a monthly tariff is
calculated (based on the estimated cost of service) and charged to individual users, often
as a separate item on a communal services bill. This system can be an improvement on
the typical internal works department approach, although low tariffs and subsidies to
householders often mean that government must still budget for a significant allocation
of funds out of its general revenue funds. This can lead to reduced service quality and
high costs.
At the third level, where government contracts directly with an autonomous enterprise
to provide specified services, a significantly greater obligation is put upon the municipal
authorities to meet the terms of the contract (subject to the contractor performing
according to specification). Under these circumstances there is often a greater imperative
for the municipal government to introduce user charges (or to establish binding
budgetary allocation processes within government) at a level that will permit the
contractual terms to be met. Arrangements such as these place a far greater onus on the
municipality to properly prepare, manage and monitor such contracts. This process
requires it to have a thorough appreciation of the full costs of service provision.
At the beginning of the review it is necessary to establish clearly the existing funding
arrangements, both in terms of payments to the service provider and from service users.
Sometimes it can be useful to show this diagrammatically (Figure 4D.2 gives an example
of the form this might take). The remainder of this section addresses some of the
important issues involved in improving the financial management arrangements
associated with the provision of these services.
Figure 4D.2 Example of financial management and policy framework for MSWM services
Government
Municipality/
City Treasurer
Financial
Request
Allocated
Budget
monthly services tax
City Waste
Dept
direct change
Customer Base
households commerce
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 9
4D.4 STRENGTHENING FINANCIAL MANAGEMENT AND CONTROL
4D.4.1 The Reasons for Poor Financial Management and Control
Reasons for poor financial management and control (commonly reflected in poor service
quality) can be revealed by a review of existing arrangements.. Reasons can include the
following:
• poor organisational arrangements;
• poor budgetary systems;
• a lack of accountability;
• poor accounting systems;
• poor revenue collection systems; and
• a lack of suitably qualified personnel.
4D.4.2 The Need for Sound Financial Management and Information
Sound financial management and information are necessary for the efficient operation of
any MSWM service. Sound management is needed to maintain high quality, costeffective
services, and for the public to have confidence that it is getting value for money
from the services provided. Reliable information is needed to enable management to
make informed decisions about the operation and future development of the service.
Effective financial management and information control systems are necessary for:
• focusing responsibility and accountability for service costs and quality;
• preparing statutory financial statements and accounts;
• establishing full service costs;
• establishing the adequacy of revenue sources;
• establishing the structure and levels of user charges;
• demonstrating a capacity to meet projected financial obligations, such as debt service;
• monitoring and evaluating service quality, costs and performance;
• involving the private sector in the provision of MSWM services; and
• future planning
Service quality and cost-effectiveness can only be improved if indicators are available by
which performance can be measured. The existence of these performance indicators
depends on having effective, reliable and up-to-date financial management information
systems (see Step 7).
ERM for WORLD BANK/SDC PLANNING GUIDE FOR MSWM
Step 4 D - 10
4D.4.3 Mechanisms for Improving Financial Management and Control
Approaches to improving budgetary and accounting systems for solid waste
management are outlined in Box 4D.1 below.
Box 4D.1 Measures to Improve Budgetary and Accounting Systems for MSWM
1. Adopt a unified organisational structure with a parallel budgetary allocation system
2. Create separate cost and responsibility centres, each managed by a senior manager
who is: responsible for service provision; financial control, monitoring and evaluating
performance, and preparing an annual budget; and accountable for service quality and
costs;
3. Structure financial information systems along cost centre lines and establish separate
accounts for each cost centre;
4. Systematically collect the physical and financial performance data needed to estimate
costs and review the performance of each MSWM component (eg, collection, transfer,
disposal);
These can be among the first steps to take in reorganising a MSWM department on a
more (i) functional and (ii) accountable basis (see also Step 4A).
The ease with which this can be done will depend on the structure of the existing
arrangements and the institutional culture on which they are based. In some instances
legislative change may be needed to establish new organisational structures, to sanction
the use of more appropriate accounting systems or to extend powers to impose user
charges. Political will and commitment is an essential ingredient for making such
changes.
The financial management problems facing MSWM services commonly reflect those
faced by the municipal government as a whole. Although change to municipal systems
is unlikely to happen in the short-term, management information systems based on the
concepts of accruals accounting can be introduced specifically for MSWM and (if
necessary) operated in parallel with an existing cash-basis system. This can facilitate
decision making, enable performance to be evaluated and compared, and generate
reports in line with accepted accounting principles. Performance measures and related
management information systems are considered further in Step 7.
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4D.5 STRENGTHENING FINANCING ARRANGEMENTS
4D.5.1 Key Issues
Two important aspects of financing are addressed in this section:
• how capital investment expenditures are to be financed; and
• how recurrent costs are to be financed.
The financing of capital investment commonly attracts most attention, as a shortage of
capital funds tends to be seen as a principal impediment to development.
However, the financing of recurrent costs is probably the more critical issue, as it is on
this that the financial sustainability of the MSWM system ultimately depends.
Planning the financing of the recurrent costs of the MSWM system must be given
equal weight to planning the financing of the investment costs.
Responsibility for generating the necessary investment and recurrent funding
requirements will depend to some extent on the nature of the service delivery
arrangements. This is best seen in terms of the three organisational structures identified
above.
Where services are provided by a municipal waste department, investment and
recurrent funding arrangements are typically organised by the municipal authorities. A
part of the funding requirement may be raised through specific charges, although it is
commonly provided out of general taxation revenues. Funds tend to be made available
as and when required, often on an ad hoc basis. This can result in inefficiency, high costs
and poor service quality.
Where services are provided by a wholly owned municipal enterprise operating (at least
to some extent) on a commercial basis, part of the investment requirement can possibly
be accumulated through the retained earnings (profit) of the enterprise. The source of
recurrent funds is typically the municipal government, which may raise part of the
requirement through some form of user charges or tariff system and part from general
municipal sources.
Where services are provided under contract by an autonomous agency the responsibility
for providing investment finance will depend on the nature of the contract. The
recurrent funding requirement is usually provided by the municipal government in
accordance with the terms of contract. Establishing and collecting user charges (tariffs) is
generally a responsibility of the municipality. There are instances, however (and
arrangements such as these can be found in Eastern Europe) where the contractor is also
responsible for establishing and collecting charges.
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The ultimate aim might be to establish the service provider on a properly commercial
basis, where it is fully responsible for overall financial performance and service quality.
It will nevertheless remain an agent of the municipal government (which has a statutory
obligation to provide the services) operating under contract to it. The contract would
specify payment terms, and these would be established at the level needed for it to
operate in a commercial manner. This can include provisions for it to recover its
investment costs and to make a return on investment. Retained reserves accumulated in
this manner would then be used to finance asset replacement and long-term liabilities
(such as facility closure and post-closure costs). Establishing the tariffs and user charges
necessary (at least in part) to fund the contract would, however, remain a responsibility
of the municipal authorities.
4D.5.2 Sources of finance for capital costs
MSWM systems involve capital expenditures being made on a wide range of
investments, including landfill development, transfer stations and the procurement of
collection vehicles. The amount of investment funds required is established through the
economic and financial assessments (Parts II and III) and after taking into account
options for private sector involvement..
There are five potential sources of finance for capital investment projects:
1. accumulated internal reserves held by the operating agency;
2. central, state and municipal government grant contributions;
3. domestic or international commercial loans raised by the state or municipal
governments;;
4. international funding agency grants and loans; and
5. private-sector finance.
Internal Reserves
MSWM departments rarely have the accumulated funds necessary to finance asset
replacement or the development of new MSWM systems. Even where such funds are
generated, other priorities often make prior claims on them (eg, to subsidise street
cleaning operations).
Internal sources of retained earnings are rarely available to finance improvements to
MSWM services. . A key aim of the Strategic MSWM Plan should be to establish the
financial management systems and cost recovery mechanisms required to keep pace with
demand and allow sustained improvement to MSWM services over time.
The aim should be for the MSWM department to be given greater financial autonomy, for
it to structure its operations around commercial principles and for it to begin to provide
for its own future financial obligations. This greater autonomy can be coupled with
increased political accountability for service quality and financial performance.
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Government Contributions
The traditional source of investment funds is via transfers from central or state
governments. Because these funds are in short supply they are often made available only
on an ad hoc basis when urgently needed. This makes the introduction of new improved
MSWM systems difficult – there is always a major incentive for decisions to be deferred.
Capital shortages and the inability to routinely replace capital plant at the end of its
useful life are major causes of poor service performance.
The role of central government in financing municipal services is also being reduced in
many countries in response to policies to encourage political decentralisation and
institutional reform.
Commercial Loans
Although commercial loans raised on domestic or international markets are a potential
sources of investment capital, they are rarely used. This is because many municipal
authorities do not have the statutory powers necessary to enter into loan agreements.
Central governments commonly maintain tight controls over foreign borrowings, aiming
to keep these within prudent economic limits. Even when municipal authorities do have
such powers, high commercial interest rates and short repayment periods often make
loan service obligations difficult to meet.
Commercial credits offered by foreign plant and equipment suppliers sometimes enable
a municipality to purchase capital equipment from the supplier. Although the terms and
conditions of these tied credits can be attractive, it is necessary to ensure that the
equipment is appropriate and affordable. There are many instances of a municipality
being seduced by attractive credit terms into the purchase of equipment that is quite
inappropriate for its intended use.
Grants and Loans
Grants and loans from international finance agencies are an important source of finance.
Grants are immediately attractive because neither interest nor capital has to be repaid.
Loans are attractive because interest rates are often lower than market rates and,
importantly, because repayment terms tend to be longer than for commercial loans.
Although grants are attractive - because they enable plant and equipment to be
purchased at no direct cost to the municipality - they should be used only for
implementing systems and technologies that are sustainable under local conditions.
The adoption of inappropriate technologies can lead to a rapid deterioration of the asset
and to a waste of investment finance. Reasons for this can include unexpectedly high
operating and maintenance costs, and a lack of the skilled personnel needed to operate
and maintain the plant properly.
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The important implication of this is that the SWM plan must be shown to be sustainable
in its own right before consideration is given to possible financing arrangements (such as
grant funding).
Grants and soft loans are valuable sources of finance during the transitional period in
which a waste management agency moves towards commercial independence. But the
long-term viability of its operations should not be dependent on the continuation of such
aid. The aim must be to provide services that are sustainable in the longer term. This
means they must be affordable to society, and capable of being financed out of society’s
resources. If, when the time comes to replace grant-funded assets, grant funds are again
required, then it is likely that the service is neither sustainable nor affordable. The
feedback between systems planning and financial planning should aim to avoid such a
dependency culture from becoming established.
Private Sector
Part of the responsibility for financing and operating waste management services can
potentially be shifted from the municipality by contracting with a third-party private
operator. This can reduce the amount of initial investment funds that have to be
provided by the municipality.
This can, however, lead to the erroneous view that the municipality can reduce the costs
of service by involving the private sector. Ultimately, the full costs of the service have to
be paid for by its users, whether the capital is provided by government or by the private
sector. One benefit of using the private sector is that the need for up-front investment
finance can sometimes be avoided. Investment costs, plus a premium for the risk
accepted by the private operator, must, however, be recovered by the private operator
through the contract it signs with the municipality. For its part, the municipality will
want to recover the costs of service from users.
A principal benefit of using the private sector is that it can lead to a reduction in unit
costs. This arises largely through the efficiency improvements encouraged by exposing
public service provision to the competition process. Despite this, involvement of the
private sector can lead to an apparent increase in the costs of service. This is because the
private sector contract forces the municipality to face up to the full costs of service
provision. This is a valuable outcome, as it also forces the municipality to consider the
overall affordability of the proposed services.
A range of potential sources is available to finance MSWM investments.
Extreme care should be taken to ensure that any investments are technically
appropriate and financially sustainable.
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4D.5.3 Strengthening the financing of recurrent costs
Recurrent costs are the costs incurred in operating MSWM services. They can include:
• direct operational expenditures, such as expenditure on wages, fuel and maintenance;
• provisions (accrued expenses) for liabilities such as employee pension obligations and
insurance payments, and long-term closure and after-care costs;
• regular recurrent cash outlays, such as debt repayment, loan interest and service
charges; and
• a provision (depreciation) for recovering the value of the capital assets progressively
used up in delivering the service (with debt repayment being financed out of the
depreciation provision).
Alternatively, loan interest and service charges plus depreciation provisions can be
replaced by an annual amortisation charge designed to recover the value of capital assets
over their useful lives. This has the effect of providing a rate of return to cover the
opportunity cost of the capital employed in the business.
Devising a realistic recurrent revenue plan is a key component of the strategic planning
process.
Service failure can be caused by a lack of proper budgeting procedures. MSWM services
are frequently provided on a day-to-day cash basis, with little provision being made to
ensure the long-term viability of the service. For the service to be viable in the longer
term, provision has to be made for recovering the capital value of assets, for funding
long-term liabilities (such as employee pensions, site closure and after-care), and for
funding routine repair and maintenance programmes. This involves proper budgeting
on an accruals basis and establishing charges at levels that recover annual recurrent costs
in full.
Funding operations on a day-to-day cash basis can result in a steady
deterioration of service quality, an increase in costs, and under-provision for
long-term liabilities. Management effort thus becomes directed towards crisis
management rather than service management. A system of financial
management (including funding) using accruals accounting methods should
therefore be adopted.
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4D.5.4 Traditional Sources of Revenue
These sources are considered below.
Transfer Funds
Central, state or provincial government transfer funds often contribute a significant
proportion of total municipal recurrent funds, but there is usually little scope for this
amount being increased. This funding source is outside the control of the municipality
and can be subject to variations caused by economic or political pressures. It is generally
not a source of revenue that can be relied upon for funding the additional requirements
of improved services. Nevertheless, it is a possible source and should be examined.
Municipal Revenue
Municipal governments also have their own sources of funds, normally from local taxes
and non-specific charges.1 Contributions from these sources are usually paid directly
into consolidated revenue and are not earmarked for specific uses. Local taxes are the
most significant component, of which property and local sales taxes are examples.2
1 The main differences between taxes and charges are as follows. Funds generated by taxes are generally paid directly into the consolidated
revenue account whereas funds generated from user charges are (desirably) allocated to their specified use. Taxes do not relate to the costs
of providing a specific service whereas user charges are designed with a view to their making a specific contribution to the costs of
providing a service.
2 Property taxes are used in many countries and, although their structures may differ, the principles are largely the same. The property tax
has often been regarded as an appropriate basis for funding local government services as it relates to the value of property (thereby acting
as a proxy measure of the capacity of the property owner to pay); and is administratively simple to impose and collect. Property taxes are
usually paid directly into consolidated revenue and are only notionally related to the provision of specific services. Other local government
taxes - such as cleansing or conservancy taxes - are sometimes established in an ad hoc manner with the aim of meeting a particular area of
local government need (such as improved MSWM services). Although referred to as charges they are more like taxes: receipts are typically
paid directly into consolidated revenue and the level of charges bears no direct relationship to the costs of providing the service.
Funds available for supporting recurrent expenditures typically come from three
sources:
1. transfer funds assigned by a central, state or provincial government, usually in the
form of non-specific grants;
2. a municipality’s own general revenue sources, consisting mainly of taxes and charges;
and
3. specific charges levied by the municipality on the users of specific services, such as
waste management, water services and electricity supply.
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Specific Charges for the use of a particular service
Some charges, such as those for water and electricity, are intended to recover the costs of
providing these services to individual users. They are usually collected and used directly
by the service provider to finance its operations. The agency normally has a degree of
financial and operational autonomy, and it can be held accountable for service costs and
quality. These funds are thus earmarked to a particular use and do not form part of
consolidated revenue. This concept of ‘ring fencing’ user charges is a crucial element in
improving autonomy and accountability.
In some cases a charge for solid waste services is identified separately on a property tax
or communal services bill, thereby giving users the ability to gauge the quality, value for
money and efficiency of the service. An example is the bill for communal services found
in many of the countries of the former Soviet Union. This itemises separately charges for
the various services provided, including rental payments, water and sewerage charges,
electricity charges, district heating charges, waste management fees, etc.
Generating Additional Funds to meet Recurrent Expenditures
Opportunities for funding the recurrent costs of improved or expanded MSWM services
can include the following:
a) expanding the use of current sources;
b) releasing funds from current sources by operating existing services more efficiently;
c) maximising the revenue available from existing taxes or charges; and
d) introducing new direct or indirect user charges.
Options (a) to (c) are considered below. Users charges are considered in greater detail in
the following section.
Expanding the use of current sources
Opportunities for increasing allocations from existing sources are normally limited in the
face of tight competition. One reason for poor service quality is often a lack of available
funds from traditional municipal sources.
Releasing Funds from Current Sources
Improvements to the operational and financial management of MSWM services can lead
to significant savings in the costs of providing the existing level of service. Such
efficiency improvements can thereby ‘release’ funds to be used for improving the system
(it being assumed that such funds are not automatically diverted to uses quite unrelated
to MSWM). This is illustrated in the following example (Box 4D.2).
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Box 4D.2 Releasing funds from Current Sources
In many metropolitan areas collection services are reasonably good while
disposal services are poor. Where this is so a main objective is often to
provide better disposal services. Experience suggests that the balance of costs
between sound collection and sound disposal systems is roughly 75% for
collection and 25% for disposal.
It follows that, if a municipality is moving from a position of having a sound
collection service but no disposal service, to one of having a sound collection
and disposal service its total costs might be expected to increase by about
33%.
But note that the additional revenue required for disposal could also be
‘released’ by efficiency improvements leading to a 33% fall in unit collection
costs. Hence the focus on the potential to ‘do more for your money’.
In practice, of course, it is not this simple, but the principle remains, and
scope for improving the efficiency of existing services is important when
considering the introduction of new or improved services.
Maximising revenues available from existing taxes and charges
In addition to releasing funds by operating existing services more efficiently, another
possible source of funds is through the increased mobilisation of resources available
from existing charges or taxes. A review of existing charges (or taxes) will often reveal
that:
• charge rates have not been reviewed recently or are not indexed for inflation;
• the charge base is incomplete and can be expanded;
• charge demands are not sent; and
• the charge collection ratio is low.
Analysis frequently reveals that large amounts of potential revenue remain
uncollected owing to inefficient management and enforcement systems, and an
absence of accountability for revenue collection.
4D.5.5 Cost Recovery Policy and User Charges
Cost Recovery Policy
A cost recovery policy is normally needed to finance the additional costs associated with
improved services. The level of the cost increases can often appear high because
traditional municipal accounting systems fail to reveal the full costs of existing services,
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and because existing services tend to be under-funded, leading to their gradual
deterioration.
Municipal authorities need to be made aware of the full costs involved in the provision
of comprehensive, healthy and environmentally sound MSWM services. Often, the
apparent cost of these services in the past has been low because service delivery has been
incomplete (eg, restricted collection service), unsustainable (eg, dumping), or not
properly costed or accounted for. Improving the quality of services is a key step in the
development process. Once the broad level of costs has been accepted it is necessary to
establish how these are to be funded.
The traditional approach is for these costs to be funded out of consolidated revenue. This
commonly leads to under-funding of direct operating expenditures, and fails to generate
additional resources by which to fund long-term liabilities, plant replacement or service
improvement.
The extent to which these sources are used for funding the recurrent costs of the
improved strategy depends on their availability, and on the financial objectives and cost
recovery policy of the municipality and the MSWM agency.
A cost recovery policy needs to establish two things:
• the total amount of recurrent funds needed year on year; and
• how these are to be provided.
The minimum amount of recurrent funds required each year is the amount needed to
finance the direct operating expenditures and debt service obligations incurred in
providing the service, i.e. sufficient to cover annual operating cash outflows.
If, on the other hand, a financial objective is for the agency to become self-sustaining
over time, then the annual recurrent funding requirement should also be sufficient to
recover capital expenditures, long-term liabilities and possibly to provide a return on
investment.
Possible options for cost recovery objectives – typically a responsibility of the municipal
government – are shown diagrammatically in Figure 4D.3.
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Figure 4D.3 Possible options for cost recovery objectives
1. No or very few costs are recovered and revenue is less than direct operating
expenditures.
2. Direct operation and maintenance costs are recovered.
3. Direct operation and maintenance costs plus loan interest payments are recovered.
4. Direct operation and maintenance costs plus debt service requirements (loan
repayment and interest payments) are recovered.
5. Direct operation and maintenance costs plus interest, depreciation and provisions for
long-term liabilities are recovered.
6. Direct operation and maintenance costs plus amortisation (capital plus a return on
investment) and provisions for long-term liabilities are recovered. Equivalent to
long-run marginal cost or full cost recovery3.
7. Long-run marginal cost plus (marginal) environmental cost (possibly reflected in a
landfill tax) – full cost recovery plus.
Cost recovery policy is typically a responsibility of the municipal authorities. It is
necessary to establish:
1. the level of cost recovery to be achieved;
2. whether the required level of cost recovery can progressively be achieved over time;
and
3. whether there is scope for charges to be levied differentially on different sectors of
the population (eg, cross-subsidies to protect those less able to pay).
In establishing its cost recovery policy the municipal authorities will need to consult
closely with the service provider to establish clearly what the full costs of service are. A
key element of the strategic planning process is to shed light on this important aspect.
3 A good indication of the revenue needed per tonne of waste generated to achieve full cost recovery (including a return on investment) is
given by calculating the average incremental cost (AIC) of the service, a concept explained in Parts II and III of this chapter.
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It is rarely politically or socially acceptable to move directly from full service funding
from general municipal resources to a policy of recovering long run marginal costs from
users. Although the objective may be to achieve full cost recovery over time, user
charges for households will normally need to be raised progressively as the service
provider moves towards greater political and financial autonomy. The recovery from
users of operating and maintenance costs, debt service obligations and provisions for
long-term liabilities (level 4 on Figure 4D.3) over a specified period could be an initial
cost recovery target to aim for during transition. This might later be modified to recover
all capital costs via the depreciation or amortisation provisions (levels five and six).
A progressive approach to cost recovery from domestic users means that part of the
recurrent funding requirement must continue to be provided from general municipal
resources during the transitional period. Thus, user charges must be set at a reasonable
level at the outset (subject to the affordability constraints discussed below) with the
balance of recurrent funds coming from general municipal sources. 4
The process of establishing an appropriate tariff structure and tariff levels should be
undertaken in parallel with studies being undertaken into affordability and the
willingness to pay.
Options for introducing new user charges are considered below. The actual level of such
charges will reflect the nature of the operations and the level of cost recovery being
sought.
Cost recovery policies and targets must be realistic and capable of
implementation politically, institutionally and socially.
User Charges
In many cities throughout the world, charges are levied specifically to recover (at least in
part) the costs of MSWM services. There are a number of ways this can be done, the
suitability of which will depend on the particular social, cultural, economic and political
characteristics of the country concerned.
Charges are a preferred means of raising new revenue because they can be presented
and justified to the public on the grounds that they are required for and will be used in
the provision of an important public service. Properly applied, they commit the
municipal authorities to accountability and transparency with respect to the costs and
financing of the services provided.
4Note that under this arrangement total funds available are likely to be sufficient to cover only some of the necessary costs - direct operating
expenses, maintenance, debt service charges and some provision for long term liabilities . The financial viability of the service in the longer
term will depend on sufficient funds being available to cover asset replacement and long-term liabilities, and possible service expansion. If
the waste management agency is to become financially autonomous then users must eventually provide the full costs of the service (at
points 5, 6 and 7 of the cost recovery diagram).
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They can, nevertheless, also meet with public resistance on grounds such as the
following:
• if service quality is currently poor, citizens may be reluctant to pay additional charges
before they experience real improvements in service quality;
• that public services should be provided ‘free of charge’;
• that the services are already being paid for out of general taxes, such as a property
tax; and
• that people do not want the proposed services and are unwilling to pay from them.
Charges can be either direct or indirect.
Direct charges are levied directly on the service user and reflect the level of use. For
example, a direct charge to an industrial customer may be based upon the amount and
characteristics of waste collected; a direct charge to a domestic customer may be based
upon the number of bins collected and the frequency of the service. They tend to reflect
the actual level of demand for the service.
Indirect charges are not directly related to the level of demand for the service. They can
take a number of forms. One approach is for different classes of users (such as people
living in apartment blocks) to pay a charge that reflects the average cost of the service
provided to them. The communal charge system used in many of the former Soviet
Union countries is an example of this, where a fixed waste management charge per
person per month is levied. Another approach is to set charges relative to the demand
for another service, such as water and electricity supply, which thereby acts as a proxy
measure of demand for the waste management service itself. Alternatively, a waste
charge is sometimes added as a separate item on to a property tax bill (which is the
approach used in, for example, the United Kingdom).
Payment of an average charge means that all users pay the same amount (although in
Russia this is subject to minimum income constraints). On the other hand, charges linked
directly to the demand for another service or to a property tax imply that people pay
more according to their consumption of those services or to the value of their property.
This introduces a progressive element into the payment system, although it does not
always follow that those who consume more of a service (such as water) necessarily
have incomes higher that are higher than the average. For example, large families can be
expected both to consume more water and to have relatively lower per capita incomes
than the average. Note also that the billing system used by water or electricity utilities
can sometimes be used as a vehicle for the collection of a fixed waste management
charge from users.
The advantages and disadvantages of direct and indirect user charges are set out in Box
4D.3.
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There is no preferred charging method - the one chosen will depend upon the
practical realities of the existing cultural, legal, political and economic
framework. The amount of revenue to be generated from user charges will
depend upon the financial policy framework, the costs of service and the
availability of funds from traditional municipal sources. Indirect charges tend
to be most applicable to domestic users and direct charges to industrial users.
Note that there may be cases where significant differences exist in the nature of the
service being provided to domestic users in different parts of a municipality (such as in
the frequency of service, in the type of service - communal collection points or individual
bins, or in the quantity of service - number of bins per household). In these cases, a
differentiated indirect charge system can be introduced. This need not be complex, but it
does depend upon good information being available to the municipal provider about the
characteristics of different collection rounds and individual users.
Box 4D.3 Direct and Indirect Charging Mechanisms
Direct charges
Direct charges relate to the level of demand for a service, and involve
service users being charged directly for their use of the service.
Advantages The principal advantage of direct charges is that they relate directly to the
level of demand placed on the service, and therefore conform to the ‘userpays’
and ‘polluter-pays’ principles.
Commercial and industrial users offer significant scope for the application
of direct charging systems. This is because:
• the extent and nature of waste generation patterns can differ
considerably between users;
• individual waste quantities can be large; and
• the number of users is relatively small.
These conditions can make it worthwhile to introduce separate direct user
charge arrangements.
The extent to which user charges can be introduced can depend on the
provisions of relevant legislation, such as local government, public health or
environment acts.
Disadvantages Disadvantages of direct charging systems are:
• the difficulty in using withdrawal of service as a sanction to enforce
payment;
• the cost and complexity of establishing and maintaining separate userregisters;
• the limited scope for introducing a progressive element into the charge
system (eg, cross-subsidies between rich and poor users);
• the difficulty in measuring different levels of demand between domestic
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users.
Although direct charges are levied on domestic users for MSWM services in
some parts of the world (most notably in the United States), examples of
this are rare. Some developed countries are experimenting with direct,
voluntary charges for domestic waste, where there amount charged
depends on the volume or weight of waste collected. Examples use prepaid
‘tagged’ bags, or on-vehicle container weighing systems with bar-coded
containers.
Residents in environmentally developing countries are sometimes willing to
pay direct charge for individual services - such as primary collection -
although these are usually organised privately through community
organisations.
It follows that direct charges tend to be used more for commercial and
industrial users than for domestic users.
For example, businesses may be charged directly for the removal and
disposal of waste from their premises. There is a direct relationship between
the level of charge and the level of service provided. The mechanism is
based on the principle that users should pay the full costs of the services
that they use.
Indirect
Charges
Indirect Charges. Under this mechanism charges for MSWM services are
not based on the level of demand for the service. Three approaches are
typically used: (1) for users to be charged the average cost of service, (2) for
charges to be linked to the demand for another service, or (3) for charges to
be linked to some kind of local government property tax.
Approaches 1
& 2
The communal charge system used in many of the former Soviet Union
countries is an example of users being charged the average cost of the waste
service. A waste management charge is identified on a monthly communal
services bill along with items such as rent, water supply, electricity, etc.
An alternative approach is for waste management charges to be identified
on the bill issued by the providers of another service (such as electricity or
water supply). Here, the utility bill can be used either as a vehicle for
imposing a fixed charge (per person or household) or for setting a charge
relative to the consumption of the other service. Although identified
separately as a MSWM charge, customers pay only one bill.
Advantages The principle advantages of indirect user charges are:
• administrative simplicity;
• low collection costs;
• convenience for customers;
• high potential collection ratios;
• the availability of sanctions for non-payment;
• revenue reliability and predictability;
• the scope for a direct transfer of funds from the collecting agency to the
MSWM provider (effectively ‘ring-fencing’ the revenue for its specific
use); and
• scope to index the charge for inflation.
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Disadvantages The principle disadvantages of indirect user charges are:
• related only indirectly to the level of demand for the service being
provided;
• depend on the linkages assumed between the demand for one service
(eg, water) and the demand for the MSWM service;
• is not strictly in accordance with the user-pays principle;
• dependence on another agency to collect and administer the charge
Indirect charging mechanisms tend to be used mostly for domestic MSWM
users, between which the characteristics of demand are broadly similar,
rather than for commercial and industrial users, where the characteristics
are quite different.
Note, however, that differences in the type of service provided can be
reflected in the charge mechanism.
Note also that the ‘progressive’ element introduced through charging users
on the basis of their level of consumption of another service depends on the
assumption that those consuming more of one service are better able to
afford to pay more for another. This is not always so; for example, a large
poor family is liable to consume more water or electricity than a small rich
family.
Approach 3 Another approach is to use an existing mechanism - such as a local
government property tax - as a vehicle for levying an indirect charge. The
advantages of this are similar to those outlined above, but there are
additional disadvantages.
Disadvantages Further disadvantages of this approach are:
• may be seen as another tax, and not linked to the costs of MSWM
services;
• new or amended legislation may be required;
• the flexibility needed to administer the charge over time may be difficult
to write into enabling legislation (eg, to index it for inflation);
• the charge may be prone to political manipulation;
• payment may be difficult to enforce and collection ratios may be low.
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One approach might be for all users to pay a standard charge for a basic minimum
level of service (possibly based on communal collection points) and for a surcharge to
be paid by those choosing to receive a higher-level service (possibly a door-to-door
collection service).
Simple yet innovative charging arrangements can be introduced which reflect the
individual peculiarities of a municipality, which are fair and protect the poor, but
which also seek to ensure that those capable of paying for their services do so.
Some householders may contract independently with private waste management firms
for the removal of their garbage, often as a result of limited, poor or non-existent
municipal services. This leads to ‘cherry picking’ - where private firms provide services
in the more affluent areas to those willing and able to pay - and should be seen as an
adjunct, rather than as an alternative, to municipally provided services (which may
themselves be contracted out directly to the private sector).
Finally, there is an additional economic reason why the government or municipality
should consider implementing or regulating carefully designed user charges. This relates
to the way charges can influence people’s behaviour in making waste management
decisions that benefit society as a whole rather than just themselves. This is illustrated in
the quotation below.
“In developing countries the least costly options for disposal of waste - dumping it in
public spaces or burning it openly – are often the most popular. Although inexpensive in
terms of out-of-pocket costs to those that dump or burn waste, these acts may impose
large costs on society. Aesthetic, environmental and health problems may result.
Households and firms left to their own devices may reap benefits from avoiding paying
for investments in environmentally sound waste disposal, but they leave a legacy of far
greater damage to future generations.
Common property resources and intergenerational externalities provide incentives for
households and firms to under consume MSWM services. Because the benefits of some
MSWM services to private consumers fall short of the benefits to society, optimal
government interventions are those that align the private and social incentive for MSWM
services as closely as possible. A number of policy instruments exist to do so.”
Source: D Beede and D Bloom The Economics of Municipal Solid Waste, World Bank Research Observer Vol 10, No. 2
1995 pp113-50.
4D.5.6 Taking a demand responsive approach
Introduction
This section looks at issues of affordability and willingness-to-pay, and how (and why)
they might be addressed during the design of a MSWM strategy.
Most attempts to improve MSWM services have historically focused on technical supply–
side issues – how to improve different means of collection and disposal, through better
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equipment provision, for example. In fact, between 1974 and 1988, 66 out of 71 World
Bank loans in the MSWM sector followed this supply-side approach, being primarily for
the procurement of waste collection vehicles (Bartone and Olivera 1990). Recently,
however, more attention has been paid to improving institutional arrangements for
service delivery, and also on investigating the demand-side aspects of MSWM.
Indeed, the use of demand led approaches (based on the concepts of affordability and
willingness to pay), to help identify the appropriate level and type of municipal services
(such as water, sanitation and waste) is now endorsed by a number of international
organisations and governments. They are seen as useful and valid ways of estimating
the demand for urban services and the economic value of the environmental changes
that they can bring. Furthermore, because the information obtained from such exercises
can be used to design and provide the types of services that people want, they thereby
also improve cost recovery.
This section discusses the issues of affordability and willingness-to-pay for MSWM
services and how to measure them. The accompanying Annex 4D.3 provides an example
questionnaire and the results from a willingness-to-pay survey.
Affordability
The issue of affordability is crucial to the design of a MSWM strategy. Unless strategies
are designed which are affordable they become, at best, academic or, at worst, weights
that burden the municipality with operating and debt charges that cannot be funded.
Two aspects of affordability need to be addressed. The first is whether or not a proposed
strategic plan is generally affordable to the society in which it is being proposed. The
second is whether user charges proposed to finance the strategy are affordable (or even
appropriate) to all members of society.
First, is the strategy affordable to society? This question relates to the costs of the
proposed service relative to national income. MSWM strategies that are appropriate and
affordable to a high-income country may be inappropriate and unaffordable to a
developing or transition country.
The costs per tonne of waste for the various components of a proposed solid waste
management system can be estimated reasonably accurately (see Parts II and III).j A
useful summary of cost ranges is for MSWM is presented in Annex 4D.1. Once unit costs
have been calculated they can:
• be compared with indicative costs considered appropriate for providing such services
in countries having similar income levels; and
• enable a judgement to be made on whether the estimated costs are affordable or
whether the strategy (or components of it) needs to be rethought.
Typical unit costs for an appropriate collection service in a middle-income country
would be expected to range from US$30 to US$70 per tonne of waste collected. Similar
costs for a low-income country would range from US$15 to US$30 per tonne. (Note that
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these costs reflect what countries need to spend if an appropriate level of services is to be
provided, and not necessarily what they are spending). 5
Since unit cost data can readily be split between capital and operating costs(using the
average incremental cost method described in Part II of this step), more detailed
assessments can be made about the affordability and appropriateness of different
components of a proposed system.
Second, is the strategy affordable to individual users? This question relates to whether
user-charges proposed under the strategy will be affordable to poorer members of
society.
Payment structures can be designed to reflect different levels of affordability. The
question of affordability is likely to be acute if, for example, a full cost recovery policy is
proposed to be introduced and payable equally by all users from the outset. An
affordability analysis is intended to show the effects of such a policy, and particularly its
impact upon the poor.
Such analysis can lead to the development of more progressive charging structures..
One option might be to introduce and then raise charges progressively over time to full
cost recovery levels (see earlier discussion, Figure 4D.3). Another might be to explicitly
design the structure of charges such that the more wealthy users subsidise the poor.
Further, user charges suitable for the more affluent areas of a city may be inappropriate
in poorer parts. Under these circumstances, differential charging systems (and possibly
different levels of service) may need to be designed.
However, there is a strong argument to suggest that everyone should pay at least
something for MSWM services. That is, the beneficiary pays principle should be adopted,
whereby those benefiting directly or indirectly from a service (ie, those having a stake in
its outcome) should also contribute to its costs. The government’s role is then to use its
regulatory powers to ensure that such a system is implemented equitably and to
minimise the problem of ‘free riding’ by those who aim to avoid payment.
5 Source: S Cointreau-Levine (1994). Private Sector Participation in Municipal Solid Waste Services in Developing Countries. Volume 1 -
The Formal Sector. UMP Technical Paper, No. 13. The World Bank, Washington. ISBN 0-8213-2825-5.
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Assessing Affordability
Affordability studies depend on the availability of information on household income
and expenditure. This is frequently available from national household surveys
undertaken periodically by the statistics agency. Statistics specific to large metropolitan
areas can usually be obtained but, if not, then national-level information must be used
and adjustments made. When using these surveys care must be taken to ensure that the
year to which the data relate is known and that adjustments to the present are made
appropriately. Advice from the statistics agency should be sought when making such
adjustments.
Other relevant information is sometimes available from government agencies, such as a
department of economic development, from international agencies operating in the
country, such as the World Bank, or from NGOs.
Average income statistics provide an indication of the overall affordability of a strategy
to society, but their use can give a distorted picture in a country with a high level of
income variability. Income statistics are particularly useful if they are available for
different income groups (population quartiles or quintiles) from which the broad
characteristics of income distribution can be inferred.
These characteristics can include:
• average per capita disposable income for society as a whole;
• average per capita disposable income of the poorest group;
• the income differential between the richest and the poorest in society;
• the relative shares of the richest and the poorest groups in total disposable income;
and
• changes in the distribution of disposable income between survey periods, providing
an indication of whether income distribution is becoming more equitable or more
skewed;
Data on household income can therefore allow the affordability of proposed charges to
different income groups to be assessed. The proportion of household income represented
by a proposed charge is calculated to assess affordability for each income group. This is
then compared with indicators of the proportion of household expenditure that might
typically be allocated to waste management services in a country having a similar per
capita income.
For example, World Bank6estimates of the percentage of household expenditure which
would need to be allocated to waste management services in a middle-income country
range from 0.75 to 1.7% of average income. This can be used as a benchmark to assess the
6 S Cointreau-Levine (1994). Private Sector Participation in Municipal Solid Waste Services in Developing Countries. Volume 1 - The
Formal Sector. UMP Technical Paper, No. 13. The World Bank, Washington. ISBN 0-8213-2825-5.
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affordability of a strategy to society in general, and its affordability to specific income
groups in particular.
In the event that household income survey data are not available, or are so old that their
use is questionable, then an alternative approach to establishing affordability can be to
construct a community profile from customer data available from water and electricity
companies. This can provide information on the size of the average bills paid by
households, the variability within these, the coverage of the community, the extent of
bad debts, and so on.
Annex 4D.3 includes an example of an affordability analysis conducted as part of the
wider economic and financial appraisal for a MSWM project in the Black Sea Region of
Turkey which illustrates some of the issues described above.7
Willingness-to-pay
Willingness-to-pay surveys assess what hypothetical MSWM service options different
customers would be willing to pay for and, as a result, can show how much they value
different services. Experience has shown that WTP surveys can provide a range of
valuable economic information about the customer base and its preferences for MSWM
options.
In particular, WTP studies can help:
• estimate people’s willingness to pay for a specific MSWM system, based on the planned
improvements. The results can be fundamental in informing future pricing decisions;
• ascertain consumer satisfaction with the current type and level of MSWM services provided.
This information can help devise a number of service enhancing and remedial
measures;
• identify gaps in public knowledge about a number of MSWM issues that may hinder the
implementation of programmes that would ultimately be in the public interest;
• collect useful information for the design of future MSWM programmes on current practices,
priorities over different services and attributes and levels of those services; and
• minimise the mismatch between what is supplied and what the public wants by increasing
the knowledge about the level of MSWM service that the public wants and is willing
to pay for.8
7 ERM and TÇT (1997). Solid Waste Management Planning and Feasibility Study for Trabzon and Rize Provinces. For GEF, the World Bank and the
Turkish Ministry of Environment.
8 From D Moran, S Mourato, C Y Tan and B Day, Paying for Municipal Solid Waste in Malaysia. A study undertaken for DANCED and the Economic
Planning Unit, Prime Ministers Department, Government of Malaysia, commissioned by CarlBro International and undertaken with assistance from
CSERGE UCL. 1998
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Furthermore, WTP studies can help break down some commonly held views among the
MSWM strategy developers themselves. For example, it is often the belief of planning
officials that households consider the provision of MSWM services to be an obligation of
the government and resent paying for them, and that households consider MSWM
services less important than other municipal services, especially electricity or water and
sanitation services.
A WTP survey for MSWM options in Gujranwala, Pakistan, showed that MSWM was not a lower
priority for residents, and that there were specific areas of the city where it was the highest
environmental priority. It also showed that just 20% of households considered free provision of
MSWM services to be the responsibility of government. The same study showed that the demand for
specific components of the MSWM services (street cleaning, bin emptying and household pickup)
changed by neighbourhood. This information was used to enable the municipality to develop a
MSWM strategy that reallocated funds between areas to increase overall consumer welfare.
Source: M A Altaf and J R Deshazo. Household Demand for Improved Solid Waste Management: A Case Study of Gujranwala, Pakistan.
World Development, Vol 24 No. 5 pp 857-868, 1996.
Assessing willingness-to-pay
Relatively complicated and specialist economic assistance is required to carry out a
robust and useful WTP study. Annex 4D.3 provides an example and executive summary
of an extensive WTP survey carried out in Kuala Lumpur. Some references are also
supplied which can provide information about how best to design and analyse
contingent valuation surveys, one of the more frequently used types of WTP study.
Furthermore, surveys seeking responses from people living in peri-urban areas to single
issues such as willingness-to-pay for waste services can often meet with little success.
Where it is intended to carry out such a survey the advice of NGOs and CBOs working
in the field should be sought on whether such a survey is appropriate and, if so, how it
might best be structured.
Willingness-to-pay (WTP) surveys are valuable for gaining an understanding
of people’s attitudes towards solid waste management, particularly in the
formal areas, but careful attention must be given to the form of the questions
being asked and the findings must be used with caution.
WTP findings should be given due weight in the strategy formulation process,
as they commonly reflect what it is that people want and are prepared to pay
for, rather than what central planners think they want, but for which they may
not be prepared to pay. For example, people may be prepared to pay for
communal point-to-point collection services (which they want) but not for
door-to-door services (which they don’t want).
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4D.6 PART II: ECONOMIC EVALUATION
4D.6.1 Introduction
This section looks at the economic evaluation methods used for selecting between
MSWM options and strategies. Part III looks at the financial evaluation methods used
once a particular strategy has been chosen.
4D.6.2 The difference between economic and financial evaluation
Economic evaluation is quite separate from financial evaluation. Since there is often
confusion between the two, the differences between the two procedures are explained
below.
Economic evaluation is the principal means for determining whether a proposed
investment is justifiable for society and for selecting between alternatives. The economic
evaluation process asks:
• what is the best way to invest the limited resources available in order to provide
maximum benefit to society; or
• what is the least cost way of investing to reach a given social policy target?
Financial evaluation, on the other hand, is concerned with establishing the sources and
adequacy of funds necessary to meet the financial commitments incurred during the
implementation and operating stages of the particular investment in question. It aims to
ensure that the investment is financially sustainable, both in the short term via capital
financing and in the longer term via the ability to meet the recurrent costs required.
More detailed information on the differences between economic and financial evaluation
is contained in Box 4D.4.
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Box 4D.4 A Summary of Economic and Financial Evaluations
Economic Evaluation:
• takes account of the full costs and benefits of each option to the
national economy;
• is concerned with the overall benefit to the municipality involved;
• is used to compare alternative technologies or strategies;
• is the principal tool for determining whether or not a proposed
investment should be undertaken;
• is concerned with benefit and cost differences between the existing
situation (‘without project case’) and the situation after the new
project has been implemented (‘with project case’);
• is not concerned with financing charges, such as debt-service
requirements or depreciation provisions;
• is not concerned with the sources of funds through which the
investment or recurrent costs are to be financed; and
• should be conducted in constant prices and use shadow prices as
appropriate;
Financial Evaluation:
• is used to establish the sources and adequacy of funds needed to
meet the financial commitments incurred in implementing and
operating the preferred MSWM strategic plan;
• is usually carried out for the preferred MSWM strategic plan only
after this has been established through the economic evaluation
process;
• uses financial prices;
• is used to assess the implications of alternative investment
financing and cost recovery arrangements;
• takes account of the sources and applications of all funds, including
debt service requirements;
• takes account of the financial implications of any proposals for
private sector involvement; and
• is undertaken using current prices (that is, future prices arrived at
after taking account of the projected effects of general inflation).
4D.6.3 Cost effectiveness and cost benefit analysis
MSWM projects are often evaluated using some form of cost-effectiveness analysis (CEA).
This means that a policy or waste strategy target is set (for example, supply x% of
households with waste services by a certain date, or process y tonnes of solid waste per year
within five years), and the economic cost of meeting this objective is sought. Cost
comparisons between different options are subsequently undertaken and a project is
selected. A comprehensive approach towards undertaking a CEA as part of the economic
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evaluation of a MSWM project is presented in Section 4D.6.4 of the text.
Although CEA is a practical and commonly used method for MSWM economic
evaluations, it does suffer from a weakness. Under CEA only an indirect evaluation of
project benefits is made, if at all (Hanley and Spash 1993). This is a particular problem for
MSWM projects, as non-market or environmental and heath benefits can often be left out
of the economic evaluation process. Furthermore, using CEA for MSWM economic
appraisal means that attempts to identify which particular set of MSWM service options, or
combination of options, would create most economic benefit for different sets of customers
are rare. As a result, the least cost option to achieve the MSWM strategy targets may
deliver much lower environmental and health benefits than, say, an option which is only
slightly more costly.
Maximising welfare for society, therefore, requires the option with the highest net benefit
rather than least cost to be selected. Cost-benefit analysis (CBA), though used less
frequently in MSWM project evaluation, seeks to compare the benefits of a project or
strategy with its costs.9 The aim of CBA is to find the project that maximises benefits and
minimises costs, thereby selecting the project that society would most prefer. Ideally,
estimates of the monetary value of benefits are compared with costs. In practice, however,
many environmental and health benefits are difficult to quantify in money terms, but they
should still be taken into account where possible by using physical units of measurement
instead.
As the box below indicates, CBA should be the preferred approach to economic evaluation,
as MSWM projects can have many non-market costs and benefits, which should be
considered as far as possible.
The non-market costs and benefits of MSWM projects
“Decision-makers must take account of environmental and public health issues. For
example, disposing of hazardous waste in hazardous waste landfills or incinerators
instead of ordinary landfills, although more costly in the short term, is highly costbeneficial
in the long term, when issues of public health and/or subsequent landfill
cleanup are taken into account.”
Source: D Beede and D Bloom The Economics of Municipal Solid Waste, World Bank Research Observer Vol 10, No. 2 1995 pp113-
50.
9 A benefit can be defined as anything that increases human well-being and a cost as anything that decreases human well-being. Human
well being is determined by what people prefer.
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A joint approach
However, while CBA may have the identification of a money value of all of the project’s
costs and benefits as its general aim, and is hence the preferable economic evaluation
approach to take, it may not be a practical analysis to embark upon. It is likely that some
benefits and costs can not be given monetary values. This is usually because of data
problems or ‘correspondence’ problems (when, for example, the data from an EIA are
not capable of being interpreted clearly into monetary valuation terms).
In these cases, which can be common within MSWM economic evaluations, a useful
approach is to take the monetarisation within a CBA as far as is credible and to leave the
remaining benefit impacts in non-monetary terms. As it is usually the ‘intangible’
benefits rather than the more tangible costs of the project which prove difficulty to
quantify in monetary terms, the end result of the economic evaluation process will be a
CEA with the potential benefits of the strategy listed alongside, but perhaps not all
monetarised.10
To help this process, a number of economic researchers have developed practical ways
for listing benefits in physical units alongside costs within a CBA framework. These
suggestions can be useful to refer to, if difficulties in valuing benefits arise within the
CBA process.11 Another approach that has been used to deal with the same problem of
benefits valuation within MSWM evaluations, is called multi-criteria analysis. Annex
4D.4 to this section provides some details on this alternative evaluation procedure.
The key steps when undertaking an economic evaluation of MSWM alternative
strategies are outlined in Figure 4D.4 below. It is useful to note how the economic
evaluation process might develop if some of the benefits of the project prove difficult to
quantify.
Whichever approach is chosen, however, it is important that the range of projects
evaluated are always compared in the same way. So, if a CEA approach is decided upon,
all of the project alternatives must be analysed in this way to allow a fair comparison
between them. If, however, it is felt that non-market impacts can be quantified in
monetary terms and a CBA is used, then again this must be used for all of the projects
evaluated.
10 In the case of a “do-nothing” economic evaluation, of course, the costs of doing nothing (continued and worsening environmental health
conditions) will be listed as the intangibles, next to the cost savings benefits of not investing in the project.
11 See especially Samual Fankhauser “The Costs of Adapting to Climate Change”, GEF Working Paper No. 13, 1997 ISBN 1-884122-14-0
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Figure 4D.4 Key steps when undertaking an economic evaluation of MSWM alternative
strategies
Cost Benefit Analysis Cost Effectiveness Analysis
Step 1
Identify a range of projects consistent with
meeting overall strategic objectives.
Step 2
Establish the evaluation period
Step 3
Decide on the appropriate discount rate to
use
Step 4
Establish the physical characteristics of the
projects - the resources they require and,
from the EIA, the environmental and health
impacts they might have
Step 5
Establish costs (capital and
operating) for alternative
strategies over the
evaluation period and
undertake monetary
valuations of their key
benefits
if a monetary valuation of
project benefits proves
difficult, evaluate the
project’s costs in economic
terms, and their benefits in
physical units
Step 5 (CEA)
Establish costs (capital and
operating) for alternative
strategies over the evaluation
period and consistent with
estimated resource
requirements
Step 6
Make necessary adjustments to
allow for differences between
financial and economic prices
create a list of the project impacts in
each case that could not be
quantified in money terms and compare
them as part of the ranking procedure
Step 7
Undertake NPV and IRR
analysis
Step 7
Undertake DCF, PV and AIC
analysis
Step 8
Identify the key risks. Carry
out a sensitivity analysis to
estimate their potential
impact on economic
feasibility
Step 9
Rank alternative strategies and make
recommendations on the preferred strategy
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4D.6.4 The Key Steps in Undertaking a Cost Benefit or Cost Effectiveness Analysis
The key steps involved in undertaking an economic evaluation of alternative projects or
strategies using cost benefit analysis (CBA) or cost-effectiveness analysis (CEA) are
discussed in more detail in this section. The term project and strategy are used
interchangeably.
Step 1. Identifying a range of projects consistent with meeting overall strategic objectives
The first step is to ensure that the strategic objectives are clearly defined and that the
ways of meeting those objectives through a selection of potential projects have been
identified.
These technical proposals can then be elaborated in a way that allows all information
required for the economic and financial evaluations to be obtained progressively and
consistently throughout the development process. It also allows for early feedback on
the financial viability of alternative strategies.
A MSWM project or strategic plan involves many interrelated elements, including:
• primary collection;
• secondary collection;
• transfer;
• haulage to landfill; and
• and landfill disposal.
It may also involve the management of growing volumes of waste over time, and
primary and secondary waste collection activities being undertaken at district level.
As a result, the strategic plan may call for more than one transfer station and more than
one landfill site. It might also include:
• waste separation facilities;
• recycling and composting facilities;
• workshop and vehicle maintenance facilities;
• administration buildings; and possibly
• waste treatment technologies.
A MSWM project for a large metropolitan city can therefore involve many interrelated
activities that must be carefully defined and understood before the economic evaluation
can proceed. It is at this point that the total resource requirements of each alternative
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strategy and their costs begin to be methodically assembled. Identification of resource
requirements can be assisted by the use of two tools:
• a schematic diagram to show clearly the component parts of each alternative strategy
and the linkages or flows between them; and
• a table setting out the resource requirements and environmental and health impacts
of each alternative strategy over the planning period.
Step 2 Establishing the Evaluation Period
The evaluation period or project lifetime is normally taken to be the sum of the operating
life of the longest lived major asset created by the strategy plus the implementation
period (although these can sometimes overlap). This establishes the time frame for the
discounting of costs and benefits.
For example, the evaluation period of a MSWM Strategic Plan option involving the
construction over two years of a large transfer station having an expected useful life of
20 years would be 22 years. For a disposal site, the evaluation period should also include
the period required for its safe close-down once full.
Step 3 Decide on the appropriate discount rate to use.
Alternative strategies are compared on the basis of their different cost and benefit
streams projected over time. Because different projects have different cost and benefit
profiles (involving different cash outlays on capital and operating expenditures and
different benefits occurring at different times) it is necessary to find a tool by which these
variable cash flow streams can be compared.
This is done using discounting, a technique which translates all of the future cost and
benefits into their present values. Essentially, discounting reflects peoples (or society’s)
time preferences, or opportunity costs of capital. Most people would prefer to have
benefits occur today rather than tomorrow. Similarly, most people would prefer to deal
with costs tomorrow rather than today. As a result, the present value of benefits and
costs which occur today are larger than those which occur tomorrow. The rate at which
future costs and benefits, measured in monetary terms, become smaller (are discounted)
is called the discount rate.
Cost benefit analysis involves discounting both the cost and benefit streams of a project
to calculate a net present value (NPV). Alternatively, another technique is to identify the
internal rate of return (IRR). This is the discount rate at which the NPV equals zero.
Cost-effectiveness analysis involves discounting costs only to calculate the present value
(PV). Projects can then be compared unambiguously using the same discount rate and
the sensitivity of changes to the rate gauged.
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No one knows exactly what the opportunity cost of capital is, although its size can be
critical to the outcome of an economic evaluation. The World Bank recommends that a
figure in the range 8% to 15% in real terms should be used for developing countries,
although advice from the relevant national economic development agency or
international financing institution should be sought.
Discounting, NPV’s IRR’s and PV’s can be easily calculated using spreadsheet software
on a computer. For more information on discounted cash flow (DCF) analysis see Annex
4D.6.
Step 4. Establish the physical characteristics of the projects - the resources they may use and the
impacts they may have
All the impacts resulting from each project’s implementation need to be identified. This
includes estimating and listing all capital and human resources used in each of their
construction processes, their different effects on employment, impacts on traffic, land
and property prices and on the quality of the environment and public health, etc.
Two important issues here are the concepts of additionality and displacement.
Additionally relates to the net impacts of the project - what extra benefit is the project
going to bring? For example, if the health benefits of a MSWM strategy are being
estimated, these benefits should be measured net of any benefits that would occur
without the project (for example, from a health education campaign). Displacement
relates to ‘crowding out’ – for example, will the new MSWM plant displace existing
informal sector activities? If so, the costs of this displacement on people’s livelihoods
also need to be included, so that the municipality is able to weigh up all the costs and
benefits of the project to society.
Step 5: Establish costs (capital and operating) for alternative strategies over the evaluation period
and undertake monetary valuations of their key benefits
For project costs
Once the overall physical characteristics and resource requirements have been
established these are translated into capital and operating costs. Capital cost items include
items such as land, site development, infrastructure, plant and equipment, and licence
costs. Operating cost items include items such as labour, fuel, materials, chemicals,
utilities, repairs and maintenance, and insurance. Prime costs are the direct capital and
operating expenditures incurred over the planning period, they do not include other
associated cost such as interest payments or depreciation allowances. Key points to note
when preparing costs are summarised in Box 4D.5 below. An example demonstrating
different price categories (constant, real and current) used for such analyses is provided
in Annex 4D.5.
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Box 4D.5 Points to note when preparing costs
The ‘Incremental-Cost Rule’. Economic evaluation is concerned with measuring cost differences
between the existing situation (the ‘without project case’) and the situation after the new project has
been implemented (the ‘with project case’). Only incremental (or additional) costs incurred as a result
of implementing the new service are included.
Prime Cost. Only prime costs - and not financial items such as debt service charges or depreciation
allowances - should be used in the cost assessment.
Market Prices. Cost estimates should be made initially using market prices. If these fairly reflect
economic prices and do not contain any significant distortions then they can be used for both the
economic and the financial analyses. If distortions do exist then adjustments may need to be made,
before they can be used in the economic analysis.
Constant Prices. Capital and operating cost estimates should be made in constant values, with
provisions made for real price increases as appropriate.
Detailed Cost Breakdowns. Cost estimates should be prepared at as desegregated a level as possible,
and the detailed analysis on which they are based should be retained. If imported capital equipment is
required then the basis on which the cost was calculated should also be retained.
Foreign Exchange Requirements. Details of foreign and local investment cost estimates are also
required to be kept separate to be used in the financial analysis to estimate the total foreign exchange
requirement and for contract packaging purposes.
Schedule of Investment Expenditures. A schedule of investment expenditures should be prepared
that relates directly to the table of resource requirements outlined above, although this may need to be
further desegregated to show the components of different cost items. The main cost items are vehicles
(for primary and secondary collection, haulage from transfer stations to landfills, and for on-site
operations at transfer stations and landfills) and facilities (communal disposal sites, transfer stations
and landfill site construction). Other specific cost elements can include incineration facilities (for which
detailed cost analysis will be required), resource recovery facilities, workshop and vehicle maintenance
facilities, and administration buildings.
Care should always be taken to ensure that cost estimates are based on realistic
assessments and that bias - particularly optimistic bias - is avoided. For more
information on constant, real and current prices see Annex 4D.5.
Project benefits
Placing monetary values on environmental or health-related benefits is important, but it
can be quite difficult to identify robust monetary values for some of the non-market
related benefits of MSWM projects. However, this does not mean it should be avoided.
Some of the most important costs or benefits of MSWM projects relate to issues such as
health or environmental quality. Not to include them in the analysis may well
misrepresent the full economic worth (or cost) of the project. At the very least the
benefits of the project - in physical units - should be listed alongside costs when
considering options.
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There are several techniques and many publications that exist to guide the practitioner in
environmental valuation within cost benefit analyses. Some useful references are
presented below.
Some useful references for environmental valuation in MSWM cost benefit analyses
• External Economic Benefits and Costs in Water and Solid Waste Investments, Institute for
Environmental Studies/ EFTEC Report Number R98/11, 1998, sponsored by the European
Investment Bank. ISBN 90 5383 632 2 (particularly for incineration issues).
• Valuating (sic) the Economic Impacts of Urban Environmental Problems: Asian Cities, World
Bank Urban Management Programme, Working Paper Series, paper no. 13, 1997. pp105.
• Cost Benefit Analysis and the Environment, N Hanley and C Spash, Edward Elgar 1993. ISBN
1 85278 947 6
• Economic Values and the Natural World, D Pearce, Earthscan 1993. ISBN 1 85383 152 2
A measure of people’s preferences for environmental or health costs or benefits can be
found through the use of willingness to pay studies, as discussed earlier in this step. For
example, a hypothetical user charge for a MSWM project option could be set equal to
people’s mean or median WTP for the potential project, and, with the population of
beneficiaries established, an estimate for the overall total economic benefit (including the
environmental benefit) of the project could then be calculated. The average tariff
multiplied by tonnage of waste, and discounted over the project lifetime would be equal
to, at least, the minimum benefit of the project. With all assumptions made clear, this
kind of benefits analysis is extremely useful for the economic evaluation process.
However, if the benefits estimation process proves difficult or too controversial, then the
projects can be evaluated on the basis of their costs alone. In this way the monetary
analysis will be one of cost effectiveness (comparing the costs of different projects) rather
than of cost benefit (comparing the net benefits of different projects).
However, it is still important to record the range of non-monetarised benefits each
project offers (for example, thousands of people at risk, or numbers of homes with
proper waste collection services) as part of the evaluation process, so that the final
ranking of options can be made with as much information as possible.
Step 6: Make the necessary adjustments to allow for differences between financial and economic
prices
The prices used in the evaluation of costs and benefits often do not reflect fairly the
value of the resources used in the production of specific inputs to the project. This is
because government policies can sometimes create distortions in market prices to such
an extent that they bear little relation to real economic costs. The adjustment of these
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market prices to reflect the true economic cost of using the input is known as shadow
pricing.12
Establishing shadow prices can be difficult or time consuming, although guidance and
appropriate values can usually be obtained from organisations working in the country,
including the World Bank and other economic development agencies. Often a simple
multiplier - a standard conversion factor - can be obtained from such sources to apply to
costs and benefits expressed in domestic prices which allows for an adjustment to be
made to counter any domestic/world price distortions.
The Usefulness of Shadow Pricing
A cost-benefit analysis of the municipal solid waste collection system in Yangon, Myanmar,
employed the principles of shadow pricing. This showed that the least-cost option of three
different waste collection systems offering the same level of kerbside collection service was one
which minimised imported vehicular equipment but optimised system productivity through
considerable labour inputs. 13
Three issues commonly require the use of shadow prices, as they can often have a
particularly important influence on the outcome of economic evaluations. These are the
exchange rate, import duties and other taxes levied on imported goods, and wage rates.
Box 4D.6 below provides a brief outline on each of them.
Box 4D.6 Exchange rates, taxes, wage rates
Exchange Rate. Some countries operate a controlled exchange rate regime in which the exchange rate
is kept artificially high. This makes the prices of imported goods lower than they would otherwise be
when measured in local currency. Unless the exchange rate is adjusted to compensate for this, the
relatively lower prices of imported goods will tend to divert demand away from their locally produced
equivalents. A shadow exchange rate should be used to overcome distortions of this kind.
Import duties and other taxes. Import duties and other taxes (such as value-added tax) imposed on
goods and services merely serve to transfer financial resources between one group and another; they
do not relate to the intrinsic economic value of the goods or services themselves. Where such taxes are
likely to distort project outcomes - high import duties may be levied on foreign equipment - then the
import duty should be removed and the underlying cost-insurance-freight (CIF) price used in the
analysis.
Wage Rates. A country with a surplus of labour will have relatively inexpensive labour cost when this
is measured in terms of other opportunities foregone by its use. In this case, a shadow wage rate can be
used to adjust wage rates that are kept artificially high downwards. This would have the effect of
improving the relative position of labour intensive solutions over more capital intensive ones.
12 The economic evaluation should also be conducted in constant prices. This means keeping prices constant as of a specific date, normally
the year in which the analysis is being undertaken. If the price of a particular commodity (eg, labour) is expected to rise in real terms over
and above the general inflation rate, then allowance should be made for this. General inflation, on the other hand, simply raises all cash
values by a given percentage and should be ignored.
13 Source: Cost Benefits Analysis of the MSW Collection System in Yangon, Myanmar. AM Tinn, et al, Elesevier, Asian Institute of
Technology, Bangkok, Thailand, 1995.
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These are important issues for developing countries. It is essential that the economic
analyst should ensure that the prices used in the evaluation reflect actual resource
scarcities and that the preferred investment will make the best use of a country’s
physical resources.
Step 7: Undertake NPV and IRR analysis for CBA or PV and AIC analysis for CEA
NPV/ PV
The net present value (NPV) of a project is the present value of the eventual benefit
surplus arising to society from the project. A calculated positive value for NPV shows
the present value by which the project has increased welfare for society. Projects with
positive NPV make society better off, while projects with negative NPV make it worse
off. Similarly, all projects with NPVs can be ranked and the one with the highest NPV
selected as best for society.
The NPV of a project can be calculated quite simply on computer spreadsheets. In
conceptual terms:
T
NPV = PV benefit - PV cost = Σ Bt -Ct
t=0 (1+r)t
where
B = benefits
C = costs
t = time period (t1 = year 1 for example)
r = discount rate (eg 12%)
PV
The present value (PV) is simply the discounted sum of the costs of the project alone (or
of the benefits alone). It is not a net value, like NPV, hence its use in CEA. Again, the PV
of a project can be calculated quite simply on computer spreadsheets.
IRR
The internal rate of return (IRR) is the discount rate that would produce a NPV of zero
for the project. Hence, if the IRR is greater than the base rate of interest for the country,
then the project could be seen to be a more viable investment than simply investing the
project resources instead. Many agencies use a ‘rule of thumb’ for the IRR. A good IRR
would lie between 10 and 20%. Any higher and it might appear too optimistic. Any
lower and the project could be seen to be delivering marginal benefit to society from the
deployment of the resources in question.
The IRR of a project can be calculated quite simply on computer spreadsheets.
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AIC
Average incremental cost (AIC) analysis can be used to compare the costs of alternative
strategies that provide different levels of service. AIC analysis is a method by which to
establish the average unit cost of a service (eg, average collection costs measured in
US$/tonne), a measure that can be used both for comparing project costs and for
providing a good general indication of the affordability of the proposed measures. It
provides a sound basis for establishing the average tariff level needed to achieve full cost
recovery from users. It is calculated by dividing the PV of a project cash flow by the PV
of its associated waste throughput stream, thereby providing an estimate of the average
cost per tonne of waste treated.
It is useful because:
• it allows strategies (or strategy components) to be compared on the basis of unit costs
of service (a readily understandable measure);
• it allows strategies based on different service levels to be compared;
• it is an indicator of the average tariff needed to achieve full cost recovery;
• it allows the unit costs of the investment and operating components of a strategy to be
calculated separately, thereby enabling the significance of each to be assessed.
For more information and a worked example of an AIC analysis see Annex 4D.6.
Step 8: Identify the key risks. Carry out a sensitivity analysis to estimate their potential impact
on economic feasibility
A decision on the preferred strategy should be taken only after each alternative has been
subjected to a thorough sensitivity analysis based on an identification of the key risks to
which it is likely to be exposed. These can take a number of forms, but important ones
are:
• the possibility of cost overruns;
• components taking longer than projected to implement;
• waste volumes being higher or lower than projected;
• certain key benefits being higher or lower than expected; and
• operating costs being higher than projected.
• the sensitivity of outcomes to changes in the discount rate should also be assessed.
Sensitivity analysis involves calculating the effect that changing the values assigned to
key parameters, costs and benefits has on project outcomes (such as unit costs per tonne)
and hence on the rank ordering of projects. One approach is to compare the effect of a
percentage change in a variable, such as a 20% increase in capital costs, on the rank
ordering of project options.
Another approach is to calculate ‘switching values’. A switching value is the percentage
change in a variable needed to bring about a specific outcome, such as the percentage
change in capital costs needed to switch the rank order of project alternatives. The
likelihood of a change of this magnitude can then be assessed.
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The box below shows possible ways of presenting the results of sensitivity analyses
based on these two approaches.
Example Presentation of the Results of a Sensitivity Analysis
(a) Sensitivity of rankings to changes in key variables (for
alternative strategies yielding identical benefits)
Rank Order Alternative Alternative
Strategy 1 Strategy 2
Base case 1 2
20% investment cost overrun 2 1
Operating costs increased by 10% 1 2
Discount rate reduced from 10% to 5% 2 1
(b) Switching values (cost >$40/tonne)
Alternative Alternative
Strategy 1 Strategy 2
Increase in investment costs 15% 30%
Increase in operating costs 50% 40%
Increase in discount rate from 10% to 14% 12%
Step 9: Rank alternative strategies and make recommendations on the preferred strategy
Once the economic evaluation and sensitivity analyses have been completed the
alternative strategies can be ranked, according to their NPVs if a CBA was used, or their
average costs per tonne if a CEA was used. A final decision can then be made taking into
account all other relevant factors. Importantly, if the findings from a CEA approach are
presented, the non monetarised costs and benefits of the options should also be clearly
listed alongside each cost/per tonne finding.
Other general issues within economic evaluation
A useful paper published in the World Bank Research Observer in 1995 also discusses some
issues related to the economics of MSWM and cost benefit analysis. The box below
summaries its findings.
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Some Further Cost Benefit Considerations for MSWM Projects
As well as taking account of non-market costs and benefits where possible, there are
generally three other key significant variables involved in the cost benefit comparisons of
alternative options for MSWM services – the relative costs of labour and other production
factors, the physical characteristics of the waste and efficient scales of operation.
1. Relative costs of labour
Capital-intensive waste management techniques, which may be economically efficient in
developed countries, may not be so in developing countries, especially in relation to
collection and processing activities. Labour-intensive collection and processing of materials
may be more efficient, although more costly equipment that reduces spillage during the
collection process may well be efficient. However, it is still important to promote more
capital intensive landfill management.
2. Physical Characteristics
Food waste is often the largest component in MSW in developing countries. This relates to
poor refrigeration and storage facilities in low-income households and the low cost of food
staples. The high moisture content of such waste can decrease the cost effectiveness of
incineration, for example, as more fuel is required.
3. Scale of Operations
Because the average cost per tonne of collecting, processing or disposing of MSW generally
varies with the amount of waste being handled, the scale of operations may be crucial to the
selection of cost effective management options. In summary, there are limited economies of
scale available in the collection of MSW and greater economies of scale associated with
transfer stations, landfills and other MSWM facilities. This suggests that, broadly speaking,
collection services are best provided on a decentralized basis, whereas it may be more costeffective
for disposal and treatment facilities to be consolidated at a regional or
metropolitan area level.
Source: D Beede and D Bloom. The Economics of Municipal Solid Waste, World Bank Research Observer Vol 10, No. 2 1995 pp113-
50.
4D.7 PART III: FINANCIAL EVALUATION OF THE PREFERRED MSWM STRATEGIC
PLAN
4D.7.1 FINANCIAL PLANNING AND APPRAISAL OF THE PREFERRED MSWM STRATEGIC PLAN
The financial analysis and appraisal is undertaken after the economic evaluation has
been completed, and is usually carried out for the preferred MSWM strategic plan only,
and not for all alternative strategies.
Whereas the economic evaluation uses economic prices to establish the most appropriate
waste management strategy, municipalities and service users are more interested in
financial costs. They need to know what budgetary allocations the new system demands
and how much needs to be recovered from users to sustain it. Financial appraisal is a
means of assessing the costs and revenues associated with SWM investments and is
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concerned with forecasting the effects of investment proposals in financial terms and
with establishing their impact on users.
The financial cost of a SWM strategy and its cost to the user can be influenced
significantly by government policies (unlike economic costing). Financial appraisal is
therefore the basis for measuring municipal affordability and the magnitude of charges
to be transferred to users. The prices used in the financial evaluation are market prices,
which must usually be adjusted for projected inflation in order to establish the actual
amount of investment or recurrent funds required in any year.
The financial evaluation has three aims:
• to demonstrate the financial viability of the strategy;
• to prepare a financing plan to cover investment expenditures during the
implementation phase of the strategy; and
• to ensure that financial resources are available during operations to meet all future
requirements for goods, services and financial obligations (ie, debt service).
Figure 4D.5 shows the principal stages involved in the financial evaluation. Each is
considered further below.
4D.7.2 Step 1: Establish Broad Financial Objectives
The need for the MSWM authority to establish broad financial objectives, and to
establish the institutional and managerial arrangements needed for these to be achieved
effectively, has been addressed in Section 4D.3. Deciding on cost recovery policy is key to
long-term financial viability.
It is crucially important that the preferred MSWM Strategic Plan should be financially
sustainable in the longer-term. Grants can be an important source of investment capital
for municipal services, but only insofar as they are seen as transitional assistance
towards helping the service achieve financial viability over the longer-term. Financial
objectives should be set with this as the goal. If it is felt that this is not achievable - for
whatever reason - then the proposed strategy is unsustainable and a less ambitious one
should be considered.
4D.7.3 Step 2: Calculate Average Incremental Costs Based on Financial Prices
Average incremental costs based on financial prices are a useful indicator of the average
unit cost per tonne of waste which would need to be levied on all users to achieve full
cost recovery, regardless of financing arrangements. Financial AICs differ from those
calculated in the economic analysis only in that financial rather than economic prices are
used, and that the discount rate reflects the average cost of capital to the MSWM agency
rather the opportunity cost of capital to the nation.
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The financial AIC represents the charge per tonne of waste which if applied to all waste
managed over the planning period would generate a revenue stream whose present
value is identical to that of the cost stream. That is, it is the unit charge which would
completely recover all costs and generate a return on investment equal to the average
cost of capital.
The financial AIC is therefore a very useful guide when formulating cost recovery
objectives, possible tariff structures and charge levels. It is again based on prime costs
only, and is calculated using constant values.
The cash flows used to calculate the financial AIC analysis form the basis for the
remainder of the financial evaluation. Since this is concerned with the ability to generate
sufficient revenues to cover future operating costs and debt-service requirements, it is
necessary to project future costs and revenues after taking into account the effects of
inflation.
4D.7.4 Step 3: Private Sector Involvement
Scope for involving the private sector in the provision of MSWM services, and the
different ways by which this can be achieved, has been addressed in Step 4A of this
Planning Guide.
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Figure 4D.5 Principal Steps in the Financial Planning and Evaluation of Action Plans
If the contract with the private firm provides for it to finance physical assets, such as
refuse collection vehicles, then private-sector involvement can result in a reduction in
the total investment required to be funded by the municipality.
The financial implications of involving the private sector have to be taken into account in
the investment financing plan, the recurrent funding plan and the sources and
applications of funds statement. Note the comments on private-sector involvement made
in Section 4D.8.5.
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4D.7.5 Step 4: Preparing the Investment Financing Plan
The investment financing plan is usually a one-page table that summarises total
investment requirements, the proposed sources of investment finance, loan draw down
and debt-servicing schedules. It is a critical part of the project finance documentation.
The stages involved in preparing the financing plan are to
• estimate total investment requirements;
• identify sources of investment funds;
• prepare the financing plan.
The total investment requirement is the total
amount of funds needed over the implementation
period. This amount is determined from the original capital cost estimates in constant
values (including physical contingencies) adjusted for price contingencies (inflation and
exchange rate effects) and any provision for interest incurred and capitalised during the
implementation period.
The analysis should be undertaken for individual project components and then
consolidated to show overall requirements. Keeping information at a desegregated level
allows ready comparisons to be made between components and the effects of sensitivity
analyses to be observed. It is also useful when preparing contract packages for different
components of the strategy.
Cost items should be classified as local or foreign, with price adjustments being made
accordingly. The costs of locally produced items should be adjusted according to
appropriate local inflation indices, which may be a general rate (such as a consumer
price index) or a specific purpose rate (such as a construction cost or manufacturing cost
index). The prices of imported goods quoted in foreign currency should be adjusted
according to the appropriate international inflation index and then converted to local
currency at the projected exchange rate.
Interest incurred during construction is sometimes capitalised to form part of the overall
loan; whether this is done depends on the financing structure and specific loan
conditions. If a loan is specifically earmarked, say, for the construction of a sanitary
landfill, then interest during construction may be capitalised to form part of the specific
loan.
Once all price adjustments have been made to the investment schedule these are set out
in a table showing for each strategy component the total funding requirement split
between local and foreign elements, and the expenditure profile over time. This is the
total investment to be funded over the implementation period. A typical financing plan
is presented in the worked example set out in Annex 4D.2.
Once the total investment requirements and
Estimate Investment Requirements
Identify Sources of Investment Finance
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expenditure profile have been established it is necessary to identify the means by which
this can be funded. Potential sources of investment funds have been reviewed in Section
4D.8. The principal sources are likely to be national, state or local government grants or
loans, commercial loans or international finance agency loans (eg, from the World Bank).
Foreign grants can be another source.
The balance between loans and grants will depend upon the availability of each, the
nature of the investments and, importantly, the amount of debt the strategy can sustain.
Whereas grant funds have no direct effect upon the future recurrent funding
requirement, loans do. Despite this, an over-dependence on grants should be avoided.
• A dependence on grants can indicate the non-affordability of a strategic plan - a
strategy unable to generate recurrent funds sufficient to cover a reasonable level of
debt is, by implication, unable to afford the capital costs associated with it.
• A dependence on grants can also fail to bring about the commercial discipline
associated with loan service obligations, thereby undermining key strategic objectives
of focusing accountability, improving quality, reducing costs and providing value for
money services.
The financing plan sets out the total
financing requirements and
expenditure schedules for the main strategy components, it indicates how these are to be
funded over time from the various sources of investment funds, and establishes probable
debt service schedules.
The debt repayment schedules depend on the specific terms and conditions of a loan.
Loans from international financing agencies, such as the World Bank, will often offer
better terms than those offered by fully commercial institutions. In particular, a World
Bank loan may offer longer loan repayment periods, a grace period before loan
repayments begin, and possibly lower interest rates than a commercial lender. Note that
it is most unusual for the term of a loan to extend beyond the expected economic life of
the assets being funded. An annual commitment fee may also be payable on the amount
of loan outstanding at a specified date.
The financing plan should form part of an integrated financial model. This allows the
effects of changes to the proposed investment financing structure to be observed directly
in the sources and uses of funds table, and reflected in the profile of debt coverage ratios
(refer below). An iterative approach can therefore be used to assess the reasonableness of
different ratios of debt and grants (or retained earnings).
The different sources of investment funds and the debt servicing schedules feed directly
into the sources and uses of funds table.
Note that the investment financing plan does not necessarily have to cover all of a
strategy’s investment funding requirements over the entire planning period, and might
Prepare an Indicative Investment Financing Plan
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only relate, for example, to the initial five year period in which the bulk of investment
expenditures are incurred. If additional major expenditures are projected for the future
then detailed consideration should be given to how these are to be funded.
4D.7.6 Step 5: Identifying Sources for Financing Recurrent Expenditures
Recurrent expenditures consist at a minimum of all operating expenditures
plus expenditures on debt service (interest, commitment fees and capital
repayment).
Where long-term liabilities are being incurred - such as employee pension
entitlements - then these should desirably be treated as recurrent costs and
financed. Provisions for the long-term closure and post-closure maintenance
of disposal facilities should also be made out of the current revenue stream.
If the service is to be operated on a fully commercial basis then a financial
objective should be to amortise and recover over the life of the project the
value of all investments made in the strategy. Implicit in this is a rate of
return on the investment funds employed.
Recurrent expenditures do not include expenditures on capital items not included in the
investment plan (such as vehicle replacement or future landfill site development or
closure) for which additional funding arrangements must be established. Ideally,
however, sufficient recurrent funds should be generated at least to contribute towards
future system development and asset replacement.
As discussed in Sections 4D.6 and 4D.7, the sources of funds available to finance
recurrent expenditures consist primarily of municipal transfers from general revenue or
user-charges. Funds from general revenue have traditionally been used for funding
MSWM services but a new strategy frequently requires additional sources, thereby
forcing the issue of user-charges to be addressed.
It is rarely possible to shift directly from a position of total dependence on municipal
funding to one of full cost recovery from users; user charges are normally introduced
progressively over a period of time.
There are two ways to estimate the amount of revenue to be raised from user charges:
• by calculating the difference between the total recurrent funding requirement and
expected receipts from normal municipal sources (after accounting for inflation); or
• by estimating contributions from user charges according to a realistic schedule for
their introduction (eg, rising to 100% of cost recovery over ten years); the difference
between this and the total recurrent funding requirement is then the contribution
needed from normal municipal sources.
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The amount of funds raised by each of these approaches would be sufficient to cover the
recurrent funding requirement only and would not contribute towards any additional
investment requirements such as plant and equipment replacement or landfill site
coverage on closure. If funds are to be accumulated through revenues to meet these
requirements then the level of user charge will need to be adjusted accordingly.
Sources of funds available from municipal sources and raised through user charges are
reflected in the sources and uses of funds table.
4D.7.7 Step 6: Preparing a Sources and Uses of Funds Statement
The sources and uses of funds table sets out all relevant cash inflows and outflows, and
is used to assess the overall cash position of the operating agency under the proposed
financing arrangements. Specifically, it brings together:
• all sources of funds projected to be used by the strategy, including investment funds
(debt, grants and retained earnings) and recurrent funds (general municipal sources
and user charges); and
• all applications of funds, including capital investments and the recurrent funding
requirement (operating expenditures and debt service). It can also include provisions
for long-term liabilities, such as facility closure and post-closure maintenance costs.
The difference between total sources and total applications is shown as a surplus or as a
deficit. Surplus funds can be accumulated (preferably in an interest bearing account) and
used to finance future liabilities (eg, pension entitlements or facility closure costs),
capital expenditures or deficits. Deficits have to be financed either out of accumulated
earnings (surplus) or from additional sources to be identified.
The sources and uses of funds table not only provides an overview of the total funding
arrangements and cash position of the strategy over time, but can also be used to assess
the financial implications of alternative investment or recurrent funding structures. The
two are closely related.
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A measure of the financial viability of a strategic MSWM plan is the ability of the net income stream to
meet the debt service requirements (loan repayment, interest and commitment fees), where:
Net income = the total of recurrent funding sources minus direct operating expenditures (excluding interest,
depreciation and tax).
The measure used is the debt-coverage ratio (DCR), which is the ratio of annual net income divided by
annual debt-service requirements. This shows the extent to which uncommitted funds cover annual debt
service.
The ratio must be greater than 1 if debt service is to be funded out of income. Financiers will normally
expect to see a debt-coverage ratio of at least 1.3, this providing a cushion against operating expenditures
being higher or user charge collections being lower than expected.
The ratio is important for assessing the outcomes of changes to key financing assumptions. In particular,
close attention should be paid to the DCR when considering the effects of changes to the ratio of loans to
grants, the level of user charges, debt repayment schedules, investment costs, or operating performance.
The ratio is an important financial indicator and is best visualised graphically.
4D.7.8 Step 7: Preparing Financial Statement and Balance Sheet
An income statement and a balance sheet are normally prepared in addition to the
financing plan and the sources and uses of funds statement to complete the framework
for making financial judgements on the strategy. Both should be prepared in line with
normal accounting practice.
The income statement records income and expenditures (including operating
expenditures, overheads, interest and depreciation) over a period of one year, and is
prepared on an accruals basis. Note that expenditure on capital assets is accounted for in
the income statement by a depreciation provision, which allows for the progressive
using up of those assets over time. Neither capital expenditures nor debt repayment
instalments appear in the income statement.
The balance sheet provides a snapshot of the assets and liabilities of an agency at a fixed
point in time.
Both the income statement and the balance sheet support the financing plan and the
sources and uses of funds table, and ratio analysis is used to assess strategy
sustainability. This can have a bearing on investment financing ratios, the conditions and
covenants written into loan agreements, the level of user-charges and overall viability of
the proposed strategic plan.
4D.7.9 Step 8: Identifying Potential Risks by Conducting a Sensitivity Analysis
Sensitivity analyses - including ratio analysis - are undertaken to test the financial
stability of the strategic plan. The aim of the sensitivity analysis is to assess the
implications for financial stability of plausible changes to the major assumptions
ERM for WORLD BANK/SDC STRATEGIC PLANNING GUIDE FOR MSWM
Step 4 D - 55
upon which the financial arrangements are based. The impact of these changes on the
viability of the strategy has to be carefully considered.
4D.7.10 Step 9: Assessing Financial Viability and Stability of the Strategic Plan
After consideration of all the analyses a recommendation is made about the overall
financial stability of the strategic plan. It is particularly important that advisers should
be convinced that the Action Plan is financially sound, and that the longer-term strategy
will be sustainable even in the event that the projections on which is based change
within reasonably plausible limits.

Supply Chain Management and Advanced Planning Systems

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One of the most prominent applications of optimization in today’s business world is using advanced planning in supply chain management (SCM). In short, SCM refers to coordinating material, information and ﬁnancial ﬂows in a company’s value chain including business partners such as suppliers, contract manufacturers, distributors, and customers. In the following chapter we give a concise introduction to the SCM and supply chain planning terms and concepts suﬃcient for the following context of optimization applied to supply chain problems and introduction of the SAP APO software. For a more thorough treatment of SCM and advanced planning see the ample literature on this topic; Stadtler and Kilger (2004, [92]) is an excellent reference.

1.1 Supply Chain Planning – a Brief Introduction The term supply chain management was introduced by the business consul- tants Oliver and Webber in the early 1980’s (see Oliver and Webber, 1992, [75]) and since then a wide variety of deﬁnitions depending on individual’s point of view has been created. We will stick to our short and broad deﬁni- tion as it is suﬃcient for the purpose of this book.

SCM is a business economics term and the involved tasks and processes as well as solution methodologies are classiﬁed in a business-oriented way. To someone with a mathematically oriented science background this may appear less exact and precise than desired. Therefore there is an arbitrary large potential for misunderstandings and conﬂict when dealing with mathematical issues such as optimization in SCM. We see it as a primary target for this book to help build a bridge between business administration and economics on the one hand and the exact sciences on the other hand. The basic advise in this context is to agree on some sort of communication quality standards ensuring that precise deﬁnitions are used and that it is checked whether all participants involved in the communication mean and understand the same when using certain terms.

As manifold as the deﬁnitions of SCM are the attempts to model processes

and concepts of actually doing supply chain management in a standardized

way. The Supply-Chain Council, a non-proﬁt organization formed as an in-

dependent consortium in 1996, standardizes supply chain terminology and

processes in the widely accepted and adopted Supply-Chain Operations Ref-

erence (SCORR ) model. The Supply-Chain Council focuses on practitioners

rather than academia and comprises several hundred members, the majority

of which are companies and organizations applying SCM and the SCOR prin-

ciples to their business. The SCOR model aims at improving supply chain

processes and structures to serve customers’ needs as well as possible. There-

fore it takes into account processes and transactions from the “supplier’s sup-

plier” to the “customer’s customer” enabling supply chain evaluations from

diﬀerent aspects – from within and outside the company. The model is di-

vided into four hierarchical levels dealing with process types, process categories,

process elements, and, ﬁnally, implementation. None of these four hierarchical

levels touches solution methodologies such as mathematical methods or opti-

mization techniques, however. In each level predeﬁned best practice building

blocks are available which can be used to model supply chain processes in an

easily reconﬁgurable way. Figure 1.1 shows the SCOR model’s level one with

the ﬁve elementary management processes plan, source, make, deliver, and

return. In each of the process types there is potential for optimization such

as in long-term capacity planning, production planning, detailed scheduling,

or vehicle routing. Kallrath (2002, [51]) discusses this in more detail. The

other levels of the SCOR model provide a deeper level of detail; level two, for

instance, distinguishes between 30 process categories covering planning, exe-

cuting, and enabling. One of the biggest beneﬁts of using a standard model

like SCOR is introducing a standard terminology enabling eﬃcient communi-

cation between the parties involved in implementing a supply chain strategy.

The Supply-Chain Council has created a glossary that deﬁnes more than 300

terms and metrics allowing standardized performance benchmarking of a given

supply chain.

Diving a bit deeper into the four processes source, make, deliver, and return

we have to distinguish between planning the future events in the supply chain

and dealing with current events and tasks. The earlier is widely called sup-

ply chain planning (SCP), the latter supply chain execution (SCE) or supply

chain operations. Examples of SCP are strategic and tactical planning such as

network design, network or master planning, production planning, transporta-

tion planning and routing, demand forecasting, and so on; examples for SCE

include event tracking (for instance, in transportation), warehouse operations,

transportation load consolidation, shop ﬂoor control in manufacturing execu-

tion, etc. From the nature of these tasks it is quite straightforward to see that

on the one hand SCP typically is done once in a while in order to get results

that remain valid between instances of executing the SCP process, and SCE

on the other hand is in some sense “always online” because it has to be ready

to trigger and execute certain actions in response to real-world events. Master

planning as a typical SCP process, for instance, is – depending on the type

of industry and particular business – done once a day, once a week or even

less frequently and results in a rough-cut plan that allocates resources in the

production network to certain activities that work towards fulﬁlling customer

demands. Due to the fact that these plans typically aﬀect multiple locations

and hence involve not only communication with electronic systems, but also

a certain amount of human interaction before they are actually executed, it

is not feasible to execute them continually.

Optimization as a solution technology for supply chain problems, at least on the tactical planning level, is “oﬄine”, too. It takes a snapshot of the business data of interest, optimizes according to a well-deﬁned model, and writes the results back to the business data repository (which usually is some sort of transactional business software system such as SAP R/3 or mySAP ERP). Often, performance, process, and problem localization requirements chase optimization away from SCE tasks: for most companies it is undesirable to re-calculate all delivery routes in the case of one delivery truck out of many dozen being involved in a traﬃc accident, for example. A more desirable scenario in this case would probably be to apply some local, rules-based algorithm that might suggest to extend the

This, of course, is an oversimpliﬁcation. There are more facts to be taken into

account such as machine setup times for certain production processes that make product changes expensive. A good master planning algorithm takes this into account.

tour of another truck or to rent an additional vehicle serving the remaining

customers from safety stock. Optimization will be successful in this area if

the model is thoroughly designed to match the speciﬁc businesses, but this

usually rules out commercial, preconﬁgured optimization applications.

1.1.2 Supply Chain Planning and Advanced Planning Systems

A step towards formalizing and deﬁning SCP in a more concise way than we

just did has been taken by Rohde et al. (2000, [79]) who deﬁne the supply

chain planning matrix classifying SCP tasks by planning horizon and supply

chain process. In Fig. 1.2 we give a version of the SCP matrix; note the

similarity of the processes along the x-axis with the SCOR process types

source, make, and deliver. The vertical axis in the SCP matrix corresponds

to the time horizon aﬀected by the corresponding planning processes and also

gives an idea about how frequently the planning activities are performed.

Although the SCP matrix is not completely adopted in the literature and has

some structural drawbacks (cf. Tempelmeier, 2001, [96]), we will use it as a

tool displaying SCM functionality “at one glance” – without asking questions

like “Why does MRP belong to procurement?” or “Does demand planning

really belong to supply chain planning?”. With the exception of stand-alone

Material Requirements Planning (MRP) we see the functional modules of the

SCP matrix in software systems called advanced planning systems (APS):

Strategic Network Planning plans and coordinates strategic supply

chain processes creating suggestions for network design, cooperative supplier

contracts, distribution structures, manufacturing programs, etc. Decisions

made based upon this module are strategic and thus long-term in nature

and consequently cannot be undone or changed without considerable ﬁnan-

cial impact. The underlying data of such decision processes are mostly not in

the transactional business software but in archives such as data warehouses.

This leads to most companies setting up strategic network planning projects

using in-house or external consultants with customized mathematical software

tools independently of their enterprise business software.

Demand Planning takes a supporting role to the planning processes

by generating forecasted demand ﬁgures that are fed into the other planning

modules. Its functionality is based on statistical methods, on “collaboration”

between business partners such as key customers or distributors that can

help estimate future demand, and on data analysis methods such as “what-if

analyses”, aggregation/disaggregation, etc.

Master Planning creates feasible mid-term production plans synchro-

nizing the material ﬂow along the supply chain and ensuring eﬃcient resource

utilization in procurement, production, warehousing, and distribution. Usu-

ally this is a centrally executed process because its outcome aﬀects the whole

supply chain and respects interdependencies of diﬀerent supply chain parts

such as production facilities being able to manufacture the same product.

Master planning depends on input data obtained from network design, de-

mand planning, and cost data from all parts of the supply chain – these costs

are used to decide between options in procurement, production, and trans-

portation of goods. Depending on the complexity of the supply chain and its

processes master planning is often restricted to consider bottleneck materials

and/or resources or aggregated production processes.

Available- and Capable-to-Promise (ATP/CTP) help in order pro-

mising. When a customer order for a speciﬁc product comes in, ATP checks

quantities in stock and planned receipts (from procurement and production)

across the entire supply chain to determine a delivery date for the order. Op-

tionally, CTP can create production orders for the required product, which

involves changing and adapting production plans according to incoming cus-

tomer orders and available resource capacity.

Production Planning and Scheduling creates detailed, short-term

production plans for individual production areas (e.g., plants) based on the

results from master planning. The tasks can be divided into lot sizing, resource

utilization planning and detailed scheduling. Similar to master planning, the

goal is a feasible plan that respects resource and material constraints, but here

we look at only one production area in all detail, i.e., without aggregating or

restricting processes as in master planning. The detailed production plan is

passed on to manufacturing execution / shop ﬂoor control systems and hence

leaves the classical domain of APS.

Distribution and Transportation Planning determines which quan-

tities of goods are transported via which routes in the supply chain at what

times. Distribution planning deals with transportation quantities and stock

levels in connection with customer deliveries considering stock and transport

capacities whereas transportation planning performs routing and load plan-

ning determining cost eﬀective and timely deliveries.

1.1.3 Advanced Planning Systems and Optimization

APS supplement the existing optimization programming libraries and pure

optimization engines with “ready-to-use” applications covering certain SCM

processes. Almost all major business software providers oﬀer an APS as part

of their application suite covering the processes described above to a larger or

smaller extent. They typically divide their software into modules covering one

or more of the SCP matrix elements; often enough the quality of this coverage

is dependent on the industry – good functionality for production planning in

the process industry does not necessarily imply that the respective APS is

well-suited for discrete manufacturing such as high tech. In a complete SCM

solution these modules have to work together in an integrated way which sets

high standards for implementing and running those APS solutions. Often it

is most beneﬁcial to use the APS and the ERP system from the same vendor

to take advantage of native system integration technologies.

Optimization techniques are applicable in the areas of Strategic Network

Planning, Master Planning, Production Planning and Scheduling, and Dis-

tribution and Transportation Planning. The remaining areas are typically

tackled with statistics (Demand Planning), rules-based algorithms (sales or-

der promising, ATP/CTP), or transactional and/or rules-based processing

(MRP). Commercially available APS that make use of optimization usually

oﬀer comprehensive, but predeﬁned mathematical models for one or more of

these application areas. We see those commercial APS as an augmentation to

the programming libraries, pure optimization engines, e.g., Xpress-MP TM and CPLEX.

CISA Exam Question Bank Mock 1 of 10 (Latest)

2015-04-29T17:18:00.001+03:00

1. Disabling which of the following would make wireless local area networks MORE secure against unauthorized access?

Select an answer:
A. MAC (Media Access Control) address filtering

B. WPA (Wi-Fi Protected Access Protocol)

C. LEAP (Lightweight Extensible Authentication Protocol)

D. SSID (service set identifier) broadcasting

Answer is D

Disabling SSID broadcasting adds security by making it more difficult for unauthorized users to find the name of the access point. Disabling MAC address filtering would reduce security. Using MAC filtering makes it more difficult to access a WLAN, because it would be necessary to catch traffic and forge the MAC address. Disabling WPA reduces security. Using WPA adds security by encrypting the traffic. Disabling LEAP reduces security. Using LEAP adds security by encrypting the wireless traffic.

2. Which of the following is the BEST reason to implement a policy which addresses secondary employment for IT employees?

Select an answer:
A. To ensure that employees are not misusing corporate resources

B. To prevent conflicts of interest

C. To prevent employee performance issues

D. To prevent theft of IT assets

Answer is B

The best reason to implement and enforce a policy governing secondary employment is to prevent conflicts of interest. Conflicts of interest could result in serious risk such as fraud, theft of intellectual property or other improprieties. The other options are not correct because issues such as the misuse of corporate resources, poor performance and theft of IT assets are not as severe as the possible ramifications of a conflict of interest.

3. An IS auditor has been assigned to review an organization's information security policy. Which of the following issues represents the HIGHEST potential risk?

Select an answer:
A. The policy has not been updated in more than one year.

B. The policy includes no revision history.

C. The policy is approved by the security administrator.

D. The company does not have an information security policy committee.

Answer is C

The information security policy should have an owner who has approved management responsibility for the development, review and evaluation of the security policy. The position of security administrator is typically a staff-level position (not management), and therefore would not have the authority to approve the policy. Without proper management approval, enforcing the policy may be problematic, leading to compliance or security issues. While the information security policy should be updated on a regular basis, the specific time period may vary based on the organization. Although reviewing policies annually is a best practice, the policy could be updated less frequently and still be relevant and effective. An outdated policy is still enforceable, whereas a policy without proper approval is not enforceable. The lack of a revision history with respect to the IS policy document is an issue, but not as significant as not having it approved by management. An IS policy committee is not required to develop and enforce a good information security policy. The policy could be written by one person, as long as the person who approves the policy has the proper authority and knowledge to review and approve the policy. Although a policy committee drawn from across the company is a best practice and may help write better policies, a good policy can be written by a single person, and the lack of a committee is not a problem by itself.

4. An IS auditor is reviewing IT projects for a large company and wants to determine whether the IT projects undertaken in a given year are those which have been assigned the highest priority by the business and which will generate the greatest business value. Which of the following would be MOST relevant?

Select an answer:

A. A capability maturity model (CMM)

B. Portfolio management

C. Configuration management

D. Project management body of knowledge (PMBOK)

Answer is B

Portfolio management is designed to assist in the definition, prioritization, approval and running of a set of projects within a given organization. These tools offer data capture, workflow and scenario planning functionality, which can help identify the optimum set of projects (from the full set of ideas) to take forward within a given budget. A CMM would not help determine the optimum portfolio of capital projects since it is a means of assessing the relative maturity of the IT processes within an organization: running from Level 0 (Incomplete—Processes are not implemented or fail to achieve their purpose) to Level 5 (Optimizing—Metrics are defined and measured, and continuous improvement techniques are in place). A configuration management database (which stores the configuration details for an organization's IT systems) is an important tool for IT service delivery and, in particular, change management. It may provide information that would influence the prioritization of projects, but is not designed for that purpose. PMBOK is a methodology for the management and delivery of projects. It offers no specific guidance or assistance in optimizing a project portfolio.

5. An IS auditor has been assigned to review IT structures and activities recently outsourced to various providers. Which of the following should the IS auditor determine FIRST?

Select an answer:

A. An audit clause is present in all contracts.

B. The service level agreement (SLA) of each contract is substantiated by appropriate key performance indicators (KPIs).

C. The contractual warranties of the providers support the business needs of the organization.

D. At contract termination, support is guaranteed by each outsourcer for new outsourcers.

Answer is C

The complexity of IT structures matched by the complexity and interplay of responsibilities and warranties may affect or void the effectiveness of those warranties and the reasonable certainty that the business needs will be met. All other choices are important, but not as potentially dangerous as the interplay of the diverse and critical areas of the contractual responsibilities of the outsourcers.

Roles and Responsibilities in IT Governance

2015-04-28T12:40:00.000+03:00

IT Strategy Committee
It is one of the best practices to have an IT Strategy Committee. This committee should not only provide advice on strategy, but also focus on IT's value, risk and performance.

IT Balance Scorecard (BSC)
IT Balance Scorecard (BSC) is process management evaluation technique used in IT governance. The application of the BSC to IT follows a three layered structure to address for perspectives.

Mission

Deliver economic, effective and efficient IT applications and services
Obtain good value from IT investments.
Create oppertunities to prepare for future challenges.

Strategies

Creating superior applications and operations
Develop user partnerships and better customer services.
Increase services levels and pricing structures
Control IT expenses
Provide new business capabailities and other value to IT projects
Training of the IT Staff

Measures

Providing a balanced set of metrics used for IT decisions.

Audit Role in IT Governance

2015-04-28T12:20:00.002+03:00

IT should be governed by best practices that ensure an organization's information and related technology support enterprises business objectives.

By today standards, IT is an intrinsic part of business and not considered as a seperate department.
How IT is applied within an organization will have an immense effect on whether the organization meets its objectives or not.

Auditing plays a key role in making IT successful for an organization. One of the main goal of audit is to give recommendations to improve the quality and effectiveness of IT.

An audit can also monitor compliance and make sure that IT is in compliance. Reporting on IT governance invovles auditing at the highest level in the organization which can cross departmental boundries.

An audit should be defined by the clear scope of work to be done with a clear definition of the functional areas and its issues.

Auditors should remain objective and independent, and if this cannot be taken care of internally , a third party independent auditor can be hired.

The IS Auditor should assess the followings:

The alignment of the IS function to the organization's objectives.
If the performance objectives are being achieved.
Compliance to regulatory laws and requirements.
Control Enviroment of the organization.
Inherent risks within the IS enviroment.
The IT investment or expenditure.

IT Governance

2015-04-28T10:49:00.002+03:00

IT Governance

Corporate Governance
Corporate governance should promote ethical issues and decision making practices within an organization.

Corporate Governance can be defined "the system by which business corporations are directed and controlled"

Corporate Governance is set of responsibilities and practices to:

Provide Strategic Direction
Ensuring that goals are achievable
Risks are properly addressed
Organisational Resources are Properly utlized

The framework of corporate governance should:

be established to manage reports on risks
require that there is an internal control system that monitors risks.
be a platform for the protection of stakeholders by dividing responsibilities to the Board of Directors.
Corporate Governance can help strike a balance between the objectives of exploiting available oppertunities to business value while also keeping within the limits of regulatory requirements.

Corporate Governance Framework is expanding into different countries where goal is to reduce inaccurate financial reporting while giving greater transparency and accountability.

IT Governance
IT Governance is part of overall Corporate Governance that should address how IT is applied inside the organization. It importance is increased because:

- Organizations are now more relying on IT
- One of the key objective of IT Governance is to align business and IT in order to increase business value.

IT Governance focus on delivering secure and reliable information that is critical to success of the organization. The other benefit of IT governance is that the delivery of this information achives the successes of being more economical, efficient and effective.

There are two major issues that IT Governance Focuses on:

- Strategic Alignment of IT with the Business
- Embedding accountability into enterprise

IT Monitoring and Assurance Practices for Board and Senior Management

It is important that all stakeholders, which would include the board and senior managment provide input into the decision making process about IT governance.

IT Governance is not just a good management practices and a framework of IT controls, but it is a management system that is about stewardship of the IT resources on behalf of the stakeholders.
Governance should be focused on delivering value and measuring performance.
IT Governance can be considered as the shared management.
It ensures alignment of IT with the organization's objectives.
It should enable an enterprise to exploit new oppertunities and maximise benefits.
IT governance framwork should be aligned with accepted best practices.

IT Governance Framework

Following are key requisites of an IT Governance Framework:

IT resource management: Focuses on the inventory of the resources as well as the risks involved in those resources.

Performance Measurement: Ensures that IT resources are performing as expected as well as, delivering benefit to the organization.

Compliance Management: Ensures that IT processes are as per all applicable regulations.

IT Governance focuses on:

Risk Management: Making sure that all are aware of the risks involved with IT, as well as knowing the organization acceptance of risk.
Resource Management: Having the right investment in the propoer management of the Critical IT Resources which would include the infrastructure and its people.
Performance Measurement: A strategy to track and monitor projects, resource usage, process performance and delivery.

Some Important IT Governance Frameworks:

COBIT: It was developed by ISACA to support. IT Governance best practices to provide guidance to organizations.

ISO / IEC 27001: A series of standards and best practices to provide guidance to organizations.
ITIL: IT Infrastructure Liabrary (ITIL) is a detailed framework with handson information on how to achieve successful service management of IT.
ISO / IEC 38500: It gives a framework for effective IT Governance for those of the highest level of management to understand and fulfill their legal and regulatory obligations.

Information Security Governance

Security is focused around three areas which are confidentiality, integrity and availability.

Security is no longer bound to to the boundries of the organization due to the large growth of technologies such as cloud computing. Protection of information is key component of information security.

The task of providing the necessary protection for information resources must now be raised to a broad level activity as well as other governance functions.

Benefits of good Information Security Governance are:

Providing assurance of policy and standard compliance.
Providing a structure and framework to optimize limited security awareness

2014-04-29T14:49:00.001+03:00

Defining Chart of Account in SAP

A chart of accounts (COA) is a financial organizational tool that provides a complete listing of every account in an accounting system. An account is a unique record for each type of asset, liability, equity, revenue and expense.

A COA, which lists the names of the accounts that a company has identified and made available for recording transactions in its general ledger, establishes the level of detail tracked in a record-keeping system. Typically, a COA contains the accounts’ names, brief descriptions and identification codes.

In practice, the COA serves as the foundation for a company’s financial record keeping system. It provides a logical structure that facilitates the addition of new accounts and deletion of old accounts.

Within the COA, accounts will be typically listed in order of their appearance in the financial statements. Typically, Balance sheet accounts are listed first followed by the income statement accounts.

Definition

This is a list of all G/L accounts used by one or several company codes.

For each G/L account, the chart of accounts contains the account number, account name, and the information that controls how an account functions and how a G/L account is created in a company code.

Use

You have to assign a chart of accounts to each company code. This chart of accounts is the operating chart of accounts and is used for the daily postings in this company code.

You have the following options when using multiple company codes:

You can use the same chart of accounts for all company codes

If the company codes all have the same requirements for the chart of accounts set up, assign all of the individual company codes to the same chart of accounts. This could be the case if all company codes are in the same country.

In addition to the operating chart of accounts, you can use two additional charts of accounts

If the individual company codes need different charts of accounts, you can assign up to two charts of accounts in addition to the operating chart of accounts. This could be the case if company codes lie in multiple countries.

Note

The use of different charts of accounts has no effect on the balance sheet and

profit and loss statement. When creating the balance sheet or the profit and loss statement, you can choose whether to balance the company codes which use different charts of accounts together or separately.

Structure

Charts of accounts can have three different functions in the system:

Operating chart of accounts

The operating chart of accounts contains the G/L accounts that you use for posting in your company code during daily activities. Financial Accounting and Controlling both use this chart of accounts.

You have to assign an operating chart of accounts to a company code.

Group chart of accounts

The group chart of accounts contains the G/L accounts that are used by the entire corporate group. This allows the company to provide reports for the entire corporate group.

The assigning of an corporate group chart of accounts to a company code is optional.

Country-specific chart of accounts

The country-specific chart of accounts contains the G/L accounts needed to meet the country's legal requirements. This allows you to provide statements for the country's legal requirements.

The assigning of an country-specific chart of accounts to a company code is optional.

Integration

The operating chart of accounts is shared by Financial Accounting as well as Controlling. The accounts in a chart of accounts can be both expense or revenue accounts in Financial Accounting and cost or revenue elements in cost/revenue accounting. You can find additional information on this subject under

Free PMP Preparation Course - 001

2014-03-25T22:56:00.001+03:00

Free PMP Preparation Course - 001 by Mujtaba Mehmood

What is PMP

PMP (Project Management Professional) is an international exam to prove your knowledge in Project Management. This course is designed by Project Management Institute - USA. PMP is recognized as one of most desired qualification for Project Managers.

About PMP Exam

PMP exams are designed to test in-depth knowledge of project management. Exams are based on real world examples, they put you in a situation and ask about your response according the situation.

Project Management Institute has set minimum criteria for sitting in PMP Exam. The criteria is as follows (as at 31-Mar-2014).

Category 1:

General Education = Bachelor's Degree

Project Management Education = 35 Contact Hours

Project Management Experience = 4,500 Hours

Experience = Three Years within last six years

Category 2:

General Education = High School Graduate

Project Management Education = 35 Contact Hours

Project Management Experience = 7,500 Hours

Experience = Five Years within last eight years

For More detailed information please visit www.pmi.org

In order to appear in exam you need to submit application by mail or electronically. Please note that PMI may select your application for audit process. In case your application is selected for audit process, you may required to send your documentary evidence through mail to PMI Office.

Once you got authorization from PMI, you can appear in the exam within a year.

Breakup of Exams Questions:
PMP Exams are designed to test every aspect of project management skills. However their weightage with respect to the topics vary. Current breakup is as follows:

Process of Auditing Information System   14%
Governance and Management of IT   14%
Information System Acquisition Development & Implementation` 19%
Information System Operation, Maintenance and Support 23%
Protection of Information Systems   30%

(Continue ... See Free PMP Preparation Course Part 002)

SAP Offers Fast Track to Innovation Via a Flexible Path to the Cloud

2013-07-26T23:28:00.003+03:00

WALLDORF, Germany - SAP AG (NYSE: SAP) is taking the next step to make the recently announced unified cloud portfolio vision a reality for customers, putting them in the driver’s seat for their cloud journey. SAP now offers customers and partners a simple, flexible model for extending current on-premise solutions to cloud applications, including offerings from SAP companies Ariba and SuccessFactors.

Based on their existing investments in SAP® software, customers can decide to reallocate elements of their installed on-premise solutions to the respective cloud solutions from SAP, replacing the affected on-premise license and maintenance with a cloud subscription. The transaction assumes an expanded investment with cloud solutions from SAP, given the substantial added value from this new hybrid scenario.

Consume Cloud Innovations at Own Pace
SAP removes barriers and enables customers to drive speed-to-value and unlock opportunities to lower total cost of ownership, taking care that existing investments are protected and exploring new options with innovative cloud solutions from SAP at their own pace. The hybrid solution can be fully integrated offering seamless delivery and support as well as full control over the application landscape, including on-premise and cloud applications. With this integrated approach, customers gain the flexibility, choice and efficiencies needed to innovate for growth across their entire business in the cloud.

Unlock Business Value With Flexibility and Ease
SAP® Rapid Deployment solutions for the SAP® Cloud portfolio support the new cloud extension opportunity. Hybrid deployment scenarios can be quickly implemented based on packaged content and implementation services in the areas of human resources, procurement, and business collaboration, among others. The cloud extension model helps companies of any size create entirely new experiences for their customers, empower employees at scale, optimize the use of resources and unlock value for their business.

Proven support offerings from SAP, including SAP® MaxAttention™ and SAP® ActiveEmbeddedservices, are available to support customers in transitioning without disruption, allowing them to build and run SAP solutions like a factory.

“Enterprises can face significant hurdles deploying and integrating cloud solutions into very complex IT ecosystems, so they are looking for pricing and adoption models that offer the flexibility to drive an extension to the cloud at their own pace," said Elaina Stergiades, research manager, IDC. “Adoption models like this from SAP can help customers streamline their investments in on-premise and cloud solutions, making it easier and more cost-effective to take advantage of these new technologies."

SAP believes that every customer has a different approach to adopt the cloud innovations based on unique business requirements. The new cloud extension model is an optional model that flexibly supports many different entry points for a cloud strategy.

“SAP is delighted to offer this tremendous opportunity to customers, allowing them to redirect existing investments to new innovation areas in the cloud,” said Robert Enslin, president of Global Customer Operations and member of the SAP Global Managing Board of SAP AG. “The unified SAP Cloud portfolio significantly expands our customers’ ability to grow their businesses by offering real-time, secure access to the cloud — all while lowering the cost of entry and through a great user interface. With this new cloud extension option, SAP helps each customer create a unique experience specific to their business requirements.”

This offer is not expected to have any material impact on the company’s full year 2013 outlook for revenue or operating income.

For more information, visit the SAP Newsroom.

About SAP
As market leader in enterprise application software, SAP helps companies of all sizes and industries run better. From back office to boardroom, warehouse to storefront, desktop to mobile device – SAP empowers people and organizations to work together more efficiently and use business insight more effectively to stay ahead of the competition. SAP applications and services enable more than 197,000 customers (includes customers from the acquisition of SuccessFactors) to operate profitably, adapt continuously, and grow sustainably. For more information, visit www.sap.com.

Any statements contained in this document that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “should” and “will” and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission ("SEC"), including SAP's most recent Annual Report on Form 20-F filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

©2013 SAP AG. All rights reserved.
SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Please seehttp://www.sap.com/corporate-en/legal/copyright/index.epx#trademark for additional trademark information and notices.

Note to Editors:
To preview and download broadcast-standard stock footage and press photos digitally, please visitwww.sap.com/photos. On this platform, you can find high resolution material for your media channels. To view video stories on diverse topics, visit www.sap-tv.com. From this site, you can embed videos into your own Web pages, share video via email links, and subscribe to RSS feeds from SAP TV.

Follow SAP on Twitter at @sapnews.

SAP Offers Fast Track to Innovation Via a Flexible Path to the Cloud

2013-07-26T23:28:00.001+03:00

IMPLEMENTERS AND RE-IMPLEMENTERS

2012-02-23T14:19:00.000+03:00

IMPLEMENTERS AND RE-IMPLEMENTERS

This post deals with how to implement ERP at a Class A level. Further, it applies to both first-time implementers and to re-implementers, companies whose first implementation resulted in Class C or D results and who now want to get the full bang for their buck. For those of you who’ll be re-implementing, be of good cheer:

Many companies now getting Class A results got there via re-implementation. The steps involved in a re-implementation are vir-tually identical to a first-time implementation; the main difference is that some of the necessary steps may have already been accom-plished satisfactorily.

Many companies today need to re-implement. Some of these are companies who, as we saw earlier, thought they were implement-ing ERP, but actually were only installing enterprise software. Their motivations were largely software-driven: Y2K compliance, legacy systems becoming unworkable, multiple hardware platforms sup-porting too many operational systems, etc. The problem is that, in many cases, the new software was installed but not much else changed.

Many companies’ ERP implementations in the past started out with the best intentions in the world. Company S, for example, wanted to re-engineer and improve processes, to improve the way they managed the business, and to give far better customer service to an increasingly demanding customer base. During the implementa-tion, however, they were overwhelmed by the software. Enterprise software tends to be highly complex, and complexity can make it very difficult to install. As the implementation project took longer

and longer, and cost more and more, top management became more and more impatient. The result: a decision to forget about imple-menting better business processes and just get the software running.

Thus, Company S has new software but is still running the busi-ness in much the same old way, and thus they need to re-implement. If you’re in this category, this book is intended for you every bit as much as for the company implementing for the first time.

THE APPLICABILITY OF ERP

2012-02-23T14:15:00.000+03:00

THE APPLICABILITY OF ERP

ERP and its predecessor, MRP II, have been successfully imple-mented in companies with the following characteristics:

• Make-to-stock

• Make-to-order

• Design-to-order

• Complex product

• Simple product

• Multiple plants

• Single plant

• Contract manufacturers

• Manufacturers with distribution networks

• Sell direct to end users

• Sell through distributors

• Businesses heavily regulated by the government

• Conventional manufacturing (fabrication and assembly)

• Process manufacturing

• Repetitive manufacturing

• Job shop

• Flow shop

• Fabrication only (no assembly)

• Assembly only (no fabrication)

• High-speed manufacturing

• Low-speed manufacturing

Within the universe of companies that make things—manufac-turing enterprises—ERP has virtually universal application. This book deals with how to implement ERP in any of the above envi-ronments. Some people struggle with this applicability issue; they sometimes say: “We’re different, we’re unique, it won’t work for us.”

We’ve heard that a lot over the years. What we have never heard is:

“We’re different, we’re unique, Generally Accepted Accounting Principles (GAAP) won’t work for us.” Well, ERP is the logistics analogof GAAP. It’s a defined body of knowledge that contains the standard best practices for managing that part of the business. The main difference between the two is that ERP and its predecessors have been with us for about four decades; double-entry bookkeep-ing and its offshoots have been around for four centuries.

MANUFACTURING RESOURCE PLANNING - MRP

2012-02-23T14:11:00.000+03:00

MANUFACTURING RESOURCE PLANNING

A method for the effective planning of all resources of a manufac-turing company. Ideally, it addresses perational planning in units, financial planning in dollars, and has a simulation capabil-ity to answer “what-if” questions. It is made up of a variety of functions, each linked together: business planning, sales and op-erations planning, production planning, master scheduling, mate-rial requirements planning, capacity requirements planning, and the execution support systems for capacity and material. Output from these systems is integrated with financial reports such as the business plan, purchase commitment report, shipping budget, and inventory projections in dollars. Manufacturing resource plan-ning is a direct outgrowth and extension of closed-loop MRP.

The next step in this evolution is called Manufacturing Resource Planning or MRP II (to distinguish it from Material Requirements Planning, MRP). A direct outgrowth and extension of closed-loop MRP, it involves three additional elements:

1. Sales & Operations Planning—a powerful process to balance demand and supply at the volume level, thereby providing top management with far greater control over operational aspects of the business.

2. Financial interface—the ability to translate the operating plan (in pieces, pounds, gallons, or other units) into financial terms (dollars).

3. Simulation—the ability to ask “what-if” questions and to ob-tain actionable answers—in both units and dollars.

This was done only on an aggregate, “rough-cut” basis, but to-day’s advanced planning systems (APS) enable effective simu-lation at very detailed levels.

Now it’s time to define Manufacturing Resource Planning. This definition, and the one to follow, come from APICS—The Educa-tional Society for Resource Management. APICS is the leading pro-fessional society in this field, and its dictionary has set the standard for terminology over the years.

SAP Books 1

2012-02-23T14:01:00.001+03:00

SAP Books for Kindle

Kindle is a great reading device from Amazon.com. I see it as an interface to the largest library on the Planet Earth. Within seconds you have access to almost 1 milion books.

If you don't have one yet, you should get one now. I recommend theKindle Wi-Fi - it's only 139 USD.

As a SAP Consultant, I checked if there are any SAP books available for Kindle. I found a lot of interesting books which cost a lot less than the paper edition.

Here is a list of the SAP Books available for Kindle:

Sams Teach Yourself SAP in 24 Hours
Book Description: Sams Teach Yourself SAP in 24 Hours, Second Edition is the perfect tool for learning one of the most sophisticated enterprise solutions available today. Designed to being with the basics, you will become acquainted with the entire SAP system, from navigation to creating your own reports. You'll also cover:

Implementation tools and methodologies
NetWeaver
ECC 5.0
Designing Screens and menus
Reporting
Integration with Microsoft Office
And more

SAP Implementation Unleashed: A Business and Technical Roadmap to Deploying SAP
Book Description: SAP can help you capture better information and deliver it more quickly, allowing you to make better decisions and maximize the business value of everything you do. However, SAP implementations require massive effort, total buy-in, and significant change throughout the organization. In SAP Implementation Unleashed, 10 expert SAP project managers, functional consultants, and technologists guide you through the entire journey, helping you avoid pain and pitfalls and gain all the benefits of SAP.

SAP R/3 for Everyone: Step-by-Step Instructions, Practical Advice, and Other Tips and Tricks for Working with SAP
Book Description: SAP R/3 for Everyone is the nontechnical user's guide to working with SAP R/3, the leading business enterprise software product in the world. Written and road-tested by experienced SAP R/3 users and trainers, this book saves typical SAP R/3 users time and trouble by providing them with the universal skills needed to work with any module of this complex software.
SAP R/3 can be used effectively by anyone who can perform a handful of simple procedures that are employed in nearly every SAP R/3 transaction. The authors explain these procedures in plain English, using illustrations and real-world examples.

SAP® ERP Financials and FICO Handbook
Book Description: This up-to-date quick reference guides the reader through the most popular SAP module. It includes material on SAP ERP Financials, SAP FICO, and SAP R/3. Unlike most books that only provide questions and answers for certification or interview preparation, this book covers fifty common business situations related to ERP Financials/FICO and provides practical solutions for them. In addition, the book begins with over 200 FAQs and certification questions for those who need a quick review of the material. A CD-ROM with FICO templates, short cuts, and color figures from the book is included with the text.

SAP® Business Information Warehouse Reporting
Book Description: Your Hands-On Guide to SAP Business Information Warehouse. Give your company the competitive edge by delivering up-to-date, pertinent business reports to users inside and outside your enterprise. SAP Business Information Warehouse Reporting shows you how to construct Enterprise Data Warehouses, create workbooks and queries, analyze and format results, and supply meaningful reports. Learn how to use the BEx and Web Analyzers, Web Application Designer, Visual Composer, and Information Broadcaster. You will also find out how to forecast future business trends, build enterprise portals and websites, and tune performance. Group data into InfoCubes and DataStore Objects and generate reports using queries and workbooks. Work with the BEx Analyzer, Web Analyzer, and Query Designer. Build queries and reports using the Business Administration Workbench. Add attachments and drill-through using Document Integration and RRI. Format and distribute results using Report Designer and Information Broadcaster. Extend functionality with Enterprise Portal, Data Modeling, and Visual Composer. Deploy charts, maps, diagrams, and unit of measure conversions. Predict trends and possible outcomes using SBC and Integrated Planning. Generate HTML pages using Enterprise Reporting and Web Application Designer. Create BI-based corporate Web and intranet sites using SAP Enterprise Portal.

SAP Project System Handbook (Essential Skills (McGraw Hill))
Book Description: Centralize and Control Enterprise Project Management Plan, execute, and track projects across the entire lifecycle using SAP Project System (PS) and the in-depth information contained in this comprehensive volume. SAP Project System Handbook explains how to configure PS for optimal performance, design structures and networks, create project blueprints, generate cost estimates and materials demands, and use the latest SAP tools. You will find full details on scheduling work, automating and tracking billing and POs, triggering events, and integrating with most other SAP modules. An invaluable reference to PS transaction codes is also included. * Configure and customize SAP Project System * Build PS objects, networks, and Work Breakdown Structures * Use customer and service projects to track sales and billing * Understand Assembly Processing concepts * Create integrated cost, settlement, and resource plans * Develop financial, workforce, and materials management blueprints * Perform resource-related billing using Dynamic Item Processor Profiles * Simulate and automatically generate sales documents, POs, and quotations * Manage corporate investments with IM structures and AUCs * Construct timesaving Project, Network, and Milestone Templates * Extend functionality with the Project Builder, Planning Board, and ProMan

Configuring SAP ERP Sales and Distribution
Book Description: The first and only book to offer detailed explanations of SAP ERP sales and distribution. As the only book to provide in-depth configuration of the Sales and Distribution (SD) module in the latest version of SAP ERP, this valuable resource presents you with step-by-step instruction, conceptual explanations, and plenty of examples. If you're an SD consultant or are in charge of managing an SAP implementation in your enterprise, you'll want this valuable resource at your side.

SAP is one of the leading Enterprise Resource Planning (ERP) software products on the market, with over 40,000 implementations
Covers the latest version of SAP ERP-ECC 6.0
Covers common through advanced configurations, so it's helpful no matter what your level of experience with SAP
Explains the conceptual framework behind the configuration process

If your company uses the SD module, keep this indispensable guide on hand

SAP MM - A Complete Reference to SAP MM (Material Management)
Book Decription: This book is for those who are in SAP MM or interested to learn SAP MM. This book is wrote keeping in mind the problems faced by newcomers or end users. It includes screen shot of SAP and Describes each and every aspect like customization paths, implementation etc...

SAP: An Executive's Comprehensive Guide
Book Description: Crucial Help for Getting the Most from Today’s Information Systems Technology Deciding what type of information systems your company will need to stay competitive into the twenty-first century is a highly complex and risky exercise. SAP: An Executive’s Comprehensive Guide provides the information you need to assess your options realistically and make the most informed decisions possible. Written by a team of business, financial, and information systems professionals who have extensive experience with SAP system implementations at Fortune 500 companies, this book:

Explores the strategic role of client/server enterprise computing now and in the next century
Helps you to evaluate your company’s long-term IS requirements
Offers an impartial look at SAP R/3 strengths and weaknesses
Outlines the costs and benefits involved in implementing SAP R/3
Helps you decide whether SAP R/3 is right for your organization
Shows you how to make SAP R/3 an integral part of process redesign
Covers all key technical SAP aspects of concern to IS professionals

SAP Enterprise Structure Concept and Configuration Guide - A Case Study
Book Description: SAP enterprise structure is organizational structure that represents an enterprise in SAP R/3 system. It consists of some organizational units which, for legal reasons or for other specific business-related reasons or purposes, are grouped together. I wrote this e-book to explain in details about the SAP Enterprise Structure (MM and related modules such as FI, Logistics, and SD) Concept and Configuration Guide. Just like other articles on my SAP Study Materials blog, I wrote the e-book in a simple-to-understand way, so you can learn it easily. You don't need to have extensive SAP knowledge and experience to be able to configure the SAP Enterprise Structure, as the e-book start explaining each step with the basic concept behind it. After understanding the concept, the e-book will show the step-by-step configuration with the screen shots.

SAP NetWeaver Portal Technology: The Complete Reference
Book Description: Your Hands-on Guide to SAP NetWeaver Portal Technology Master SAP NetWeaver Portal with the most comprehensive, step-by-step reference available on the entire portal implementation life cycle. Written by SAP architect Rabi Jay, this book provides everything you need to plan, design, install, configure, and administer SAP NetWeaver Portal, including SAP NetWeaver Application Server Java. SAP NetWeaver Portal Technology: The Complete Reference is filled with detailed descriptions, numerous illustrations, and hundreds of expert tips. Design and deploy portals with high availability, scalability, and performance. Implement single sign-on to backend systems and integrate SAP and non-SAP applications. Configure reliable J2EE engine and portal security, and devise a flawless portal backup and restore strategy. Improve performance using portal workload, GC, thread dump, and HTTP analysis. Plan futuristically using PAM, release planning, and maintenance strategy Design global portals using federated portal networks and external-facing portals Implement self-registration and delegated user and content administration Enable authorization using security zones, UME actions, and ACL permissions Manage users centrally using LDAP, UME, and Identity Management Implement user-, type-, and attribute-based authentication Brand your portal using portal desktop rules, themes, and framework pages Configure portal transports, and deploy patches and business packages using JSPM Monitor your portal using CCMS and GRMG Availability Monitoring Manage your portal centrally using NWA and maintain systems using SLD.

List of SAP CO Activities

2012-02-23T13:52:00.000+03:00

List of CO Activities

The following are the List/steps-wise-configuration activities of of SAP CO Module :

Introduction to SAP R/3
Introduction to ERP, Advantages of SAP over other ERP Packages
Introduction to SAP R/3 CO (Controlling)
Enterprise Structure of CO (Basic Setting of CO)

Defining Controlling Area
Defining Number ranges for Controlling Area
Maintain Planning Versions

Cost element accounting:

creation of primary cost elements from financial accounting area
creation of primary cost elements from controlling area
display of cost element master records
change cost element master records
primary cost element categories
secondary cost element categories
default account assignments

Cost Center Accounting

Defining Cost Center Standard Hierarchy
Creation of Cost Centers and cost center groups
display cost center master records
change cost center master records
creation of cost center groups
posting to cost centers
reposting of co line items
Repost of Costs
planning for cost centers
Overhead Calculation
creation of secondary cost element master records
Creation and Execution of Distribution Cycle
creation and execution of assessment cycles
cost center reports
Internal Orders
Defining order types
Creation of internal order master records
display internal order master records
change internal order master records
postings to internal orders
planning for internal orders
reposting co line items for internal orders
repost of costs for internal orders
Report of Variance analysis for internal orders
creation of real internal orders
posting of business transaction to real orders
definition of allocation structures
definition of settlement profiles
definition of planning profiles
settlement of real internal orders
budgeting and availability control
maintain number ranges for budgeting
define tolerances for availability control
specification of exempt cost elements from availability control
maintenance of budget manager

Profit Center Accounting

Basic Settings for Profit Center Accounting
Creation of Dummy Profit Centers
maintenance of control parameters for actual postings
Maintaining planning versions for profit centers
maintaining the number ranges for profit center documents
Creation of profit center master records
display of profit center master records
changing the profit center master records
Creation of revenue cost elements
Automatic Assignment of Revenue elements for Profit Centers
assignment of profit centers in cost center master records
creation of account groups in profit center accounting for planning
planning for profit and loss account items
planning for balance sheet items
posting of transactions into profit centers
generating the variance reports for profit and loss account items
Generating the variance reports for balance sheet items.

Profitability analysis

Maintaining the operating concern
Define profitability segment characteristics
Assignment of controlling area to operating concern
Activating the profitability analysis
Define number ranges for actual postings
Mapping of SD conditions types to COPA value fields
Creation of reports
Viewing the reports

Product costing:
Product cost planning:

creation of bill materials
creation of activity type master records
planning for activity hours
activity type price calculation
creation of work center master records
creation of routings
defining cost sheet( over head structures)
assignment of cost sheet to costing variant
creation of cost estimate with quantity structure
marking
releasing
creation of cost estimate without quantity structure

Outline of SAP FI module

2012-02-23T13:49:00.000+03:00

Outline of SAP FI module

The following are the steps-wise-configuration of SAP FI Module :

Introduction to SAP R/3
Introduction to ERP, Advantages of SAP over other ERP Packages
Introduction to SAP R/3 FI
Financial Accounting Basic Settings:

Define Company
Define Company Code
Assignment of company to company code
Definition of business area
Definition of fiscal year variant
Assignment of fiscal year variant to company code
Definition of posting period variant
Assignment of posting period variant to company code
Open and close posting period
Defining document type & number ranges
Maintenance of field status variants
Assignment of field status variant to company code
Definition of tolerance groups for GL accounts
Definition of tolerance groups for employees
Assignment of tolerance groups to users
Taxes on Sales & Purchases (input & output)
Creation of chart of Accounts
Defining Accounts Groups
Defining Retained Earnings Account.

General Ledger Accounting:

Creation of General Ledger Master (with and with out reference)
Display/Change/Block/Unblock of general ledger master
Document Entry posting normal postings and posting with reference
Display and change of documents
Display of GL balances
Display GL account line items
Parked documents
Hold documents
Creation of Sample Document and postings with sample documents
Defining recurring entry document and postings with recurring doc.
Creation of account assignment model and posting
Configuration of line layouts for display of GL line items
Reversal of individual documents, mass reversal , reversal of cleared items and reversal of accrual and deferral documents
Defining Exchange Rate types and Translation ratios
Define Exchange rates & posting of foreign currency transactions
Interest calculations on term loans
Accrual and Deferral documents

Accounts Payable

Creation of vendor account groups
creation of number ranges for vendor master records
assignment of number ranges to vendor account groups
Creation of tolerance group for venders
Creation of vendor master (display/change/block/unblock of vender master)
Posting of vendor transactions (invoice posting, payment posting, credit memo)
Settings for advance payments to parties (down payment) and clearing of down payment against invoices (special GL transactions)
Posting of partial Payment & Residual Payment
Creation of payment terms,
Creation of house banks and account ids.
Creation of check lots and maintenance of check register
display check register
cancellation of un issued checks
creation of void reasons
cancellation of issued checks
posting of purchase returns
Configuration of automatic payment program
Payment to vendors through APP
Defining correspondence & party statement of accounts

Accounts receivable:

Creation of customer account groups
creation of number ranges for customer master records
assignment of number ranges for customer account groups
Creation of tolerance group for customers
Creation of customer master (display/change/block/unblock of vender master)
Posting of customer transactions (sales invoice posting, payment posting, debit memo)
Settings for advance payment from parties (down payment)
Configuration of settings for dunning
generating the dunning letters
defining correspondence and party statement of accounts
Bills of exchange
posting of sales returns

Asset Accounting

Defining chart of depreciation
creation of 0% tax codes for sales and purchased
assignment of chart of depreciation to company code
Defining account determination
definition of screen lay out rules
definition of number ranges for asset classes
Integration with General Ledger & Posting rules
Defining Depreciation key
definition of multilevel methods
definition of period control methods
creation of main asset master records
creation of sub asset master records
Acquisition of fixed assets
sale of fixed assets
transfer of assets
Scrapping of assets,
Depreciation run
Line item Settlement of assets under construction of capital work in progress

New General ledger accounting:

Parallel ledgers
document splitting
Segments.

Reports

Financial statement version
General Ledger
Accounts Payable
Accounts Receivable
Assets Reports

Complete List of SAP Modules

2012-02-23T13:46:00.000+03:00

Complete List of SAP Modules

This page contains following topics :

A) Environments for SAP ERP

1. Supported Hardware

2. Supported Database

3. Supported Operating System

B) COMPLETE MODULES OF SAP ERP

1. Basis

2. ABAP/4 Programming

3. FI (Financial Accounting)

4. CO (Controlling)

5. EC (Enterprise Controlling)

6. TR (Treasury)

7. IM (Investment Management)

8. HR (Human Resource)

9. SD (Sales and Distribution)

10. Logistics Information System

11. MM (Materials Management)

12. PM (Plant Maintenance)

13. PP (Production Planning)

14. QM - Quality Management

15. BW (Business Warehousing)

16. IS (Industry Solutions) / SAP for Industries specific solutions

17. CS (Customer Service)

18. SMB

19. CA (Cross Application Components)

20. PS (Project Systems)

21. mySAP SEM

22. mySAP CRM (Customer Relationship Management)

23. mySAP Product Life Cycle Management

24. SCM (SAP Supply Chain Management)

25. Netweaver

26. mySAP SRM (Supplier Relationship Management)

A) ENVIRONMENTS FOR SAP

1. Supported Hardware for SAP ERP

SAP can be installed on the following systems. The functionality and programming technique is same for all systems.

1.1. HP

1.2. IBM

1.3. Sun

1.4. AT&T

1.5. AS400

1.6. Bull

1.7. Sequent

1.8. SNI

1.9. Compaq Digital

2. Supported Database for SAP ERP

SAP is a back-end-free ERP system. That means the following Database can be used in SAP software. The functionality/programming technique is same for all database system.

2.1. Oracle

2.2. MS SQL

2.3. Informix

2.4. Sybase

2.5. Adabas D

2.6. DB2 for AIX

2.7. DB2/400

3. Supported Operating System for SAP

SAP can be installed on the following platforms (Operating systems):

3.1. MS Windows NT

3.2. OS/400

3.3. Unix

3.4. Solaris

3.5. AIX

3.6. HP UX

3.7. Sinux

B) Complete SAP Modules:

1. SAP Basis

1.1. Security (BC - SEC)

1.2. Application Link Enabling (ALE)

1.3. Remote Function Calls (RFC)

1.4. Object Linking and Embedding (OLE)

1.5. Common Program Interface Communications (CPI-C)

1.6. Electronic Data Interchange (EDI)

1.7. Customizing (BC-CUS)

1.8. ABAP Programming and Runtime Environment (BC - ABA)

1.9. Client Server Technology (BC - CST)

1.10. Network Integration (BC - NET)

1.11. Basis Services/ Communication Interfaces (BC - SRV)

1.12. Computing Center Management System (BC - CCM)

1.13. Upgrade General (BC - UPG)

1.14. Change and Transport System (BC - CTS)

1.15. Operating System Platform(BC - OP)

1.16. Database Interface, database platforms (BC - DB)

1.17. Front End Services (BC - FES)

1.18. ABAP Workbench (BC - DWB)

1.19. Documentation and Translation Tools (BC - DOC)

1.20. Controls and Control Framework (BC - CI)

1.21. Business Management (BC - BMT)

1.22. Middleware (BC - MID)

1.23. Computer Aided Test Tool (BC - CAT)

1.24. Ready to Run R/3 (BC - BRR)

1.25. Authorisations System Monitoring with CCMS Workload Alert Monitor

2. ABAP/4 Programming

2.1 ABAP Workbench

2.2 Menu Painter

2.3 Screen Painter

2.4 Data Dictionary

2.5 SAP Script

2.6 Business Workflow (BC - WF)

2.7 ALE

2.8 EDI

2.9 Business Connector

2.10 Business Server Pages

2.11 Internet Application Server

2.12 Mercator Report Painter

2.13 ALV reporting

2.14 Report writer

2.15 Dialog Programming

2.16 Repository Information System

2.17 ABAP 00

2.18 IDOCS

2.19 LSMW

2.20 Smartforms

2.21 EBP

2.22 ASAP methodology

2.23 ABAP Query

3. SAP FI (Financial Accounting)

3.1. General Ledger Accounting (FI - GL)

3.2. Special Ledger (FI - SL)

3.3. Extended Ledger

3.4. Accounts Payable (FI- AP)

3.5. Accounts Receivable (FI - AR)

3.6. Asset Accounting (FI - AA)

3.7. Bank Accounting

3.8. Funds Management (FI - FM)

3.9. Travel Management (FI-TM)

3.10. Consolidation

4. SAP CO (Controlling)

4.1. Cost Centre Accounting (CO - CCA)

4.2. Overhead Cost Controlling (CO - OM)

4.3. Activity Based Coding (CO - ABC)

4.4. Product Cost Controlling (CO - PC)

4.5. Profitability Analysis (CO - PA)

4.6. Material Ledger (CO - ML)

5. SAP EC (Enterprise Controlling)

5.1. Consolidation (EC - CS)

5.2. Executive Information System (EC-EIS)

5.3. Profit Center Accounting (EC - PCA)

5.4. Business Planning and Budgeting

6. SAP TR (Treasury)

6.1. Cash Management (TR - CM)

6.2. Loans Management (TR - LM)

6.3. Market Risk Management (TR - MRM)

6.4. Treasury Management (TR - TM)

6.5. Funds Management (TR - FM)

6.6. Information System

7. SAP IM (Investment Management)

7.1. Investment Programmes

7.2. Investment Measures (orders/products)

7.3. Corporation Wide Budgeting

7.4. Appropriation Requests

7.5. Automatic Settlement of Fixed Assets

7.6. Depreciation Forecast

7.7. Information System

8. SAP HR (Human Resource)

8.1. Recruitment

8.2. Personnel Administration

8.3. Benefits Administration

8.4. Compensation Management

8.5. Personnel Development

8.6. Organizational Management

8.7. Travel Management

8.8. Training and Events Management

8.9. Personnel Planning

8.10. Time Management

8.11. Incentive

8.12. Wages

8.13. Workflow

8.14. Payroll

8.15. Internet Scenarios

8.16. Information System

9. SAP SD (Sales and Distribution)

9.1. Master Data

9.2. Sales

9.3. Sales Support

9.4. Sales Information System

9.5. Billing

9.6. Special Business Transactions

9.7. Shipping

9.8. Transportation

9.9. Credit Control

9.10. QM in SD

9.11. Internet

9.12. Foreign Trade

9.13. Electronic Data Interchange

10. SAP Logistics Information System

10.1. Purchasing Information System

10.2. Sales Information System

10.3. Inventory Controlling

10.4. Retail Information System

10.5. Production Planning and Control Information System

10.6. Plant Maintenance Information System

10.7. Project Information System

11. SAP MM (Materials Management)

11.1. Purchasing

11.2. Invoice Verification

11.3. Logistics (General)

11.4. Logistics Information System

11.5. Inventory Management

11.6. Inventory / Valuations

11.7. Materials Planning

11.8. Workflow

11.9. External Services Management

11.10. QM in MM

11.11. Warehouse Management

12. SAP PM (Plant Maintenance)

12.1. Preventative Maintenance

12.2. Maintenance Order Management

12.3. Maintenance Projects

12.4. Service Management

12.5. Maintenance Planning

12.6. Equipment and Technical Objects

12.7. Structuring Technical Systems

12.8. PM Processing

12.9. Work Clearance Management

12.10. Internet Scenarios

12.11. Customising

12.12. Information System

13. SAP PP (Production Planning)

13.1. Make to Order (CR)

13.2. Make to Order (PIR)

13.3. Repetitive Manufacturing

13.4. PP for Process Industries (PP - PI)

13.5. PP - Processes

13.6. Sales and Operations Planning

13.7. Capacity requirements

13.8. Master Planning

13.9. KANBAN

13.10. Production Orders

13.11. Product Cost Planning

13.12. Plant Data Collection

13.13. Assembly Orders

13.14. Information System

14. SAP QM - Quality Management

14.1. Planning

14.2. Inspections

14.3. Notifications

14.4. Control

14.5. Certificates

14.6. Test Equipment Management

14.7. QM-IS

15. SAP BW (Business Warehousing)

15.1. Data Warehousing

15.2. BI Suite - Business Explorer

15.3. BI Platform

15.4. ODS Structures

15.5. Development Technologies

15.6. Info Cube

15.7. Design Build

16. SAP CS (Customer Service)

16.1. Service Processing

16.2. Controlling

16.3. Service Contracts

16.4. Workflow in Customer Service

17. SAP SMB

17.1. SAP SMB

18. SAP CA (Cross Application Components)

18.1. SAP Business Workflow

18.2. Application Link Enabling (ALE)

19. SAP PS (Project Systems)

19.1. Basic Data

19.2. Operational Structures

19.3. Project Planning

19.4. Approval

19.5. Information System

19.6. Project Execution and Integration

19.7. Work Breakdown Structure

20. mySAP SRM (Supplier Relationship Management)

20.1. Self Service Procurement

20.2. Service Procurement

20.3. Plan Driven Procurement

20.4. Spend Analysis

20.5. Strategic Sourcing

20.6. Catalogue Content Management

21. mySAP SEM

21.1. Business Consolidation (SEM-BCS)

21.2. Business Information Collection (SEM-BIC)

21.3. Business Planning and Simulation (BW-BPS)

21.4. Corporate Performance Monitor (SEM-CPM)

21.5. Stakeholder Relationship Management (SEM-SRM)

22. mySAP CRM (Customer Relationship Management)

22.1. CRM Enterprise

22.2. Field Applications

22.3. Interaction Center

22.4. E-Commerce

22.5. Channel Management

22.6. Industry Specific CRM

23. mySAP Product Life Cycle Management

23.1. Document Management

23.2. Engineering Change Management

23.3. Enterprise Content Management

23.4. Classification

23.5. Basic Data for Process Manufacturing

24. SAP SCM (SAP Supply Chain Management)

24.1. SCM Process and Business Scenarios

24.2. SAP Forecasting and Replenishment

24.3. SAP Advance Planning and Optimization (SAP - APO)

24.4. SAP Inventory Collaboration Hub (SAP - OCH)

24.5. SAP Event Management (SAP - EM)

24.6. SCM Basis

25. SAP Netweaver

25.1. SAP Masterdata Management

25.2. Information Integration

25.3. Portal Content

25.4. Process Integration

25.5. Knowledge Management

25.6. Life Cycle Management

25.7. SAP Business Intelligence

25.8. SAP Visual Composer

25.9. People Integration

25.10. Application Platform

25.11. SAP Web Application Server

25.12. SAP Business Information Warehouse

25.13. SAP Solution Manager

25.14. SAP Enterprise Portal

25.15. SAP Mobile Engine

25.16. Security

26. SAP IS (Industry Solutions) / SAP for Industries

SAP has the following industries specific solutions:

26.1. Aerospace & Defence

26.2. Consumer Products

26.3. Defence & Security

26.4. Retail

26.5. Insurance

26.6. Mill Products

26.7. Higher Education & Research

26.8. Industrial Machinery & Components

26.9. Logistics Service Providers

26.10. Automotive

26.11. Chemicals

26.12. Pharmaceuticals

26.13. Banking

26.14. Telecoms

26.15. Life Sciences

26.16. Mining

26.17. Public Sector

26.18. Service Provider

26.19. Media

26.20. Healthcare

26.21. Oil & Gas

26.22. Utilities

26.23. Postal Services

Besides the above functionalities and flexibilities, SAP also adding new features, new modules, new environment and new industry specific solutions to its flagship ERP product continuously.

From the above list of diversify functionality, industry-specific solution with hardware and database independency depicts the power of SAP in the arena of ERP world.

Activity Based Costing

2012-02-23T13:33:00.000+03:00

Activity-Based View of Cost

The groundswell of ABC occurred in the mid-1980s. This approach was born to emphasize what is being done and what it costs to do it. Activity-Based Costing provided for a real understanding of the activities being performed by each department. While a direct cost method may assign costs to the correct objects, without the ABC view, it is still difficult to understand how to reduce costs or what the resources are actually doing.

The view of ABC originated in the resource center (albeit the resource view was most likely embedded within the general ledger [G/L] account coding), but the focus was to “convert” the G/L account view of the resources to a process per-spective. Exhibit 1.2 illustrates a traditional ABC cost flow. In this example, the G/L account view within the Distribution Support resource/cost center is con-verted into the view of the processes supported by that center, for example, Enter Documents and Schedule Laborers processes

The normal conversion routine was to establish a “resource driver” via an interview process, thereby gaining a snapshot perspective of the effort expended on each activity. The most common process breakdown was formulated by inter-viewing the resources or the cost center manager to determine a percentage of time spent on each process. This weighting factor became the resource driver or apportionment tool for costs assigned to the process view.

Achieving the activity view in this manner did provide an activity perspec-tive on costs. However, the perspective was achieved based on a primary as-sumption that, in order to reduce model maintenance workloads, the relationships would be frozen in a given point in time, for example, annually, semi annually, or quarterly at best. Also, in addition to the risks posed by using a stagnant model, the new activity view sacrificed and minimized the perspective of the resource view. The limited expression of resources along with the technical limitations of the computer hardware used to accommodate the models led to a number of weaknesses in the ABC models and in the information these models provided.

Weaknesses in the ABC models were:

• Models were backward-looking, using only historical data. The models had no predictive perspective at all.

• Causal relationships, particularly those between resources and processes, were expressed only in value or in ratios/portions of value.

• Models were usually of a step-down nature, that is, costs flowed from re-sources, to activities, to final cost objects. Fully burdened resource costs were not provided.

• Models were very maintenance intensive.

• Models had limited ability to deal with complexity.

• Because they were stand-alone models, there was the need to “feed the beast” with all the information required to run the model.

Weaknesses in the information provided by ABC were:

• All costs for a period would be spread to products without regard for actual utilization levels. This full absorption approach spread costs to products indiscriminately. Companies that utilized ABC information potentially faced the fixed cost death spiral.

• Because the nature of cost was viewed inconsistently, the ability to provide accurate gross and contribution margin was limited.

• From a control perspective, the capabilities were limited in that plans were static, and the ability to generate authorized reports generally was not supported.

• Limited variance calculations was available.

• The weak resource expression led to ineffective capacity management capabilities.

• Activity-Based Budgeting (ABB) efforts have a tendency to overstate the budget because all costs are usually extrapolated, including fixed costs.

Traditional costing certainly no longer supports management accounting needs. ABC provides more analytical capabilities, yet, as can be seen from the weaknesses listed, it does not completely support the needs of management ac-counting. Therefore, there is an identified gap in the tools and abilities to fully support management accounting.

History of SAP

2012-02-09T17:49:00.000+03:00

SAP's story is one of a steady rise from a small, five-man operation headquartered in southwest Germany's Rhine-Neckar region to one of the world's largest independent software providers and an employer of more than 54,000 people in over 50 countries.

1972 - 1981: The First 10 Years

"The First 10 Years" chronicles the highlights of the company's beginnings and subsequent development – from SAP's foundation, its first software modules, and the SAP R/2 system to the company's first-year revenues, first customers outside of Germany, and first tradeshow appearance.

1982 - 1991: The SAP R/3 Era

Using four servers with 64MB of memory. Employing 100 employees and signing its 1,000th customer. Reaching the DM100 million in revenues, and expanding abroad. The development of the SAP R/3 product generation. These and other landmark events are the subject of "The SAP R/3 Era."

1992 - 2001: The Age of E-Business

Reaching €6 billion, and employing more than 24,000 employees. Trade shows and conferences. Going public, and developing new technologies and platforms. Learn more about SAP's meteoric rise in "The Age of E-Business."

2002 to Today: SAP Today

SAP's story continues with the SAP NetWeaver platform, where technologies intertwine system landscapes and information flows, integrate companies and their employee teams, and establish connections among markets across virtually any perceived barrier. "SAP Today" describes the most recent technological and entrepreneurial milestones in SAP's continuing development.

[From www.sap.com]

History of QuickBooks

2012-02-09T17:36:00.001+03:00

History of QuickBooks

by Denise Loter

QuickBooks, one of three flagship products offered by California-based Intuit, was originally patterned after personal accounting package Quicken. Intuit executives wanted to provide a package that would offer small business owners the flexibility of an easy-to-use software package and the structure and compliance required to run a profitable business.

At its launch in 1998, QuickBooks was very popular with business owners with no formal accounting background. Unfortunately, although the package was easy to use and offered significant benefit to its customers, many accounting professionals felt that it lack the security, audit trail and robustness really needed. These concerns were exacerbated because many business owners used QuickBooks, which quickly established an 80% market share, for day-to-day bookkeeping – but relied on professional accountants for month-end and year-end services.

Intuit sought to bridge this gap, and by 2000 the software included several of the missing features including audit trails, double entries and other accounting-industry compliant items. Next, Intuit began developing niche products: including those with basic or advanced features, as well as packages tailored to the needs of specific industries like contracting, retail, manufacturing and even not-for-profit. QuickBooks also leveraged the relationship between small business owners and accountants/bookkeepers by developing the Pro Series, which is specifically designed for accounting professionals who support multiple small business clients.

More recently, enhancements to the QuickBooks line have included payroll processing, remote access options, electronic payment functions, online banking, import and export options from Microsoft Excel. QuickBooks Enterprise Solutions, a product aimed at larger organizations that run accounting via networks was developed and now runs in both Windows and Linux server environments.

Today QuickBooks continues to hold a dominant share of the market. Far from an adversarial relationship with accounting professionals, Intuit now has a network over 50,000 CPAs, bookkeepers, and consultants who serve as QuickBooks ProAdvisors. These professionals offer an array of services including QuickBooks training, technical support, consulting services, full-charge bookkeeping all targeted at the QuickBooks platform.