CHAPTER 6 :

THE INTERNAL
AUDIT
Ahmad F. Ibrahim
Angga P.Y
Balindo D.B.S

Mohamad Yusuf
Salim Al Habsyi
Triandika Ramadhan

The Nature of an
Internal Audit
Internal audit are activities that assessing
organizations strength and weakness.
Internal strength and weakness, together with
external opportunities and threats and clear vision
and mission statements, provide the basis for
establishing objectives and strategies; which
established to capitalizing strength and overcoming
weakness.

 Key internal forces

Firms should continually strive to improve on their

weaknesses, turning them into strengths, and
ultimately developing distinctive competencies that
can provide the firm with competitive advantages
over rival firms.

 The Process of Performing an Internal Audit

Performing an internal audit requires gathering,
assimilating, and evaluating information about the
firms management, marketing, finance and
accounting, production and operations, R&D, and
MIS operations.
Financial ratio analysis exemplifies the complexity
of relationships among the functional areas of
business.

The Resource-Based
View
The resource-based view approach to competitive
advantage contends that internal resources are
more important for a firm than external factors in
achieving and sustaining competitive advantage.
The basic premise of the RBV is that the mix, type,
amount, and nature of a firms internal resources
should be considered first and foremost in devising
strategies that can lead to sustainable competitive
advantage.

Integrating Strategy and

Culture

Management
The function of management has five basic
activities:
Planning Strategy formulation
Organizing
Motivating
Strategy implementation
Staffing
Controlling
Strategy evaluation

 Planning

Planning consists of all those managerial

activities related to preparing for the
future. Specific tasks include forecasting,
establishing objectives, devising
strategies, developing policies, and setting
goals.

 Organizing

Organizing includes all those managerial

activities that result in a structure of task
and authority relationships. Specific areas
include organizational design, job
specialization, job descriptions, job
specifications, span of control, unity of
command, coordination, job design, and
job analysis.

 Motivating

Motivating involves efforts directed toward

shaping human behavior. Specific topics
include leadership, communication, work
groups, behavior modification, delegation
of authority, job enrichment, job
satisfaction, needs fulfillment,
organizational change, employee morale,
and managerial morale.

 Staffing

Staffing activities are centered on personnel or

human resource management. Included are
wage and salary administration, employee
benefits, interviewing, hiring, firing, training,
management development, employee safety,
affirmative action, equal employment
opportunity, union relations, career development,
personnel research, discipline policies, grievance
procedures, and public relations.

 Controlling

Controlling refers to all those managerial

activities directed toward ensuring that
actual results are consistent with planned
results. Key areas of concern include
quality control, financial control, sales
control, inventory control, expense control,
analysis of variances, rewards, and
sanctions.

MARKETING

Customer
Analysis

Selling
Product
and
Services

Distributio
n

Product
and
Service
Planning

Marketing
Research

Pricing

Cost/Bene
fit Analysis

CUSTOMER
ANALYSIS
Definition:
The
examination
and
evaluation of consumer needs, desires,
and wants involves administering
customer surveys, analyzing consumer
information,
evaluating
market
positioning
strategies,
developing
customer profiles, and determining
optimal market segmentation strategies
Sometimes, the source of the analysis
can be a survey a research that are
conducted by independent researcher.
Such as in Lenovos case, when they
won the notebooks consumer
satisfaction survey, conducted by TBR
Source

SELLING PRODUCT
AND SERVICES

Selling = advertising, sales promotion,

publicity, personal selling, sales force
management, customer relations, and
dealer relations

Selling example:
lenovos advertisement

PRODUCT AND
SERVICE PLANNING
Definition: activities such as test
marketing; product and brand
positioning; devising warranties;
packaging; determining product
options,
features,
style,
and
quality; deleting old products; and
providing for customer service
In Lenovos casr, they sometimes
release they product earlier in
China to test how they product
market would fare in the global
market
Source

PRICING

A companies pricing decision is affected by

five stakeholders, which is: consumers,
governments, suppliers, distributors, and
competitors

Lenovo often uses tiered pricing, where

they create a different tier of product, from
low end to high end, to appease a different
segment of the market

Source

DISTRIBUTION
Distribution
activites
includes
warehousing, distribution channels,
distribution
coverage,
retail
site
locations, sales territories, inventory
levels and location, transportation
carriers, wholesaling, and retailing
Lenovo
called
their
distribution
strategy as Protect and Attack a term
coined by their CEO, Yan Quanying, in
2009, where they will Protect their
market share in China, and Attack
the emerging world market, by using a
robust distribution strategies
Source

MARKETING
RESEARCH

Definition: The systematic gathering,

recording, and analyzing of data about
problems relating to the marketing of
goods and services

Lenovo has its own market research team.

In one case, they are trying to gain an
insight on their Chinese market. So they
studied everything, from chinese billboard,
listening to chinese music, ethnographic
research, etc, to better understand their
chinese customer

Source

COST/BENEFIT ANALYSIS
Definition: Activities that involves assessing the costs,
benefits, and risks associated with marketing decisions

Three steps of cost/benefit analysis

Compare total cost to the associated decision
Estimate the total benefit from the decision
Compare the total cost with total benefit

Cost/benefit analysis is very important, especially when a

company is involved in a major strategic decision. In
Lenovos case, a prime example would be when they
decided to purchase IBM for 1,75 billion US dollars in 2004.
Source

FINANCE AND
ACCOUNTING

Finance and Accounting Functions

Investment
Decision

Financing
Decision

Dividend
Decision

FINANCIAL
RATIOS

Liquidity Ratios

Liqudity Ratios

2012

2013

2014

2015

2016

Quick Ratio (x)

0,89

0,85

0,79

0,70

0,64

Current Ratio (x)

1,00

1,02

1,00

0,89

0,82

Cash Flow per share (US$)

Free Cash Flow per share
(US$)

0,19

0,00

0,14

0,02

0,03

0,06

0,09

0,11

0,12

0,04

Leverage Ratios

Leverage Ratios

2012

2013

2014

2015

2016

LT Debt to Equity

0,00

11,31

0,33

45,93

82,78

Total Debt to Equity

2,57

17,87

15,06

74,38

107,42

Profitability Ratios

Profitability Ratios

2012

2013

2014

2015

2016

Return on Equity

19,42

23,57

27,03

20,37

-4,78

Return on Assets

3,00

3,74

4,45

3,05

-0,58

Return on Invested Capital

18,93

19,99

23,49

11,68

-2,30

Gross Profit Margin

11,65

13,07

13,08

14,43

14,75

Pretax Margin

1,97

2,37

2,62

2,10

-0,62

Net Margin

1,61

1,86

2,11

1,81

-0,32

Asset Utilization Ratios

Asset Utilization Ratios

2012

2013

2014

2015

2016

Total Assets Turnover

1,86

2,01

2,11

1,69

1,80

25,84

18,50

14,42

14,01

13,69

Inventory Turnover

Breakeven Analysis
Breakeven
Firm must sell product to meet TC=TR
Limitations
Breakeven analysis is only a supply side analysis
Assume FC constant
Assume average VC constant for every output
Assume unit produced = unit sold

Lenovo Breakeven
analysis

Lenovo breakeven from Motorola acquisition (Mobile Business Group)

1.82 acquisition in November 2014

Breakeven in 18 month

http://www.mobilenewscwp.co.uk/2016/03/10/lenovo-meets-vow-to-break-even-after-motorola-buy/

https://www.digifloor.com/wp-content/uploads/2014/01/lenovo-acquires-motorola-mobility.jpg

Lenovo Worldwide
manufacturing

Google picture

LeNOVO Research &

DEVELOPMENT
46 world-class laboratories & research center in Beijing, Shanghai,
Wuhan and Shenzhen, China; Yokohama, Japan, and Morrisville, North
Carolina, USA.
Lenovo R&D teams ultimate goal is to make more affordable products
that add value and connect with the evolving needs of customers.
Holds over 22,000 patents worldwide, with annual application
numbers exceeding 3,500.

http://www.wipo.int/wipo_magazine/en/2015/03/article_0002.html

Lenovos Expenditure RnD

from 2007-2016

Lenovo has its own RnD Facility and its expenditure on this section is
continuously increasing year over year. Through their press release, they
state that for a technology company like them, RnD plays an important
role driving business success through innovation. And it seems like this
options fit to Lenovo, because this company is still being the in the top 5
pc, smartphone and it solutions company in the world.

Management
Information Systems
It is a system that gather all the information
especially evaluation, result, and data from every
corner of the company (finance, marketing, hr,
operations) that could help to measure the
company performance in order to give some
information needed for the decision making made
by the company.

MIS in Lenovo

Value Chain Analysis

Refers to the process whereby a firm determines
the costs associated with organizational activities
from purchasing raw materials to manufacturing
products to marketing those products.
Knowing that Lenovo has a multiple resources
especially manufacturing and RnD plant across the
globe, Lenovo could make a lot of different of
consumer-tech product and fit along with a lot of
market segements

VCA on Lenovo
To compete with huge brand such as Samsung or Apple,
Lenovo strike the market with a huge of options of their
product lines. Lenovo wants to fill wide market from the
cheaper one to the luxurious one. It can be done because
Lenovo has the strong point in its multiple manufacturing
plant.
Quoting the COO of Lenovo North America, Emilio Ghilardi,
First in his mind is its complete line of products from
mobile devices all the way to the data center.
Source : http://www.extremetech.com/computing/221043how-lenovo-is-succeeding-despite-a-shrinking-market-for-pcs

IFE MATRIX
It is a tool to summarize and evaluate the major strengths and weaknesses in the
functional areas of a business. There are several steps to conduct this matrix
o List key internal factors as identified in the internal-audit process.
o Assign a weight that ranges from 0.0 (not important) to 1.0 (allimportant) to each factor
o Assign a 1-to-4 rating to each factor to indicate whether that factor
represents a major weakness (rating = 1), a minor weakness (rating =
2) a minor strength (rating = 3), or a major strength (rating = 4).
o Multiply each factors weight by its rating to determine a weighted
score for each variable.
o Sum the weighted scores for each variable to determine the total
weighted score for the organization.