NTULO, E

• Audit is generally defined as an examination of documents and results to find out whether they are in the desired order.

• Capital expenditure plans and control do not end with project construction but rather there is a last phase known as PCA.

• PCA is an attempt at assessing the actual profile of a given project in terms of results vis-à-vis the intended profile besides focusing on whatever matters the senior management desires.

• Usually a PCA is pursued as the major vehicle for project analysis.

• There are three types of audit1. Statutory audit – it is for financial accounts of

companies registered under the Companies Act,2002.2. Cost audit – mandatory for some industries3. Internal audit – voluntary for the verification of actions

against prescribed rules and procedures.• PCA is part of internal audit but goes beyond

comparison of actual against laid down rules.

• Any audit can be classified into two groups:a) Propriety audit Aims at checking if the action and decision are in

coordination with objectives. The auditor is allowed to question the policies, rules

and regulations instead of just comparing with the target.

The purpose is to find the cause of deviation so as to overcome the same problem in the future.

b) Efficient audit.Involves the comparison of actual with target.Target are not questioned.The difference between the propriety and efficient audit is that efficient audit can be performed by middle level personnel while propriety audit needs to be performed by the senior and well informed personnel with an open mind and analytical ability.

PROJECT CONTROL PCA

Refers to the periodic comparison of expected and actual expenditure before the completion of the capital project.

Usually conducted after the project construction is complete.

Aims at checking whether the project in question remains within acceptable limits

Mainly aims at improving the effectiveness next time a new project is undertaken

Is more of a routine activity alongside the progress of the project, and hence it normally involves the lower level of management.

It is not a routine activity and is specific to the project.

It is efficient audit It is Propriety audit

PCA must accomplish at least four primary objectives.1)Financial control mechanism – helps in evaluating Financial and non financial impact of the project to the company (positive or negative)How the actual results of the project compare to data and assumptions included in the program request.Future actions that are necessary or expected regarding the project.

2) Provide information for future capital expenditure decisions.3) Removing certain psychology and political impediments usually associated with asset control and abandonment.4) Psychological impact on the individuals proposing capital investment.

It helps provide a check on personal biases It improves the quality of estimates It improve the productivity as estimates becomes goals. It helps to identify limiting factors. Recognition to those involved in capital expenditure

planning

• The person or team to perform PCA needs to be identified at the planning stage

i. The group that evaluate the project ii. The project teamiii.A team representing the planning group, execution

group and neutral membersiv.An external agency can be entrusted with the task.

• Depends on the type of assets.Example strategic projects should be post audited more

frequently than operating capital projects.The riskiness of an asses should also determine the

frequency of post audit.

The size of the project Stake involved in the project Scope of the project Strategic importance of the project for the organization

Should not be shared, Why? It will affect the morale of the project team if the

results are not good.

1) Collection of appropriate information. Starting point – project completion report. Compare the projected data with the accounting data

collected through the regular MIS. The auditor needs to collect information about the

incremental cash flows rather than the total cost figures.

2) Recasting data.Collected data should be recast/ reorganized before they are compared.The collected data must be first adjusted with external factors like inflation before it is compared.3) Comparison of projected financial parameters with actualThe comparison is a starting point from which the real audit begins by comparing the comparable data.

4) Establish the possible causes of variance.Once variance figures are calculated, if they are significant the possible causes for the same are explored.5) Final recommendations.Once the causes are ascertained the PCA can give recommendations based on which the manager may take decisions for cash flow forecasting to reinvest or abandon the ongoing project.

• There are four techniques of PCA, namely:1) Cost variance analysis.In this method only the project cost (actual and estimate)

is studied.2)Profit variance analysisProfit analysis is carried out by the auditor, and the

estimated gain adjusted with the inflationary effect is compared with actuals.

3) Cash flow and financial criteria variance analysis.This method is developed around four schedules that can provide the management with the information it needs to find engineering, operational and administrative costing faults of past projects.a)Profit variance analysis schedule

b) Cash flow and financial criteria variance analysis schedule.This is used to illustrate project cash flow and return variances between the projected and actual results.c) Project cash flow schedule (projected and actual)These are used to show the projected and actual cash flows of the project.Each cash flow entry is made according to the time it was projected to be incurred or was actually incurredd) Supplementary schedule: these schedules explain for the significant variances

4) Present value Depreciation Technique (PVD)Calculation of year wise NPV and IRR.Is defined as the decline in the present value of the expected future cash flow during the year using IRR as the discount rate.

Stemar associates deals with sport items. Recently they have set up a manufacturing facility. The abstract of the capital budget and the actual cash flow in the first two years are given below. PCA has estimated the subsequent two years cash low. The estimate life of the project is four years. Initial cash outlay is Tshs. 134,000

Year Cash flow

Budgeted Actual Projected

1 30,000 25,000

2 50,000 40,000

3 70,000 50,000

4 70,000 50,000

The company’s cost of capital is 15%. Calculate:1.NPV, IRR and uniform annual series of the project.2.Present value of Depreciation3.Year wise NPV and year wise IRR for planned figures.4.Year wise NPV and year wise IRR for the first two years actual and next years project cash flows5.Show NPV and IRR variance over the period