MANAGEMENT & OPERATIONAL AUDIT
MANAGEMENT AUDIT :
“M.A. concern itself with whole field of activities of concern, from top to bottom, primarily concerned with whether the general management is functioning smoothly and satisfactorily.” T.G.
Rose
⇒ It is audit of management.
(Management Audit = Op. audit + Review of adequacy and competence of top management).
⇒ Primary accent is on evaluating managers ability to manage.
Scope of Management Audit 1. Purposes of organization.
2. Management Structure.
9. Material management.
10. Sales management.
11. Decision making process.
12. Books and Records.
13. Financial Managements.
Thus, management audit includes all the elements of op. audit also.
Need / Desirability of Management Audit
1. For detecting and overcoming current problems – Managerial problems and related operational difficulties can be spotted before their adverse effects. This is thus forward looking approach.
2. It is another tool to assist the organization in accomplishing desired objectives – Management Audit questionnaire pinpoint the important problem areas. Thus corrective actions can be taken so that organizational objectives can be achieved with utmost efficiency.
3. Helpful for ailing industries – Management audit is helpful in detecting the problems of such industries and providing the suggestion to improve them. It becomes more important if such industries are to be taken over by government etc.
4. Public sector undertakings – In such PSUs mostly problems occur because of poor management which may be improved by conducting management audits.
Organising Management Audit (1) Devising statement of policy.
(2) Location of audit function within organization or outside (3) Allocation of personnel.
(4) Staff training program.
(5) Time and other aspects.
(6) Frequency.
Conducting Management Audit
⇒ Getting facts through interview.
⇒ Measuring performance through Management Audit questionnaire.
⇒ Concluding it.
⇒ Oral recommendation for improvement.
Management Audit Reports
(1) Oral Reports : emergency wants. However not considered reliable. No permanent record but corrective steps can be taken immediately.
(2) Interim written report : If it is advisable to inform management before regular report for their early consideration.
(3) Regular written reports : formal report at end of work, may be short or long.
(4) Summary written report : “Flash’ reports summarizing various individual reports. For top management. Integrated approach. It facilitates management by exception because management (top) has not time to go to through those lengthy individual reports.
Organisation of written report (1) Format :
(i) Title
(iv) Findings, conclusions and opinions.
(v) Recommendations.
(vi) Auditee’s view.
(vii) Summary.
Behavioural Aspects in Management Audit Financial auditor deal with figures, Management auditor with people.
⇒ Colleagues in own department.
⇒ Staff of auditee department
⇒ Top management.
Causes :
1) Staff / line conflict : Management Auditors are staff, thus line unhappy.
Reasons
(i) Normally staff has superiority complex they don’t wonna understand line considering it to be inferior.
(ii) Staff may give irresponsible advice without judging its feasibility.
(iii) Line doesn’t co-operate with staff.
(iv) Line doesn’t provide sufficient information to staff.
(v) Line doesn’t use staff advice property.
(vi) Staff has fault finding advice.
(vii) Staff doesn’t consider line before advising.
2) Control : Auditee fear that his actions will have adverse effect on top management. They have
→ fear of criticism, → fear of changes and → punitive actions due to – (i) insensitive audit practices and (ii) Hostile audit style.
3) Changes : Resistance to changes. Auditor’s recommendation for changes to which auditee resists.
Solution to such problem 1. For constructive benefit.
2. Maximum service.
3. Minimum interference with regular op.
4. Officers should be informed and review findings with them before submission of formal management audit report to top management.
5. Trust and friendly atmosphere.
6. Constructive criticism.
7. Reporting Methods : Participative. Suggest with those who have to implement them.
8. Right management culture, good auditee and right auditor.
Three cases 1. Auditor Objective
Auditee Offensive
3. Auditor progressive Auditee participative.
Management objective.
Management Audit / Operational Audit
“Management audit would concern itself with whole field of activities of concern from top to bottom primarily concerned with whether general management is functioning smoothly and satisfactorily.”
- T.G. Rose
“Operational Audit is undertaken at the instance of management for providing it with information and appraisal of operations and activities.”
Management Audit Operational Audit
⇒ Audit of Management ⇒ Audit for management
⇒ Wider
⇒ Quality of Managing ⇒
Narrow
⇒ Quality of operational effectiveness Types of operational Audit
1. Functional Audits: Function are means of categorisation of activities of a business. It deals with functions of an organisation. Function audit requires specilisation by auditor. For e.g.:- production, payroll.
2. Organisational Audits: To emphasis how efficiently & effectively functions interact.
3. Special Assignment: At the request of Management For e.g.:- causes of ineffective IT system.
Differences between Financial / Operational Auditing
1. Purpose: opinion on financial information / effectiveness & efficiency of operations.
2. Area: only financial statements / all activities
3. Reporting: to all shareholders, bankers / to management.
4. End Task: reporting / suggestions.
Financial Operational
1 Opinion on effectiveness & efficiency of operation 2 All activities
3 Report to management
4 It ends in report including suggestions 5 By team of expert
6 May be by is house team 7 Optional
8 It depends
9 Comparatively new approach Need for Operational Audit because –
(1) Executives → no time to collect information and locate problems. Preoccupied with their own problems.
(2) Managers generally relied upon.
(3) Information transmitted by managers → biased.
(6) Operation of control → no idea of environmental condition. Whereas the operational auditor is always supposed to be open-minded.
(7) Survey → costly, time consuming.
Objectives of Op. Audit
1. Appraisal of control – Internal controls provide the essential means to ensure proper performance in each functional or organizational area for accomplishing the desired organizational objective. Operational auditing deals with the administrative controls and its purpose is to determine whether the controls are adequate.
2. Evaluation of performance – During performance evaluation, an operational auditor is heavily dependent upon availability of acceptable standards.
3. Appraisal of objectives and plans – Though controversial, one school of thought holds that operational auditing can be stretched to evaluate management objectives and plans. If the management policy favours installation of controls, controls would have to stay within the policy frame. Therefore, the basic things that should be evaluated is management policies, plans and objectives.
4. Appraisal of organization structure – Organisational structure provides the line of relationship and delegation of authority and tasks. This is also another important area for appraisal by the operational auditor.
Internal Auditing & Operational Auditing
“Internal Auditing is an independent appraisal activity within an organization for review of operation as
service to organization.” Institute of Internal Auditors. N.Y.
⇒ Aforesaid definition equals Internal and Operational Audit.
⇒ Operational Audit is not different from internal Auditing, it is merely an extension of Internal auditing into operational area.” Cadmus.
Difference between the two A. Perception :
Traditionally, Internal auditors appraised financial and A/c. controls. But gradually started covering non-A/c. control as well. However, approach is to examine the same from monetary point of view only. For e.g. → To Internal auditor loss of Rs.1,000 because of wrong totaling is important but for operational one, carrying of maintenance program of machine is more important. Thus, difference in approach. While the Internal auditor’s approach (Traditional) is about monetary / Quantitative terms. Operational Auditor give more importance to the qualitative aspect (viz. attending to customers complaints, etc.).
B. Issues : According to few, area of operational audit is young while Internal audit is old concept.
Extension of scope of operational audit to recommendation of specific changes. As per Lindberg &
Cohn, operational auditors shouldn’t involve in installing systems and controls of operational areas whose audit they’re expected to perform. Same way, as per Institute of Internal Auditors. Internal
C. Objectives : operational auditor try to verify fulfillment of plans and other requirements and focus on objectives and their achievement. Having good knowledge of business aspects. Open minded, well acquainted with performance yard-sticks, which he apply with suitable adjustments. Now, the modern definition of Internal auditing is broad enough to embrace the areas covered by operational auditing as well.