Вы находитесь на странице: 1из 15


We have learnt about the nature and characteristics of financial audit and cost audit in the previous chapters. Let us
now discuss a relatively new concept of auditing viz., Management Audit.
For last few decades, we have been watching that volume of business growth is not in proportion to the rise in
expenditure and investment in the new projects and the expansions of the present industrial projects. Unless
increase in the productivity, in line with high capital ratio, is achieved, improvement in the economy is not possible.
In the modern age, it has been realized that efforts must be made to set up aggregate growth per performance of the
business enterprises, a progressive reduction in the incidence of poverty and unemployment. To achieve the set
goals, the productivity has to be improved and thereby the performance of the business unit has to be increased. It
has therefore been suggested that induction of the management audit in every business enterprise has become
essential in the present era.
It is the audit conducted to examine all aspects of management in business. It includes the examination of plans,
objectives means of working, utilization of physical resources, organizational patterns, and coordination of various
activities at all levels and control of the entire business. Management audit takes into accounts both financial and
non-financial factors. Thus, management audit signifies critical assessment of the enterprise from the broadest
possible point of view. It reviews the companys past, present and future. Management audit now widely practiced to
evaluate managements objectives, the extent to which they have been achieved and company policies and producers
complied with, especially in large scale business organizations.

Management audit as a concept in management literature evolved over a period of nine decades. It was T.G. Rose, an
industrial consultant from the United Kingdom who had first introduced the concept of management audit in a paper
he presented in 1932 before the Institute of Industrial Management (now merged with the British Institute of
Management). The management audit concept, however, received greater attention in the United States of America.
Jackson Martin dell, an investment consultant and founder President of the American Institute of Management
(incorporated in 1948) developed a logical system of the concept of management and employed it for evaluating 52
publicly owned companies from 1948 to 1960. These studies were published under the title, Investment Value of
Management Excellence.


The term Management Audit is composed of two words, Management + Audit. Management is used to mean the
work of creating and maintaining environments in which people can accomplish goals efficiently. These
environments involve the integrated use of human, financial and natural resources for the purpose of achieving
goals. The word audit refers to a systematic examination by an independent person, of financial statements,
management functions and related operations to determine adherence to generally accepted accounting principles,
management policies and stated requirements. Auditing is as old as human civilization. It was used in ancient Egypt,
the Roman Empire, and of course the great mercantile establishments of the middle Ages. The common areas of
audit action throughout its history have been examining, verifying and reporting. Audit has been a key factor in
controlling economic and financial aspects of an organization.
On the basis of the above, the term Management Audit may be defined as a systematic examination of
managements efforts to accomplish goals efficiently and effectively in order to determine adherence to the
management policies and stated requirements. To accomplish the goals efficiently, management has to perform
certain operations. Management Audit critically examines these operations. The audit attempts to evaluate
managerial performance. That is why it is also termed as Performance Audit or Performance Appraisal. The main
aim of performance appraisal is to evaluate managerial efficiency. Consequently, it may also be termed as Efficiency
3.1 Traditional Concept
Simply defined, the management audit is a comprehensive and thorough examination of an organization or one of its
components. The audit is implemented to identify problems or significant weaknesses in the organization or
corporation, thus providing management with a tool to address and repair the problem area.
The term management audit is commonly used for examination and appraisal of the efficiency and effectiveness of
management in carrying out its activities. Areas of auditor interest include the nature and quality of management
decisions, operating results achieved, and risks undertaken.
The management audit focuses on results, evaluating the effectiveness and suitability of controls by challenging
underlying rules, procedures, and methods. Management audits, which are generally performed internally, are both
compliance reviews and goals-and-effect analyses. When performed correctly, they are potentially the most useful of
evaluation methods, because they result in change.
3.2 Modern Concept
Management audit is the composition of several audits such as Environment audit, Human resource audit, Quality
audit, Managerial style audit and Secretarial audit. These audits are helpful not only a strengthening internal
soundness but also the external activities resulting in evaluation of overall performance.
It is a new concept in the sphere of auditing and also still in the process of evaluation, it is also known by the name of
efficiency audit. It was United States of America, which coined the term management audit. The management audit
means the audit of management process and function; it is a comprehensive examination and a critical view of
management. Management audit ensures the efficiency of all areas covered by the management.


a) T. G. Tokhe says, The Management Audit is a comprehensive critical review of all aspects of process of
b) William P. Leonard, A comprehensive and constructive examination of an organizational structure of a
company, institution or branch of Government, or of any component thereof, such as a division or department,
and use of human and physical facilities. These definitions have pointed out that the management audit deals
with the management process as a whole. It facilitates the most effective relationship with the outside world
and the internal efficiency of the business.
c) According to Leonard, "management audit is a comprehensive and constructive examination of an
organisational structure of a company, institution or branch of Government, and components thereof such as a
division or department, and its plans and objectives, its means of operations and its use of human and physical
d) Leslie R. Howard, Management audit is an investigation of a business from the highest level downwards in
order to ascertain whether sound management prevails throughout, thus facilitating the most effective
relationship with the outside world and the most efficient organization and smooth running internally.
e) Taylore and Perry, Management auditing is a method to evaluate the efficiency of management at all levels
throughout the organization, or more specifically, it comprises the investigation of a business by an
independent body from the highest executive level downwards, in order to ascertain whether sound
management prevails throughout and to report as to its efficiency or otherwise with recommendation to
ensure its effectiveness where such is not the case.
According to Business Dictionary, Systematic assessment of methods and polices of a firms management in
the administration and the use of resources, tactical and strategic planning, employee and organizational
improvement. Its objectives are to
Establish the current level of effectiveness
Suggest improvements and lay down standards for future performance.
Management auditors (employees of the firm or independent consultants) do not appraise individual
performance, but may critically evaluate the senior executives as a management team.
f) According to the Institute of Internal Auditors, It is a future oriented, independent and systematic evaluation
of the activities of all levels of management for the purpose of improving organizational profitability and
increasing the attainment of the other organizational objectives.
g) According to the FFOIC, management audit is a systematic independent appraisal activity within an
organization for review of the entire departmental operation as a service to management. The overall objective
of operational is to audit and assist all levels of management in the effective discharge of their responsibilities
by furnishing them with objective analysis, appraisal, recommendations and pertinent comments concerning
the activities review.
h) According to American Institute of Management, Management Audit is a diagnostic appraisal process for
analyzing goals, plans, policies and activities in every phase of operation to turnover unsuspected weakness
and to develop ideas for improvement in areas that have escaped from Management Attention.
From the above definitions, it would be evident that the management audit is an examination, scrutiny and appraisal
of the plans, policies, objectives, and means of operation and the use of physical facilities. This reviews the policies
and actions of the management in turn. It will normally be so revealing as to encourage action of a perspective nature
that will put into effect the objects for which it was originally demanded.
A management audit can be defined as an audit which analyzes the effectiveness of the management team of a
company. The purpose of this is seven-fold: understand current practices, relate these to company financials, suggest
new procedures which will improve the efficiency of managers, present a financial gain related to these new
procedures, and create benchmarks and projections for the future. A management audit letter is the final piece of
material shared with the client; it is a report of the findings.


a) Management audit is of a recurring nature. It does not necessarily have an annual feature. It can be as
immediate as three months or it can be as long as three years.
b) The management audit need not necessarily be carried out after an organization has fallen sick. It is
preventive rather than curative in nature. The apparently healthy and profitable units require the audit of
their systems, procedures, methods, techniques and costs.
c) The management audit has various facets which include the appraisal of corporate structures, directorate,
fiscal policies, investor relations, and heath of earnings, production efficiency, cost control policies, executive
thinking and others.


Many accountants regard management audit as a vague concept and argue that it serves no useful purpose. It is also
argued that a review of past managerial actions and decisions would stifle the initiative and dynamism of managers.
The example of government organization is quoted in this regard. The fear of a detailed scrutiny of their actions
generates among the government officers a preference to keep their files up-to-date rather than achieve higher
productivity or efficiency. Also, it is easy to review a past decision or action. A management auditor can easily
criticize a decision on many grounds since he review it much later when all the information is available. The
decision-maker, on the other hand, faces a large number of uncertainties at the time of making a decision. Thus,
management audit, it is argued, may discourage initiative and dynamism.
The critics of Management Audit do not realize that it is not really a detailed audit of the kind that the government
auditors undertake. Management Audit is easily a review of the performance of various managers. It does not
examine whether the prescribed producers have been followed or not or whether all the formalities have been
completed or not. It evaluates the actual performance and compares them with the predetermined targets. It
concentrates on the results and not on the files. It concerns itself primarily with the results and with the ratios of
inputs and outputs. It measures in quantitative terms various inputs that a manager uses in terms of labor, material,
overheads, or capital resources. The outputs are measured in terms of quantity, return or performance targets. The
performances are evaluated by relating inputs with outputs. Thus, management audit is highly result-oriented. It can
be particularly useful in situations like the following.
a) To assess the performance of various managers: A progressive management may have management audit
conducted periodically to assess the performance of various managers and link a system of incentives with
such an assessment. This appraisal may conduct on the basis of objectives, predetermined standards.
b) To examine the sickness of the unit: In many circumstances, an outside agency may be interested in getting a
management audit conducted. Thus, the government may order a management audit with a view to examining
the efficiency of the management of a particular industrial unit. In the past, many sick units have been taken
over by the government. It would be useful if the government takes over such units only after a detailed
management audit. Through such audit, the government should try to judge whether the sickness of the unit is
due to the particular way in which the present management is functioning or whether it is due to the
circumstances beyond the control of the management. In case there is inefficiency, the government may
consider taking over the management. However, where it is found that the sickness of the unit is beyond the
control of the management, the government may try to remove the constraints rather than take over the
management itself.
c) To determine the credit-worthiness: A bank or financial institution may like to get a management audit
conducting before advancing loans or before agreeing to participate in the equity capital of an enterprise.
Institutions like Life Insurance Corporation, Industrial Finance Corporation, etc. participate in equity capital of
many concerns. It would be useful for such institutions to get a management audit conducted before they
commit funds.
d) For foreign collaborations: Foreign collaborators may also like to get management audit conducted periodically.
This would help them in assessing the managerial ability of their associates.
It can thus, be seen that management audit, if properly undertaken, can be an excellent tool of management control
in many situations. This concept offers an entirely new dimension to the audit function and has great potential.


a) To identify the overall objectives of the organization along with detailed targets and plans for various segments.
b) To ensure that management objectives and targets are beings met.
c) To help the management to manage its affairs better, i.e., achieve the most efficient administration of the
d) To assist all members of the organization in the effective discharge of their responsibilities.
e) To improve organizational profitability.
f) To reveal defects or weaknesses in any of the elements examined by the management auditor and to suggest
improvements to obtain the best possible results of the operations of the concern.
g) To ensure the most efficient administration of the operations essential for smooth running of a business.
h) To obtain the efficiency and effectiveness of the management.
i) To suggest ways and means and for the achievement of objectives and targets set forth by the management.
j) To facilitate the most effective relationship with the outside world and the most efficient organization and
smooth running internally.
k) To evaluate performance by relating inputs (human and physical both) with outputs.
l) To assist the management to establish good relationship with the staff to enable it to elaborate the duties,
rights and liabilities of the entire personnel.


It provides the following advantages:
a) It helps the management in preparing plans, objectives and policies and suggests the ways and means to
implement those plans and policies.

b) The inefficiencies and ineffectiveness on the part of the management can be brought to light.

c) The techniques of management audit are not only applicable to all factors of productions, but also to all
elements of cost.

d) Proper management audit techniques can help the business to stop capital erosion.

e) It increases the overall profitability of a concern through constant review of solvency, profitability and
efficiency position of the concern.

f) It helps the top management in arriving at correct management decisions without any delay.

g) It helps the management in strengthening its communication system within an outside the business.

h) It can help management in the preparation of budgets and resources management policies.

i) It can also help the management in training of personnel in marketing policies.


There are some disadvantages of management audit can briefly be stated as follows:
a) Management audit involves high cost and it is suitable only to big organizations.
b) Management audit may create a fear in the minds of the executives and may curb their initiative and
c) The management auditor may lack independence and may simply take instructions from the top
d) Management audit discourages initiative and dynamism;
e) It tries to find undue faults in the working of the system;
f) It is an unnecessary interference in the system of administration;
g) its recommendations may be ideological and difficult to implement


Within the business there has grown wide spread delegation of authority and this has led to the need for audits and
checks. As specialization grows the need for auditing automatically grows. It becomes absolutely imperative to know
the effectiveness of performance in each delegated functional area of operation and the impact of breakdown in any
area of specialized function or other areas of operation. With the growing size of each organization and geographical
dispersion it is virtually impossible to all management authority at one place. Each branch may start taking a
complete life of its own divorced from the policies of the management so checks and blames are needed which are
provided by management audits. Due to their very nature management audits are able to provide objectives views
and give the strategic level. The technical level managers also can express their option criticism and
recommendations for improvement. So we can say that Management Audit provides a forum. At present with the
growing liberalization and globalization of economy every business house is facing problems and challenges. Now
the management faces these challenges which can prove to the central focus to the management audit and the
starting point of action.
Management Audit requires an interdisciplinary approach since it involves a review of all aspects of the management
functions. It should be conducted by a team of experts because the variety of skills required cannot be mustered by
any one individual. This team may consist of accountant, operations research specialist, industrial engineer, and
social scientist. Each number of the team should have an analytical mind and an ability to look at a management
function from the point of view of the organization as whole.
The members of the management audit team should have proper training. They should have an expert knowledge of
the science of management. They should also be acquainted with salient features of various functional areas.
Experience of actual work situations would be useful.
The conduct its work properly, the management audit team should have a clearly defined authority from the
management. Management audit cannot be effective unless it is fully supported by the top management.
The process of conducting a review of the various activities in an organization, a management auditor can adapt and
use a number of techniques of edificatory audit. However, a management auditor may not be concerned much with
techniques likes recompilations, retracing book-keeping producers, external confirmation of balances, and
comparison of records with supporting documents. This is because the objectives of a management audit are much
different from the objectives of a verificatory audit. The management auditor primarily concerned with the appraisal
of performances in the various areas of management. Hence, he does not look for evidence to support definite
accounting figures. Instead, he attempts to evaluate the processes and functions of management. In doing so, he can
use the following techniques effectively.
a) Inquiry: A management auditor may collect most of the evidence required by him by asking relevant question
and obtaining pertinent answers to these questions. Proper framing the questionnaire is one of the first steps in
conducting management audit. The main value of a questionnaire lies in the fact that a good question is often a
key to uncover a hidden problem.

b) Examination: In many cases, the management auditor may have to conduct an examination of documents and
records. This may be necessary in case his inquiries reveal certain information that needs corroboration or that
suffers from internal contradictions.

c) Confirmation: A management auditor may also obtain written or oral statements from various persons in order
to confirm the information obtain by him.

d) Observation of Pertinent Activities and Conditions: In many cases, the management auditor may have to rely
upon his own observation of pertinent activities and conditions in the organization. A management auditor may
prepare organizational charts and flow charts as a result of his observation of pertinent activities and

e) Correlation of Information: The information through the various techniques has to be correlated so that proper
conclusions can be drawn. The management auditor has to compare the actual performances with the standards
laid down or with the performances in the previous years. A good deal of skill is required in correlating the
relevant information so as to reach meaningful conclusions.


Management audit is as examination review and appraisal of the various policies actions of the management. It is
concerned with identification of the objectives of the organization and to see that they these are achieved. It is a
method to evaluate efficiency of the management of the enterprise from the higher management level downward.
Sometimes government may invites teams of management auditors to conduct management auditors to
management audit with a view to examining the efficiency of the management of a particular industrial unit, many
sick textile units have been taken over by the government after detailed management audit. In case some public
enterprises are not working properly and are enable to achieve the targets then the government may order
management audit conducted of such enterprise in order to find out the reasons of inefficiency in its working.
Foreign companies also get management audited of a business concerns before agreeing to participate as business
partner. This will enable them to ascertain the financial soundness of the business concern.

The scope of management audit can be widened to appraise in detail the systems and sub-systems, producers, job
separation, authorization, work-quantity studies, accountability, quality of personnel, quality of information
generation etc. Management audit is a measure of control designed to improve performance, eliminate inefficiency
and increase effectiveness and profits of an organization. The circumstances that have led to the development of
management audit may be pointed out as follows:
a) The suitability, practicability and present compliance or otherwise of the organization with its designated
objects and aims.
b) The current reputation of the organization in relation to the general public and within its own particular
industrial or commercial field.
c) The rate of return on investors capital whether poor, adequate or above average.
d) Relationship of the business with its own shareholders and the investing public in general.
e) The ratios of operating returns and the rate of return on capital projects.
f) The relationship between management and staff within the business.
g) The aims and effectiveness of management at its various levels such as top level, middle level and
operational level.
h) Financial policies and control relating to production, sales and distribution and in other functions of the
For a better success, a management audit team needs an amicable rapport with the management, effective
communication throughout the course of the audit process and a full disclosure of facts by the management.


A financial audit is an audit conducted to present Management audit is a systematic evaluation of
an opinion whether the company financial capabilities of the companys management with
statements reflect a true and fair view. regard to effectiveness in achieving the strategic
objectives of the company and quality of decision
Nature of Audit
A financial audit is quantitative in nature as it Management audit is a qualitative audit that
only evaluates the financial information. assesses both financial and non-financial
Party Conducting
Financial audit is conducted by the external An employee of the company or an independent
auditor. consultant conducts the management audit.
Time of Conducting Audit
Financial audit is conducted at the end of each Management audit is conducted when the company
financial year. is on the verge of a change in strategic direction.

The difference between financial audit and Management audit can be easily understood based on the elements that
are being audited in each audit. The integrity, completeness, and accuracy are audited in a financial audit where the
auditors provide their opinion whether the statements present a true and fair view. Management audit assesses the
quality of decision making and efficiency of the management. The success of these audits always depends on how
objectively they can be conducted.


Let us now distinguish between Financia1 Audit, Cost Audit and Management Audit. The main areas of difference
between these three concepts are as follows:
Points of
N Financial Audit Cost Audit Management Audit
Financial Audit is an effort
Cost Audit ensures that the
to ensure a true and fair Management' Audit
cost accounting system
view of the state of affairs examines the efficiency of
followed in the organisation
1 Scope of a company represented almost every area of
serves as a true basis of
through its Profit/ Loss operation within the
ascertainment of cost of
Account and Balance organisation
Sheet for the period

It is a process of Management Audit mainly

Cost Audit takes into view the
verification of past applies its attention to
2 Approach current system of cost
records of accounting future planning and
relating to a previous year. performance.

It aims at detection and It examines the reliability of It is an attempt to assess

3 Object prevention of errors and the systems which produce efficiency and suggest its
frauds cost information further 'improvement

Management Audit
It uses the techniques of It examines the records of
determines the adequacy of
vouching, Verification and materials, labour and other
4 Technique procedures and control
valuation for the purpose expenses as components of
adopted by the
of forming an opinion total cost of operation
It is a policy audit and
It is an audit of cost
5 Status It s a statutory audit efficiency audit, but not a
ascertainment and control
statutory obligation.
Conducted as per the
Conducted regularly every Conducted as per the needs
6 Frequency instructions issued by the
year and desires of the company
Central Government
It examines systems,
Financial Audit is a
policies, performance and
verification of Cost Audit evaluates economy
7 Method organisation to identify
transactions recorded in and output
weaknesses and suggest
the books of account
It reports about the actual
Cost Audit confines itself to It is concerned with the
state of affairs pertaining
8 Responsibility cost implications of performance profitability of
to financial position as on
operations the organisation.
a particular date
Cost Audit covers both the
record of actual expenses Management Audit begins
Task It begins where the work
9 incurred as well as the where the work of financial
of accountancy ends
estimated cost of materials, audit ends
labour and other items
It is conducted by a qualified
Financial Audit is It may be conducted by any
chartered or cost accountant
10 Appointment conducted by a qualified independent expert or
with the prior approval of the
Chartered Accountant consultant
Central Government
It is an appraisal of
It is interested in the activities, identification of
It checks the correctness of
accuracy of operational possible areas of
11 Emphasis costing system and
results rather than in their inefficiency and measures
adequacy to improve future

A management auditor is expected to offer special skill and expertise to his clients. He, therefore, has a special
responsibility to exercise special care in the performance of his duties to ensure positive response to his opinion to
motivate action thereon. A management auditor should be competent in the exercise of his audit function and
formulation of his opinion based on such audit. He should be a man of independent thinking, who can maintain an
unbiased view, without any influence, financial, sentimental or otherwise. He should be technically competent in
the discharge of his duties, having had education, training and experience all round. The management auditor
should be supported by a good organisation i.e. a team of people who can competently execute his audit.
Generally, no qualification has been prescribed for a management auditor. But generally s/he should CA having
knowledge of accountancy, financial administration and management. However, A management auditor should
have the following specific qualities:
a) Ability to understand and gauge business problems.
b) General understanding of the organisation.
c) Expert knowledge on the principle of delegation of authority, management by objective, management by
exception, management planning and control and the different budgetary systems, and those of internal
control devices (viz. flow chart, flow of work, analysis of work scheduling, use of computer, etc.).
d) Sufficient knowledge and experience in preparing various reports for presentation.
e) General understanding of different laws: general laws, company law, tax laws FERA, MRTP, etc. that affect the
functioning of the whole of the organisation.
f) Background knowledge about Engineering, Statistics, Costing, Management accounting, financial accounting,
Industrial psychology, Managerial economics, etc.
g) Tactfulness, perseverance, and
h) Lastly, pleasing and dynamic personality.


(i) Formulation of plan and policy: He should ensure that accounting, economic and other data needed by the
management in constructing its basic policy framework are supplied by the management services unit.
(ii) Decision-making process: He should take into account the outcome of the decisions previously applied, and
see that the decisions are based onmanagement by objectives, management by exception, management
information services.
(iii) Designing organisational authority structure: He should assist in the flow of information among different
functional managers (responsibility-wise).
(iv) Measuring and evaluating business performance: He should concentrate on key functions or operations in
the profit-making process.
(v) Tax-planning and budgeting: He should appraise the appropriateness of tax implications, and those of
different information and data needed for budget preparation.
(vi) Improving communication system: He should guide in the flow of internal communication (between
various departments) to strengthen the organisation structure, and in the flow of external communication
(e.g. market conditions, legal requirements, social accounting, competitors standing, economic trends, etc.)
with a view to strengthening the progress of the business.
The role of a Management Auditor in the co-ordination (or harmonization) of the functions of planning, organising,
controlling and appraising of business, is crucial. This can be best explained by a chart below.
A Management Auditor should have the following general considerations to:
1. Indicate source, nature and basis of data.
2. Stick to essential information; that is, not matters of general knowledge.
3. Avoid gathering data acquired during a previous study, except when a change in the data presents new
4. Obtain the complete details where cost is an important factor.
5. Look for irregularities, uncertainties, conflicts and possible disagreements about plans, objectives, functions,
systems and operations.
6. Be alert for weaknesses in organisation systems, methods, controls, operations and personnel.
7. Substantiate all data by verification through actual observation, examination or test checks.
8. Watch out for inaccurate, incomplete, inadequate and unnecessary reports, forms and statements.
9. Determine compliance of policies and procedures by checking performance.
10. Seek out methods for improvement.
11. Note areas and functions for greater effectiveness in performance.
12. Be on the lookout for inadequate protective and preventive methods.
13. Determine whether or not responsibilities are being appropriately discharged.
14. Look into the matters of cost-effective utilisation of all resourceshuman, physical financial and national,
including the scarce resources and utilities of public nature.
15. Take note of fluctuations in production, work-loads and services.
16. Ascertain the ultimate use (i.e. utility aspects) of each activity, record and report in order to determine value
or necessity.
17. Look for problems, bottlenecks, waste, unnecessary work or function, poor coordination, low morale,
inadequate motivation and other defects in all functions and areas under study.


To achieve better results of management audit, it should be conducted by a team of experts because a variety of
skills cannot be possessed by one individual. Therefore the members of the team of management auditors should
consist of an accountant an industrial engineer, a social scientist and so on and who should have proper training.
Such a team should have a full backing by the top management to enable it to fully appraise the various areas of
Before the management auditor commences the work, he should study the details of the organisation and its plans,
if any. After having studied the plan, he should cover the following matters:
1. He should see whether the plan, as laid down by the management, is suitable and practicable to achieve
the objective in the circumstances of the case.
2. If he finds that the plan, as laid down by the management. is suitable and practicable, whether it has been
able to achieve the objective.
3. He should study the position of the organisation vis-a-vis other organisations in the same field.
4. He should ask relative questions to collect the necessary information. such as:

a) What is the economic outlook?

b) Whether the organisational structure is adequate;
c) Whether the controls are efficient and accurate;
d) Whether the protective methods are adequate;
e) Whether the compliance with the plans, policies, procedures, etc. are being followed;
f) Whether there are variances between the plans laid down and the actual performance-or there are
variances between the results of the previous year and the current year, and if so, what are the
causes of such variances;
g) Whether the manpower and equipment is properly utilized;
h) Whether there are bottlenecks, and if so, what are the causes thereof;
i) Whether there has been any breakdown, and if so, what were the causes thereof;
j) Whether the methods of operations re satisfactory;
k) Whether any irregularities have been committed, and if so, who committed such irregularities;
l) Whether there is any internal friction between the executives, and so on.
5. He may have to examine documents or other information in writing so as to confirm the information which
he has already collected by asking questions.

6. After obtaining the necessary information it should be correlated that he may be able to draw conclusions.
7. He has to compare the actual performances of the organisation
a) With the actual standards laid down by the top management;
b) With the performance during the previous year.
8. While correlating the relative information, he should be very careful in doing so, so that he may arrive at
meaningful conclusions.
9. Above all what has been stated in the foregoing paragraphs; he may have to rely on his own observation
regarding the activities and conditions of the organisation. For this purpose, he may have to prepare charts
and flow charts.
If the management auditor is satisfied as to the condition of the general management of the business he may
proceed to check the items on the following lines:
l. Production
a) Buying: Materials of right specification, right quantities right time, right prices.
b) Planning: Receipt of customers orders execution of their orders.
c) Processing: If he is not a technical hand, he should be very careful in the critical analysis of the manufacturing
process; he should inspect the factory or the workshop anal see whether it is clean, materials are not lying in
the gangways as to hinder the free movement of the workers and thus causing delay.
d) Storage: Proper inspection, of materials before storage; storage conditions; whether storage conditions will
damage, or deteriorate the materials; whether placed properly; safety measures; etc.
e) Internal transport and despatch: Movement of materials: whether quick or delayed; packing problems;
whether packing cases regularly supplied or not.
2. Distribution
f) Sales Records: Whether' adequate sales records are maintained: whether sales service is satisfactory; selling
g) Sales. Policy; Critical examination of sales policy; sales agents; sales depots; sales reports from: the agents
and depots.
h) Services: Whether there have been complaints from customers; after-sale service; whether interest of
customer is waning whether goodwill of the concern is maintained.
i) Publicity: Whether scrap book is maintained in regard to publicity; As media for publicity satisfactory;
whether results of advertising analysed:
j) Sales control: Whether orders are executed promptly; whether there are complaints by customers delays;
'whether there arecoml3laints regarding quality of goods and so on.
Before the management auditor begins his work, he should chalk out the audit programme. It may be pointed out
here that it is not necessary that he should rigidly adhere to the audit programme which he had chalked out.
Outlines of management audit programme
a) Organisation: He should study the structure of the organisation in the area of the management audit, work
assigned to him. In this connection he should compare the company's organisation chart, if any. He should
ascertain whether careful attention has been paid to the principles of good organisation.
b) Plans and objectives: He should discuss the plans and objectives of the concern with the management.
c) Policies and practices: He should find out whether the policies as laid down are properly adhered to.
Whether any improvement can be made to the existing policies and practices so that they may be more
d) Systems and procedures: He should study the systems and procedures with a view to find out whether there
are certain defects in them. If he finds such a thing, he should suggest improvements to the existing systems
and procedures.
e) Controls: He should find out whether these controls are adequate and effective. If not, he should make
suggestions to make them more effective.
f) Operations: He should ascertain whether there is any loophole in the working of the organisation in
connection with the manufacturing process which hinders the achievement of the maximum production. If
this is the case, he should suggest ways and means to overcome these drawbacks and difficulties.
g) Layout and physical equipment: He should study the existing layout and see whether any improvement can
be made therein in order to take maximum advantage of it. Similarly in regard to the physical equipment,
whether better and greater use of modern physical equipment can be derived.
h) Personnel: He should see whether manpower is fully utilised and if not, what can be done to increase
productivity. He should see whether there-is co-operation between the workers and the management. How
can better and improved relationship between them be established?
i) Regulations: He should ascertain whether the concern complies with not only its own rules and regulations
and the Companies Act but also those of the municipal and local authorities.
The efficiency of the management audit will depend upon the management auditor as to how he handles the audit
work; how cleverly and tactfully he extracts information: how he conducts investigation and how he analyses the
data collected by him. He should bear in mind the following points while conducting audit:
a) He should look for, irregularities which might have been committed.
b) He should see whether there has been any conflict and any disagreement amongst the members of the
management about the planning, objectives and functions.
c) He should pay special attention to the cost element and obtain complete details in regard to this element.
d) He should be alert for weaknesses in the organisation, systems, methods, controls, objectives and personnel.
e) He should go deeper into details if he comes across any incomplete, inaccurate or inadequate data or
f) He should see whether: procedures, policies, etc are properly followed.
g) He should ascertain whether or not duties and responsibilities, are being carried out.
h) He should pay attention that the manpower, equipment, materials, etc., have been fully utilised
i) He should pay attention to any bottlenecks, wastes, unnecessary work, lack of coordination and other defects
in all the areas of the study.
After conducting management audit, the management auditors are required to prepare a report to be submitted to
the management of the organization. On the basis of findings and definite information, the auditors prepare a
report making recommendations for improvement in the functioning of the management. He should not hesitate in
criticizing the management. His recommendations should be constructive and adequate for the improvement of the
overall efficiency of the management. Nevertheless the report must be clear and unambiguous, either making the
point at efficiency is such that no change is advocated, or if organization is considered and advisable, then the
management auditor must be sufficiently confident of his own ability to have assessed the situation he can make
adequate proposals which will lead to improvement and increased profitability.
Broadly, however, reports may be divided into four main categories:
1. Reports prepared by the management audit staff after their visits to a unit.
2. Periodical reports prepared by senior members of management audit department which summarise the
main audit findings and recommendations for the period under consideration and which afford a concise
review of the departments activities for that period.
3. Reports on the results of special investigations and inquiries.
4. An annual audit report.
The right of the management auditor to report to the highest level is now well established in many organisations
but in all cases responsible officials of the different units which have been subjected to audit should be afforded the
opportunity of discussing matters in the report concerning their departments before this is passed in final form to a
higher level.
The reporting of results covers a wide spectrum of types. We can describe the more important ones as follows:
21.1.1 Oral reports
In many situations, the reporting of results will be on an oral basis. To some extent, this is inevitable since a part of
the actual audit effort is carried on in conjunction with company personnel. In other cases, it is a result of
emergency action needs. It may also be a prelude to more formal written reports. To some extent, there will always
be oral reporting as a means of later supplementing written reports, especially when individuals being served have
special needs. Oral reporting therefore, serves a useful and legitimate purpose. It is recognised that it has a major
limitation that there is no permanent record. As a result there are more likely to be later misunderstandings. What
is important, therefore, is that this type of reporting be used carefully and for all significant matters, specially the
matters covered by emergency oral reporting, should be followed up immediately by a written report giving
reference to oral reporting. For example, a management auditor, if he has come across any embezzlement, should
immediately inform the concerned management orally, so that steps may be immediately taken to prevent further
21.1.2 Interim written reports
In situations where it is deemed advisable to inform management of significant developments during the course of
the audit, or at least preceding the release of the regular report, there may be some kind of interim written report.
This report may pertain to especially significant problems where there is a need for early consideration. or the
report may be of a progress nature. In either case, they may be quite formal in nature or of the more informal type
of current memoranda. They can be reserved for very exceptional developments, or issued on a more extensive
basis. Often, their distribution is limited to this audit management, but this is not necessarily the case. All in all,
interim reports represent a type of reporting which, when used with judgment, can be a good device to improve the
total reporting process.
21.1.3 Regular written reports
In the typical situation, the particular audit assignment will include the preparation of a formal written report. The
form and content of such written reports will vary widely, both as between individual audit assignments and
individual companies. They may be short or long. They may be presented in many different ways, including the
extent to which quantitative or financial data are re-included. We will in the later pages discuss in more detail the
organisation and planning of this type of report.
21.1.4 Summary written reports
These summary reports are also referred to as flash reports. In a number of companies the practice has developed
of issuing an annual (or sometimes more frequent) report summarising the various individual reports issued, and
describing the range of their content. These summary reports in some cases are primarily for audit committees of
Boards of Directors, but in other cases for higher level management. They are especially useful to top level
managers who do not actively review the individual reports. They are also useful to the general auditor in seeing his
total reporting effort with more perspective and on an integrated basis.
a) The report should be correct, i.e., the statements which he makes in the report should be correct and should
be based upon definite information he receives while engaged in the audit work.
b) It should be concise, but clear-cut and- comprehensive of facts.
c) It should be courteous i.e., even if it has to criticise the management it should be so worded as to avoid
unnecessary sharpness or implication.
d) It should contain the recommendations if any, which should be constructive and not condemning in nature.
Though there is no prescribed form of management audit report, it should normally incorporate the opinion of
the auditor on the following matters:
a) Is the return on the investments of the shareholders poor, adequate or above average?
b) Comparison of the rate of return on investment between the current year and the previous year/years.
c) Comparison of the operating costs of 'the concern with .other' concerns conducting the same type of
d) Whether plan and machinery in use is suitable or otherwise to get the maximum amount of production.
e) Whether the relationship between management and the staff and the worker's has been cordial.
A management audit report, therefore, should be an aid to future control and performance effectiveness.
Though it is difficult to lay down a format applicable to all situations, yet the following general guidelines may be
a) Title - The management audit report should have a short but descriptive title so that its subject matter can be
easily identified.
b) Objectives - The management auditor may describe the objectives of the audit assignment.
c) Scope - The management auditor may give a brief description of the activities audited by him.
d) Findings, conclusions and opinions - These may be given either department wise or in the order of
importance. All the facts and data pertaining to the, situation should be assembled, classified and analysed.
Each finding should be discussed comprehensively and correlated with other findings. Conclusions and
opinions should normally follow the findings. Tables or graphs may be used for the presentation of statistical
data in appendices.
e) Recommendations - A management audit report may include recommendations for potential improvements.
However, care should be taken in making recommendations in order that the auditors own objectivity may
not become subject matter of question. He may point out defects and make recommendations in a broad
manner on how to overcome them. He should avoid providing detailed procedures in the capacity of an
auditor. Normally specifying procedures etc. should rest with consultants.
f) Auditees views - The auditees views about audit conclusions or recommendations may also be included in
the audit report in appropriate circumstances.
g) Summary - A summary of conclusions and recommendations may be given at the end.


1. What do you understand by management audit'? How does it help management in improvement of its
2. Define Management Audit. What benefit may one derive from management audit? Draft a programme for
management audit of a large industrial undertaking?
3. Define Management Audit and discuss its importance.
4. What are the objectives of management Audit? Show the distinctions between statutory audit and
management audit.
5. Who should conduct management audit?-Give reasons for your answer?
6. What are the preliminaries to be adhered to before conducting management audit? Give an outline of
management audit program.
7. What are the major areas of examination involved in management audit'?
8. What ate the duties of management auditor?
9. What are the essential aspects of management auditor's report? State the matters to be dealt with in the