Course : F0162 Management Audit

Year
: 2012-2013

Overview of Management Audit

TOPICS

Management audit concepts

Some basic business principles
Criteria for organizational growth
Economy, efficiency, and effectiveness
Definition
Terms
Financial audit vs management audit
Why perform a management audit?
Specific objectives and purposes
Benefits of management audit
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TOPICS

Management audit phases

What function to audit
Budget
Initial survey
Engagement development

MANAGEMENT AUDIT CONCEPTS

Organization has been in existence for thousands of
years.
Some successful and long-lasting.
Others short-lived.
Management audit: a process for analyzing internal
operations and activities to identify areas for positive
improvement in a program of continuous
improvement.
The goal is to make each activity the best
possible and keep it that way.
Stakeholder expectations are the key to evaluating
the companys performance.
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SOME BASIC BUSINESS

PRINCIPLES

Produce the best quality product at the least

possible cost.
Set selling prices realistically.
Build trusting relationship with critical vendors.
The company is in the customer service and cash
conversion businesses.
Do not spend money that does not need to be
spent; money not spent is money to the bottom
line control costs effectively.
Manage the company; do not let it manage the
managers.
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SOME BASIC BUSINESS

PRINCIPLES

Identify the companys customers and develop

marketing and sales plans with the customers in
mind.
Do not hire employees unless they are absolutely
needed.
Keep PPE to the minimum necessary to maintain
custimer demand.
Plan for the realistic.
Develop contingency plans for the positive
unexpected.
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CRITERIA FOR ORGANIZATIONAL

GROWTH

Cost reductions.
Price increases.
Sales volume increases.
New market expansion.
New distribution channels.
Market share increases in existing markets.
Selling or closing a losing operation or location.
Acquire another company, division, operation, or
product.
Developing a new product
7 or service.

CRITERIA FOR ORGANIZATIONAL

GROWTH

Efficiency or productivity improvements.

Non value-added activities eliminated.
Making employees responsible.
Organizational structure revisions.

ECONOMY, EFFICIENCY, AND

EFFECTIVENESS
Economy, efficiency, and effectiveness 3 Es of management
audit.
Economy: the cost of operations.
Is the organization carrying out its responsibilities in the most
economical manner through due conservation of its resources?
In appraising the economy of operations and related allocation
and use of resources, auditor may consider whether organization
is:
Following sound purchasing practices.
Overstaffed as related to performing necessary functions.

ECONOMY, EFFICIENCY, AND

EFFECTIVENESS

Allowing excess materials to be on hand.

Using more expensive equipment than necessary.

Avoiding the waste of resources.

Efficiency: methods of operations.

Is organization carrying out its responsibilities with the

minimum expenditures of effort?

Examples of operational inefficiencies to be aware of include:

Improper use of manual and computerized procedures.

Inefficient paperwork flow.

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ECONOMY, EFFICIENCY, AND

EFFECTIVENESS

Inefficient operating systems and procedures.

Cumbersome organizational hierarchy and/or
communication patterns.
Duplication of effort.
Unnecessary work steps.
In evaluating economy and efficiency, auditor analyze
the use of resources: people, facilities, equipment,
supplies, and money.
For example, auditor might analyze the following:
Allocation of responsibilities and authority within the
organizational structure.
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ECONOMY, EFFICIENCY, AND

EFFECTIVENESS

Physical development of distribution of resources.

Scheduling of resources: when people work, when
facilities are used.
Segmentation of tasks into logical groupings.
Match between skill level, capacity, performance
capability, and so on, and the way a resource is used.
Prices paid.
Charges levied.
Rate at which tasks are performed.
Number of tasks completed.
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ECONOMY, EFFICIENCY, AND

EFFECTIVENESS
Effectiveness: results of operations.
Is the organization achieving results or benefits based on
stated goals and objectives or some other measurable
criteria?
The audit of results of operations includes:
Appraisal of organizational planning system as to its
development of realistic goals, objectives, adn detail plans.
Assessment of the adequacy of managements system for
measuring effectiveness.
Determination of the extent to which results are achieved.
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ECONOMY, EFFICIENCY, AND

EFFECTIVENESS

Identification of factors inhibiting satisfactory

performance of results.
Although it is responsibility of management to assess
the results of operations, its objectives and
measurement criteria are not always clearly defined.
Without such clarification, auditor cannot meaningfully
evaluate the results of operations.
Effectiveness is concerned with results and
accomplishments achieved and benefits provided.
In evaluating the effectiveness of operations, auditor
asks whether the activity is achieving its ultimate
intended purpose qualitative, rather than
quantitative.
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DEFINITION
Management audit is a widely used term encompassing
many aspects and techniques.
No uniform, commonly recognized definition has been
unanimously accepted.
Definition that have been given for operational audit
include the following:
An extension of the audit function into all operations of a
business.
The application of internal auditing to operations rather
than financial controls.
The identification of opportunities for greater efficiency
and economy, or to improve effectiveness in carrying out
of operating procedures.
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DEFINITION
A control technique for evaluating the effectiveness of
operating procedures.
Nothing more than an audit of controls, now including
nonfinancial controls.
Audit of activities other than those pertaining to
examination of financial data.
Audit technique that involves evaluating the efficiency
and economy with which resources are managed and
consumed.
Audit of operations with a management viewpoint.
Audit of operations made for internal management,
not for external third parties, with the result circulated
internally rather than externally.
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DEFINITION
Combination of economy, efficiency, and
effectiveness, or program results evaluation.
Combining these definitions, it could be said
that operational audit is an audit of
management performed from a
management viewpoint to evaluate the
economy, efficiency, and effectiveness of
any and all operations, limited only by
managements desires.

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TERMS
In recent years, various terms have been used
interchangeably with operational audit to describe
this approach. Examples include:
Program audit
Management audit
Performance audit (and evaluation)
Departmental audit
Nonfinancial audit
Compliance audit
Cost-benefit analysis
Economy and efficiency evaluation
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TERMS

Effectiveness or results evaluation

Functional analysis
Full scope audit
Responsibility audit
Comprehensive analysis and audit
Internal benchmarking study
Total quality management study
Reengineering study
Organizational audit
Value-added study
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FINANCIAL AUDIT VS MANAGEMENT

AUDIT
Purpose: express opinion on financial condition vs analyze
and improve methods and performance.
Scope: fiscal financial records vs business operations.
Skills: accounting vs interdisciplinary.
Time orientation: to the past vs to the future.
Precision: absolute vs relative.
Audience: stockholders and public vs internal management.
Necessity: legally required vs at option of management.
Standards: GAAP (PSAK), IFRS, GAAS vs economy,
efficiency, effectiveness.
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FINANCIAL AUDIT VS MANAGEMENT

AUDIT
Opinion: required vs not required.
Audit results: opinion, financial statements vs
recommendations to management.
Focus: financial statement presented fairly (free of material
misstatement) vs operational positive improvements.
Viewpoint: financial vs management.
Success: unqualified opinion vs management adoption of
recommendations.

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WHY PERFORM A MANAGEMENT

AUDIT?
Assess performance.
Identify opportunities for improvement.
Develop recommendations for improvement or
further action.

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SPECIFIC OBJECTIVES AND

PURPOSES

Specific objectives:
Adherence to financial policy
Procedures performed by individuals with no
incompatible functions
Adequateness of existing audit trail
Observability of right procedures
Safeguarding of assets
Reliability of financial records
Separation of duties
Physical controls over assets
Operational efficiency
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SPECIFIC OBJECTIVES AND

PURPOSES

Evidence of action to achieve stated goals and

objectives
Adherence to long-term/short-term plans
Achievement of management objectives
Effective recruiting and training
Evaluation of organizational policies
Clear understanding of responsibilities and authority
Current job/functional descritions
The right number of people to do the right job
Evaluation of operational results
Doing the right job, the right way, at the right time
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SPECIFIC OBJECTIVES AND

PURPOSES

In conducting an operational audit, the auditor should

be aware of the purpose of audit.
Prior to the start of the operational audit, the auditor
should communicate clearly his or her understanding
of the purpose(s) to appropriate management
personnel and the purpose(s) should be mutually
agreed upon from the start.
The purpose may be one or more of the following
seven listed items:
To audit and evaluate the adequacy of accounting
system and related internal accounting controls
(including both accounting and administratove
controls).
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SPECIFIC OBJECTIVES AND

PURPOSES

To analyze systems and controls, as related to

internal controls, functional operations, and legal
compliance.
To analyze the capability to accomplish agreed-upon
stated goals, objectives, and results in
managements approved plan.
To compare actual accomplishments/results with the
goals and objectives established in managements
plan for the period; and to determine reasons that
established goals and objectives were not met.
To analyze and explain cost overruns or high unit
cost for each function/activity for which such data
can be quantified.
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SPECIFIC OBJECTIVES AND

PURPOSES

To assess and evaluate compliance with

federal, state, and local laws and regulations;
ensuring at least minimal compliance.
To identify and report deficiencies and areas for
improvement and to provide technical
assistance and follow-up where necessary.

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BENEFITS OF MANAGEMENT AUDIT

Identifying problem areas, related causes, and
alternatives for improvement.
Locating opportunities for eliminating waste and
inefficiency; that is, cost reduction.
Locating opportunities to increase revenues; that is,
improvement.
Identifying undefined organizational goals,
objectives, policies, and procedures.
Identifying criteria for measuring the achievement of
organizational goals.
Recommending improvement in policies, procedures,
and organizational structure.
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BENEFITS OF MANAGEMENT AUDIT

Providing checks on performance by individuals and by
organizational units.
Auditing compliance with legal requirements and
organizational goals, objectives, policies, and procedures.
Testing for existence of unauthorized, fraudulent, or
otherwise irregular acts.
Assessing management information and control sysytems.
Identifying possible trouble spots in future operations.
Providing an additional channel of communication between
operating levels and top management.
Providing an independent, objective evaluation of
operations.
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MANAGEMENT AUDIT PHASES

Planning
Work programs
Field work
Development of findings and recommendations
Reporting

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WHAT FUNCTION TO AUDIT

One way to decide which functions to audit is to
determine how critical each function is to the
overall organizational operation.
For instance, for a manufacturing business, the
most critical area may be the inventory or
production control functions.
Criteria for determining a companys critical areas
include:
Areas with large numbers in relationship to other
functions.
Areas where controls are weak.
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WHAT FUNCTION TO AUDIT

Areas subject to abuse or laxity.
Areas that are difficult to control.
Areas where functions are not performed
efficiently or economically.
Areas indicated by ratio, change, or trend
analysis characterized by wide swings up or
down when compared over a number of
periods.
Areas where management has identified
specific weaknesses or needs for improvement.
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BUDGET
It is important to understand the relationship between
budgeted audit time and the scope of operational audit
desired to be accomplished.
It is also important for the auditor and management to
consider the cost against the expected benefits of the
specific operational audit.
There are number of factors to consider in establishing the
operational audit budget:
Scope of the operational audit.
Frequency of the operational audit.
Nature of the business operations.
Degree of management effectiveness.
Expectation of benefits.
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INITIAL SURVEY
To achieve the greatest results from limited
operational audit resources, the auditor identifies
those areas of major importance and those
offering the greatest potential savings or benefits
as part of initial survey.
Auditor uses the questionnaire as a guideline and
does not rely solely on yes or no responses.
Quick review tool to help identify critical areas for
further audit.

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ENGAGEMENT DEVELOPMENT

Recognize and define the problem

Gather appropriate data
Evaluate the situation
Proposal letter
Perform the management audit

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