Overview of Management Audit

Course: F0162 Management AuditYear: 2012-2013

TOPICSManagement audit conceptsSome basic business principlesCriteria for organizational growthEconomy, efficiency, and effectivenessDefinitionTermsFinancial audit vs management auditWhy perform a management audit?Specific objectives and purposesBenefits of management audit*

TOPICSManagement audit phasesWhat function to auditBudgetInitial surveyEngagement development*

MANAGEMENT AUDIT CONCEPTSOrganization 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.*

SOME BASIC BUSINESS PRINCIPLESProduce 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.*

SOME BASIC BUSINESS PRINCIPLESIdentify 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.*

CRITERIA FOR ORGANIZATIONAL GROWTHCost 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 or service.*

CRITERIA FOR ORGANIZATIONAL GROWTH

Efficiency or productivity improvements.Non value-added activities eliminated.Making employees responsible.Organizational structure revisions.*

ECONOMY, EFFICIENCY, AND EFFECTIVENESSEconomy, 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 EFFECTIVENESSAllowing 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.*

ECONOMY, EFFICIENCY, AND EFFECTIVENESSInefficient 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.*

ECONOMY, EFFICIENCY, AND EFFECTIVENESSPhysical 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.*

ECONOMY, EFFICIENCY, AND EFFECTIVENESSEffectiveness: 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.*

ECONOMY, EFFICIENCY, AND EFFECTIVENESSIdentification 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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DEFINITIONManagement 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.*

DEFINITIONA 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.*

DEFINITIONCombination 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.*

TERMSIn recent years, various terms have been used interchangeably with operational audit to describe this approach. Examples include:Program auditManagement auditPerformance audit (and evaluation)Departmental auditNonfinancial auditCompliance auditCost-benefit analysisEconomy and efficiency evaluation*

TERMSEffectiveness or results evaluationFunctional analysisFull scope auditResponsibility auditComprehensive analysis and auditInternal benchmarking studyTotal quality management studyReengineering studyOrganizational auditValue-added study*

FINANCIAL AUDIT VS MANAGEMENT AUDITPurpose: 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.*

FINANCIAL AUDIT VS MANAGEMENT AUDITOpinion: 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.*

WHY PERFORM A MANAGEMENT AUDIT?Assess performance.Identify opportunities for improvement.Develop recommendations for improvement or further action.*

SPECIFIC OBJECTIVES AND PURPOSESSpecific objectives:Adherence to financial policyProcedures performed by individuals with no incompatible functionsAdequateness of existing audit trailObservability of right proceduresSafeguarding of assetsReliability of financial recordsSeparation of dutiesPhysical controls over assetsOperational efficiency*

SPECIFIC OBJECTIVES AND PURPOSESEvidence of action to achieve stated goals and objectivesAdherence to long-term/short-term plansAchievement of management objectivesEffective recruiting and trainingEvaluation of organizational policiesClear understanding of responsibilities and authorityCurrent job/functional descritionsThe right number of people to do the right jobEvaluation of operational resultsDoing the right job, the right way, at the right time*

SPECIFIC OBJECTIVES AND PURPOSESIn 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).*

SPECIFIC OBJECTIVES AND PURPOSESTo 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.*

SPECIFIC OBJECTIVES AND PURPOSESTo 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.*

BENEFITS OF MANAGEMENT AUDITIdentifying 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.*

BENEFITS OF MANAGEMENT AUDITProviding 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.*

MANAGEMENT AUDIT PHASESPlanningWork programsField workDevelopment of findings and recommendationsReporting*

WHAT FUNCTION TO AUDITOne 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.*

WHAT FUNCTION TO AUDITAreas 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.*

BUDGETIt 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.*

INITIAL SURVEYTo 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.*

ENGAGEMENT DEVELOPMENTRecognize and define the problemGather appropriate dataEvaluate the situationProposal letterPerform the management audit*

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