Accounts Notes: Management Audit Operational Audit

Friday, 25 March 2011

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 financial information.
2. Only financial information
3. Report to shareholders
4. It ends in report
5. By C.A
6. By independent
7. Compulsory
8. Yearly
9. Old concept 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.
(4) Conventional nature of internal audit report and mechanical nature, as it does not provide recommendations.
(5) Other reports (performance)  own limitation.
(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 auditor should also be completely objective in his approach. Thus, we can understand operational audit as an extension of internal auditing with definite work content stretching beyond traditional field of internal auditors (financial A/c.) Every aspect of operational audit, however, is towards management policies, management objects and goals only.

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.