management audit

Definition

Systematic assessment of methods and policies of a firm's management in the administration and the
use of resources, tactical and strategic planning, and employee and organizational improvement. Its
objectives are to (1) establish the current level of effectiveness, (2) suggest improvements, and (3) 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. See also performance audit.

Three basic evaluation methods exist for any work activity: inspection, compliance
auditing and management auditing. The first method, inspection, measures a process's
output against certain characteristics. These characteristics, generally identified as form,
fit and function, are specified, and the process output either possesses those
characteristics or it doesn't. As a result, an inspection's outcome is always binary: pass or
fail.

In contrast, compliance audits check on the implementation of written manuals,

procedures and work instructions. The compliance audit evolved in the 20th century as
business practices became more complex. The first use of compliance auditing appeared
in financial transactions, because tax collectors and bank examiners needed assurance
that the financial data were correct. This concept of verifying compliance was picked up
by the quality profession in the 1960s and applied to the military and the nuclear power
industry. Compliance audits are still used in high-risk activities, where there is a desire to
verify that the activities are being performed in strict compliance to approved
requirements. Third-party registration audits, regulatory inspections and most supplier
audits measure compliance. The application of a compliance audit results in stability and
assurance that rules are being followed.

The management audit is a more recent concept. It 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 compliance
audits plus cause-and-effect analysis. When performed correctly, they are potentially the
most useful of the evaluation methods, because they result in change.