Ch.

1 Overview of
Operational reviews

Produce the best quality

product at the least possible
cost.

The operational review is most

helpful and beneficial in the
following :

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.

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.

o Identifying operational areas in need

of positive improvement looking
for best practices as part of a
program continuous for
improvements.
o Pinpointing the cause not the
symptom of the problem avoiding
risk fix short-term solutions in favor
of longer term elegant solutions.
o Quantifying the effect of the present
situations on operations
o Developing recommendations as to
alternative courses of action to
correct the situation.

Management audit
concepts
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.

11 Some basic business

principles

13 Criteria for
organizational growth (hal
10)
Cost reductions.

 Price increases.

allocation and use of

resources, auditor may
consider whether
organization is:

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.

o
o

Developing a new product or

service.

Following sound purchasing

practices.
Overstaffed as related to
performing necessary
functions.
Allowing excess materials to
be on hand.
Using more expensive
equipment than necessary.
Avoiding the waste of
resources

Efficiency or productivity
improvements.

Efficiency: methods
of operations.

Non value-added activities

eliminated.

Making employees responsible.

Organizational structure
revisions.

Economy, efficiency, and

effectiveness

Economy: the cost of

operations.
o

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

Is organization carrying out

its responsibilities with the
minimum expenditures of
effort?
Examples of operational
inefficiencies to be aware of
include:

o
o
o
o

o
o
o

Improper use of manual and

computerized procedures.
Inefficient paperwork flow.
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.
o

For example, auditor might

analyze the following:

Allocation of responsibilities
and authority within the
organizational structure.
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.

o
o

o
o

o
o
o
o

Effectiveness: results of
operations.
o

o
o

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.
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.

Definition

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.

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

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.

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

Financial audit vs
management audit
Charact Finan
eristics cial
Audit
1.Purpo expre
se
ss
opinio
n on
financ
ial
condit
ion

Managem
ent Audit

2.Scop
e

business
operation
s

3.Skills

fiscal
financ
ial
record
s
accou
nting

analyze
and
improve
methods
and
performa
nce.

interdisci
plinary

4.Time
orienta
tion
5.Preci
sion
6.Audie
nce

to the
past

absol
ute
stock
holder
s and
public
7.Nece legall
ssity
y
requir
ed
8.Stand GAAP
ards
(PSAK
),
IFRS,
GAAS
9.Opini requir
on
ed
10.Audi opinio
t
n,
results financ
ial
state
ments
11.Focu financ
s
ial
state
ment
prese
nted
fairly
(free
of

to the
future.
relative.
internal
managem
ent
at option
of
managem
ent
economy,
efficiency,
effectiven
ess
Not
required
recomme
ndations
to
managem
ent
operation
al
positive
improvem
ents

materi
al
misst
ateme
nt)
12.Vie
financ
wpoint ial
13.Succ unqua
ess
lified
opinio
n

managem
ent
managem
ent
adoption
of
recomme
ndations.

Why perform a
management audit?
Both business and government
management seeks more information
with which to judge the quality of
operations and make operational
improvements. Request by top
management for such specific
operational reviews have increased as
a result of greater emphasis on the
economy, efficiencies, and
effectiveness of operations and related
results.
3 general purposes :

Assess performance : to
compare the way ORG conducts
its activities w/

o Objectives established by
management
o Comparison with other
similar or individuals within

organizational (int
benchmarking)
o Comparison with other ORG
(ext benchmarking)

Identify opportunities for

improvement : The auditor
identify specific opportunities
for improvement (best
practices) by analyzing
interviews. Observing
operations, reviewing past and
current operational data, etc
Develop recommendations for
improvement or further action :
The auditor should be
continually looking for best
practices (both int&ext) in a
program for continuous
improvement.

Specific objectives and

purposes
Objectives

Adherence
to financial
policy
Procedures
performed
by
individuals
with no
incompatibl
e functions
Adequatene
ss of
existing

audit trail
Observabilit
y of right

7 Purposes
To audit and
evaluate the
adequacy of
accounting
system and
related internal
accounting
controls
(including both
accounting and
administratove
Controls.
To analyze
systems and
controls, as
related to

procedures
internal controls,
Safeguardin
functional
operations, and
g of assets
legal
Reliability of
compliance.
financial
To analyze the
records
capability to
Separation
accomplish
of duties
agreed-upon
Physical
stated goals,
controls
objectives, and
over assets
results in
managements
approved plan.
To compare actual
accomplishment
s/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.
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.

Benefits of management
audit (hal 34)

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.

5 Management audit
phases (hal 38)
Planning : the auditor obtains
general info about the kinds of
activities performed, the

general nature of those

activities and their relative
importance, and other general
info.
Work programs : the auditor
prepares the audit work
program for the preliminary
review of those activities
selected for review in the
planning phase.
Field work : the auditor analyzes
operations to determine the
effectiveness of management
and related controls. Such
functions and controls are
tested in actual operation.
Development of findings and
recommendations :

Conditions : what did u find?

Criteria : what should it be?
Effect : what is the impact on
operations?
Cause : why did it happen?
Recommendation : what
needs to be done to correct
the situation (based on
present best practices, and
always subject to change)
Reporting : The auditor prepares
the report based on the results
of the review in order to bring
these results to the attention of
those having an interest in, or
responsibility for the findings.

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.
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

Degree of management
effectiveness.
Expectation of benefits.

Initial survey (hal 45)

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

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 development
(hal 49)

Budget (hal 44)

There are number of factors to

consider in establishing the
operational audit budget:

Recognize and define the

problem

Gather appropriate data

Evaluate the situation

Proposal letter

Perform the management audit

Scope of the operational audit.

Frequency of the operational
audit.
Nature of the business
operations.