Basics of Management Audit

Basics of Management Audit Cost and Management Audit 8.
Management Audit – Definition and Scope (December 2008, 2013 & 2018)
Management audit is the process of APPRAISING THE PERFORMANCE OF DIRECTORS,

MANAGERS, or in the other words, appraising the performance of the management of an
organisation. It attempts to look into all aspects of the management performance. Management audit
does not concentrate on financial matters alone as in the case of financial audit. It is the examination
of the effectiveness of management in controlling the total activities of the organisation in the
accomplishment of the organisation objectives.
Management audit deals with –
(i) the objectives of an organisation;

(ii) the policies and procedures in terms of the objective of the organisation; and
(iii) adequate performance of an organisation in terms of objectives, policies, and procedures.
FYK – Auditor has to be very careful

while conducting the management
audit, as the subject of the audit is the
top management of the Company and
their decision-making capabilities.
Any adverse comment of the auditor

(without adequate backup /
supporting evidences) may ignite
friction in the management.
Further, in absence of statutory
guidelines for conduct of this audit, no
clear-cut / square jacketed
methodology can be defined to carry
out this audit.
Hence, the dynamism renders riskiness
to this type of non-statutory audit.
COVERAGE OF MANAGEMENT AUDIT
It covers the entire arena of management operations including organisation, personnel,

administration, manufacturing, marketing, finance, research and development and other areas.
The audit is expected to cover every activity of the organisation undertaken in pursuance of
organizational objectives or policies decided by the Board of Directors from time to time. The various
Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

YouTube Channel – CA CS CMA Nikkhil Gupta; - guptanikkhil24@gmail.com (only for FB)
Basics of Management Audit Cost and Management Audit 8.2
plans prepared by management, its policies, programs, procedures their Audit is management Audit.
It is popularly known as OPERATIONAL MANAGEMENT or EFFICIENCY AUDIT.
MANUFACTURING
ORGANISATION
PERSONNEL
ADMINISTRATION
MARKETTING
FINANCE
Agency theory of management – the propeller of management audit
An agency, in broad terms, is any relationship between two parties in which one, the agent, represents
the other, the principal, in day-to-day transactions. The principal or principals have hired the agent to
perform a service on their behalf. Most commonly, that relationship is the one between shareholders /
stakeholders, as principals, and company executive, as agents.
Management audit extends to examination of accountability between the management and others
at large. Audit mechanism ensures this accountability. Since the right to exercise control lies entirely
with different set of people away from the owners, the examination of accountability and ensuring
shareholders’ and other participants’ welfare becomes important.

OBJECTIVES of Management Audit (December 2015 & 2018)
- Appraise the management performance at all the levels.

- Highlight the decisions or activities that are not in conformity with organizational
objectives.
- Ascertain that objectives are properly understood at all levels;
- Ascertain that controls provided at different levels are adequate and effective in
accomplishing management objectives or plans of operations;
- Evaluate plans which are projected to meet objectives,
- Review the company's organizational structure, i.e. assignment of duties and responsibilities
and delegation of authority.
- To ensure optimum utilization on all the resource employed, including money, materials,
machines, men and methods;
- To highlight efficiencies in objectives, policies, procedures and planning;
- To suggest improvement in methods of operations;
- To highlight weak links in organizational structure and in internal control systems and
suggest necessary improvements;
- To help management by providing health indicators and help prevent sickness or help cure
in case of sickness; and
- To anticipate problems and suggest remedies to solve them in time.

NEED / BENEFITS for Management Audit - The main cause of the economic and social problems
can be attributed to managerial ineffectiveness, which in turn causes other problems. It is, therefore,
imminent that an appraisal of managerial effectiveness is undertaken to monitor and remedy the
weaknesses wherever exist. This is the function of management audit.
(i) It helps management in framing basic policies for the organisation and to define objectives.
(ii) In pursuance of the objectives of the organizations, management audit helps in preparing a
viable and achievable plan for the organisation.
(iii) It helps in setting up an organizational framework to implement the plans.
(iv) It assists in designing systems and procedures for smooth operation of the organisation.
(v) It helps in designing and reviewing management information system (MIS) for decision
making to help in coordination, motivation and control of the operations.
(vi) It assists in analyzing SWOT (strengths, weaknesses, opportunities and threats) of the
organisation and assists in marketing the organisation stronger.
(vii) It helps the Government in identifying improper or wasteful use of funds, checking
extravagant organization practices and curving ineffective use of physical resources,
especially in case of public accounts etc.
(viii) Indian financial Institutions, banks and Board for Industrial Finance and Reconstruction
(BIFR) have found management audit (called concurrent audit) useful in monitoring sick
industrial units and to help the units in their rehabilitation.
(ix) The Railways of India have subjected their finances to open discussion by public to
improve resource mobilization, reduce cost of operations and conserve their scarce
resources which are main objectives of management audit.
(x) It can help in analyzing social-cost benefit analyses for public projects like dams, power
houses, national highways etc.
(xi) It is essential whenever a unit is planned to be taken-over or an amalgamation or merger
with another unit is proposed.
SCOPE of management audit - Unlike statutory audits, management audit does not have any pre-
defined / specific area for conducting audit. It is much wider in scope and covers every activity of the
organisation undertaken in pursuance of organizational objectives or policies decided by the Board of
Directors from time to time
(i) The suitability of the plans, activities and decisions of the organisation with its desired
objectives and aims.
(ii) The current image of the organisation among customers, general public within its own
particular industrial or commercial field.
(iii) Efficient utilization of resources of the organisation.
(iv) The rate of return of investors’ capital – whether poor, adequate or above average.
(v) Relationship of the business with its own shareholders and investing public in general.
(vi) Employee relationship.
(vii) The aims and effectiveness of management at its various levels such as top level, middle
level, and operational level.

(viii) Financial policies and control relating to production, sales and distribution and in other
functions of the organization.
QUALITIES of management auditor are:
Management audit is systematic, examination, analysis and appraisal of the overall performance of the
organisation. The essential qualities of management auditor are:-
1 Ability to grasp business problems.

2 General understanding of the motive, purpose and objects of organisation.
3 Ability to assist the programme of management.
4 Knowledge about the principles of delegation of authority
5 Understanding different internal control devices, flow charts, flow of work etc.
6 General understanding of all economic and commercial legislations like Company Law, Customs
Law, Labour Law, Tax Laws etc.
7 Ability to prepare reports to various levels of management
8 Capacity to adjust personnel of different types with tact etc.
The FUNCTIONS of Management auditors are as follows:
The functions of Management Audit extend to audit of the effective functioning of every area of
operations coming under the management purview from the stage of its planning to proper
implementation and execution. Every manufacturing or service organisation could broadly be
identified into the following functional areas:
1. Marketing, including selling and distribution

2. Manufacturing/servicing, including maintenance of supply chain, machinery and equipment
etc.
3. Human resource management from selection to recruitment, training, motivating, retaining,
advancement, etc.
4. Personnel policies and industrial relations
5. Finance including maintenance of accounts and providing accounting information to guide the
management of its performance and position.
6. Research and Development including application research and basic research, if any.
An understanding of the objectives of each functional area at every level of the organisation and
effectively achieving such objectives shall be the prime responsibility of management. Checking of
such effective achievement is the function of management audit.
(June 2008, 2014, 2015 & 2019)
Steps of management audit

1. Select an area of operation of management like – Planning / Organising / Staffing /

Coordinating / Communicating / Directing / Motivating / Controlling / Communicating.
2. Establish what should be the objective, standard or target of the operation.
3. Determine whether the actual results meet the standards, norms or targets. If not, why not?
4. Establish what is done to ensure the achievement of the norms, target and standards.
What steps are taken for –
(i) planning
(ii) operations, execution and implementation e.g. sue of up-to-date technology.
(iii) Measurement of performance and controls?
5. Carryout a detailed investigation, collective evidence as well as document for audit findings
6. Report the findings of the audit and make recommendations.
Sources of information to the management auditor – In case of statutory audits, the auditors have
easy and direct access to the information / records (like financial records / books of accounts /
secretarial records) which they want to audit. However, the requisite information is not readily
available to the management auditor and he has to dig though the information using the following
techniques:
Management Survey – This is

best way to Identify possible
control weakness. Through this
technique, practical working
information is obtained on how the
activity is supposed to function and
how is it actually functioning.
`
Management reports - The
auditor’s review of management
and internal reports may be used to
obtain information on progress,
status, or accomplishment of work
and also on information on
possible problem areas suggesting
audit attention.
Internal audit or inspection

reports – Just like management
reports, these reports can also be a
valuable source of information on
problem areas. Inquiry into the
reasons and justification for
inaction in such cases should be
made, since these circumstances
could throw light on weaknesses in
management system.

Physical inspection - Physical

inspections of the organisation’s
activities and resources by the
auditor can be a useful way of
identifying possible inefficiencies.
Examples are apparently excess
accumulations of material, idle or
little used equipment, employee
idleness, rejections of product by
inspectors (or customers). This
may prove to be a very useful way
to obtain a practical insight into the
efficacy of procedures
Discussions with the officials and

employees - The management
auditor can obtain valuable
information on problem areas
through discussions with
responsible officials in the
organisation and other employees
concerned.
Testing procedures and

practices – Test checking of the
practices and procedures, may
indicate problem areas on
weaknesses needing further
probing.
Techniques of management audit: Techniques employed by a management auditor in effectively

carrying out his audit are –
(i) Accounting or economic techniques – like (a) Break-even analysis (b) Budgetary control
including flexible budget system (c) Cost management techniques indicating how an
organisation’s assets should be allocated over competing projects or to decide whether it is worth
proceeding with the investment, keeping in view proportionate value of expenditure on such
projects. (d) Discounted cash flow and net present value methods. (e) Cost benefit analysis. (f)

Standard costing and marginal costing (g) Activity based costing to test the relevance of costs to
activities. (h) Quality analysis of company transactions.
(ii) Scientific techniques like - (a) Computer Models to take decision on material mix, product, mix,
make or buy etc. (b) Network analysis: To analyse strings of tasks to arrange them in sequential
or parallel order to complete the project in shortest possible time. (c) Mathematical programming
solving by Linear programming is usually effective when relationship vary in linear order
whereas quadratic programming may be used when the variations are in the order of square root
of some other factors.
(iii) Statistical techniques like - (a) Activity sampling: It is one of the many ways in which the
present workloads can be measured to obtain controls to be exercised by management. (b) Monte
Carlo Simulation: In this a number of variables are drawn from large statistical population which
have equal choice of being selected and obtain the best sample possible (c) Exponential
smoothing (d) Interfirm comparison
(iv) Personnel techniques – like (a) Attitude / Aptitude survey (b) Ergonomic (Man-machine
relationship) (c) Training methods (d) Profitability and productivity measurement
(v) General techniques like - (a) Statistical theory of management is an attempt to emphasize what
should be the practical approach to a problem (b) Brain storming (c) Transfer pricing (d)
Management by objectives (e) Management by exception (f) Corporate planning (g) Information
theory
Management Evidence - Unlike financial audit or other audits there can be no fixed items of evidence
to be checked by a management auditor. A management auditor has to rely more on his experience
and acumen to identify areas of review and study, particularly areas of weaknesses to be overcome,
strengths to be exploited and risk to be properly covered. The management auditor’s evidence comes
from:
- discussions with the people concerned in the organisation,

- the survey and review of various reports of the organisation, including internal audit reports,
inspection reports or any investigation reports,
- physical inspection,
- test examination of various transactions, inspection of important departmental files,
- monthly performance review statements,
- minutes and notes and above all personal observations.
Management Audit Team –A management auditor (organisation) should have a competent team of
people, who possess the qualifications attributed to a management auditor. As a management auditor
is concerned with all aspects of the business and the organisation, ranging from manufacture, to
marketing and finance, the management audit team should be MULTI-DISCIPLINARY1 to make
MULTIDIMENSIONAL approach to audit function, Viz., production, materials management,
maintenance, personnel, marketing, finance, industrial engineering, quality control, etc.
1
relating to or involving people from different types of work or who have different types of knowledge.

Management Audit Programme (MAP): Management audit programme is an essential prerequisite

to conducting the audit. It is a plan of action drawn in advance of taking up the audit, and to help the
auditor to cover the entire area of his function thoroughly. (June 2017)
An efficient management audit programme shall comprise the following:
(i) Review of the organisational objectives and plans

(ii) Study of the policies and practices of the management
(iii) A critical review of the organizational structure
(iv) Study of the systems and procedures
(v) Evaluation of operations
(vi) Study of the efficiency of the use of physical resources available
(vii) Exercise of proper management control
(viii) Maintain suitable monitoring system through management information system (MIS)
(ix) Check on adherence to the statutory obligation and
(x) Above all, review the efficiency of manpower handling, which ultimately results in the
organisation’s success. (June 2017)
CHARACTERISTICS of a good management audit report
a) Pertinence – The audit report should be relevant to the area for which the audit has been
conducted.
b) Comprehensiveness – The audit report should cover all the aspects of the chosen area of
audit
c) Brevity – The audit report should be brief and to the point.
d) Timeliness – The audit report should be issued in a timely manner so that suitable rectifying
actions may be taken on time.
e) Motivating – Auditor should use positive wordings in the audit report. E.g. Instead of writing
that “the production planning was done inadequately”, it may be written that “the production
planning may be improved by taking the following steps……”
f) Formatting and presentation – The audit report must be drafted in a consistent format. Like
font type, font size, spacing etc should be the same in the entire report.
CONTENTS of the management audit report - The top policy executive is generally interested in
four factors in operating statements – a) facts, b) person responsible, c) deviations in actual
performance from standards and d) the effect of the result on financial or physical status of the
organisation. The report must allow management to
- study comparisons,
- review organisation, and to appraise the effectiveness of the executives.
- Review Departmental weakness.
- create awareness among the management of prudent management practices.
- help change of management mind-set.

- indicate suggestions that had come from the people themselves

- get solutions to the problems
Special reports - Sometimes, the reports have to be prepared and submitted for special persons or
purposes. Salient features for these special reports are briefly discussed below:
Reports prepared Special features required in the report

for
Banks and - Accuracy and reliability in report and confirmation of statement made
creditors - Bankers are more oriented towards security due of debt servicing by the
business.
- All statements by the auditor should be clear and positive.
- They are also keen in the explanatory notes to the financial statements
Shareholders - analytical details alongwith the after the full facts of the organisation’s
business.
- convey the right and correct message to a lay man, who might not
understand technical jargons.
- auditor’s report in the prospectus at the time of public issue is very
important.
- Experts read “between the lines” of the auditor’s report. It will ultimately
reflect in the auditor.
Employees - better understanding of the business, to dispel any misconceptions,
counter charges by unions,
- The report must gain the confidence of employees and earn respect for the
statements.
- The report should consider the needs of employees,
- Auditor’s views will be expected to be totally unbiased.
Small business - Report to be designed in a very simple way if it specifically directed to a
person or a small group of persons only.
- Suggestions in the report must be based on proper appraisal of the
problem.
Management Audit and Operational Audit are COMPLEMENTARY and SUPPLEMENTARY

to one another.
Management Audit is that it is wider in scope compared to operational audit. Management Audit is
concerned with the quality of managing, whereas Operational Audit centers on the quality of
operation. The basic difference between the two audits is not in method, but in the level of appraisal.
In Management Audit, the auditor is to take his tests to the level of top management, its formulations
of objectives, plan and policies and its decision making. It is not that he just verifies the operation of
Control and procedure and fulfillment of plans in conformity with the prescribed policies. Thus, the
two audits are complementary and supplementary to any another. (December 2013 & 2015)

Features of Different Types of Audits
The Table below brings out the distinguishing features of different types of audit carried out in an
organization: (June & December 2011)
Financial, cost and

Basis Management Audit Internal Audit
other audits
Appraising Assisting Management Specific under statutory
Expectations management to identify problems and other’s directions
Friend, Philosopher
Attitude and guide Policeman/judge Watch dog/judge
Outside team or Specially designated
Agency management Internal or External persons
Force Voluntary Statutory in some cases Statutory/Voluntary
Complete Management
Area or specific problems Mainly past/ procedural Specific objectives
Effectiveness/ quality
of Quality of procedures
Evaluation management/Policies Operations/data Specific information
Period
covered Past, present and future Past and present Mainly past
Procedures Flexible Structured Highly structured
Reporting
level Higher Operational Designated
Current and immediate
Time span Futuristic Current and immediate past
Periodicity Regular Regular Annual



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Basics of Management Audit Cost and Management Audit 8.

Management audit is the process of APPRAISING THE PERFORMANCE OF DIRECTORS,

Management audit deals with –

(i) the objectives of an organisation;

FYK – Auditor has to be very careful

Any adverse comment of the auditor

COVERAGE OF MANAGEMENT AUDIT

It covers the entire arena of management operations including organisation, personnel,

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Agency theory of management – the propeller of management audit

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

OBJECTIVES of Management Audit (December 2015 & 2018)

- Appraise the management performance at all the levels.

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

QUALITIES of management auditor are:

1 Ability to grasp business problems.

The FUNCTIONS of Management auditors are as follows:

1. Marketing, including selling and distribution

(June 2008, 2014, 2015 & 2019)

Steps of management audit

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

1. Select an area of operation of management like – Planning / Organising / Staffing /

Management Survey – This is

Internal audit or inspection

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Physical inspection - Physical

Discussions with the officials and

Testing procedures and

Techniques of management audit: Techniques employed by a management auditor in effectively

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

- discussions with the people concerned in the organisation,

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Management Audit Programme (MAP): Management audit programme is an essential prerequisite

An efficient management audit programme shall comprise the following:

(i) Review of the organisational objectives and plans

CHARACTERISTICS of a good management audit report

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

- indicate suggestions that had come from the people themselves

Reports prepared Special features required in the report

Management Audit and Operational Audit are COMPLEMENTARY and SUPPLEMENTARY

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Features of Different Types of Audits

Financial, cost and

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

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