APPROACHES TO

OPERATIONS
AUDITING

Reference: Operational Auditing by Chamber and Grahams

 INTERNAL CONTROL

Is broadly defined as a process, effected by the entity’s board of

directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives in the
following categories:
• Effectiveness and efficiency of operations.
• Reliability of financial reporting.
• Compliance with applicable laws and regulations.
 INTERNAL AUDITING

An independent, objective assurance and consulting activity designed

to add value and improve an organization’s operations. It helps an
organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of
risk management, control, and governance processes.
 AUDIT UNIVERSE

Although the focus of operational auditing is likely to be on those

activities which are most strongly associated with the main
commercial markets of the organization (for example: production,
sales, after sales support, service provision, etc.), it is likely that the
supporting or infrastructure operations will also need to be reviewed
on the basis that they too contribute to the well-being of the
organization as a whole.
 AUDIT UNIVERSE

At the top level, one possible categorization of all these areas could be as follows:
• Management and administration
• Financial and accounting
• Personnel and human relations
• Procurement
• Stock and materials handling
• Production/manufacturing
• Marketing and sales
• After sales support
• Research and development
• Information Technology
• Contracting
 AUDIT UNIVERSE

It is unwise to restrict one’s thinking of these systems or activities as

either existing or operating in isolation. Any organization will be
formed from a number of interacting activities with points of
interface.

For example, in the case of ordering and receiving goods from external suppliers,
there needs to be a coordinated flow of accurate information between the
purchasing department, the stock warehouse and the accounts payable section.
 AUDIT OBJECTIVES

OBJECTIVES OF MANAGEMENT FOR THE OPERATIONS BEING

AUDITED

Audit Objectives
“Audit objectives” are not synonymous with “management’s objectives” as the
former specify the particular focus that the auditors will have during the audit
engagement.

No time should be expended during the audit engagement on issues which are
immaterial to the achievement of management’s objectives.
 THE THREE “E”

EFFECTIVENESS. Doing the right things

EFFICIENT. Doing things well

ECONOMY. Doing things cheap

 THE THREE “E”

EFFECTIVENESS. Doing the right things

Achieving objectives. It is the ratio of actual outputs to planned

outputs (i.e. planned objectives).
 THE THREE “E”

EFFICIENT. Doing things well

Ratio of actual inputs to actual outputs. Good systems which avoid

waste and rework.
 THE THREE “E”

ECONOMY. Doing things cheap

Ratio between planned inputs and actual inputs in terms of unit

costs of given quality.
 RESOURCING TECHNICAL
ACTIVITIES
“Internal auditors must possess the knowledge, skills, and other competencies
needed to perform their individual responsibilities. The internal audit activity
collectively must possess or obtain the knowledge, kills, and other competencies
needed to perform its responsibilities.”

It is likely that the chief audit executive will favor recruiting internal auditors who
are familiar with more than one of the requisite technical areas.
 RESOURCING TECHNICAL
ACTIVITIES
A further option is to buy-in temporarily the technical expertise to work along side
in-house internal auditors so as to build their competence to perform audits in
particular technical areas.

Indeed, sometimes the approach is followed to outsource completely the audit of

highly technical areas. IT auditing is often so outsourced.
 VALUE FOR MONEY (VFM)
AUDITING
“ADD VALUE”
Value is provided by improving to achieve organizational objectives, identifying
operational improvement, and/or reducing risk exposure through both assurance
and consulting activities.

The internal audit activity adds value when the organization and its stakeholders
benefit from the results of internal audit work. Benefit arises when the internal
audit activity provides objective and relevant assurance, and contributes to the
effectiveness and efficiency of governance, risk management and control
processes.
 VALUE FOR MONEY (VFM)
AUDITING
Value for money auditing takes account for three Es. It frequently makes extensive
use of performance indicators in the form of ratios and other statistics to give an
indication of value for money –especially when trends are explored in theses
performance indicators over time, or variations in performance are identified and
explained between difference operating units.
 VALUE FOR MONEY (VFM)
AUDITING
In a more formal environment (for example, where acquiring new computing
facilities) it may be necessary and desirable to go through a detailed feasibility
study as part of an overall project appraisal process. This can then incorporate the
appropriate cost and performance comparisons which underline the determination
of value for money.
 BENCHMARKING

Benchmarking can be defined simply as a comparison of one's own performance in

a specific area with that applied by others incompatible circumstances.

For a benchmarking exercise to be meaningful, it is necessary to understand fully

the existing processes, systems and activities as a firm basis for subsequent
comparison with external points of reference (such as industry or professional
standards).
 BENCHMARKING

The principal objectives of benchmarking are likely to include:

• maintaining a competitive advantage in the appropriate market;

• establishing current methods, best practice and related trend;
• ensuring the future survival of the organization;
• maintaining an awareness of customer expectations (and being able to address
them);
• ensuring that the organization has the appropriate approach to quality issues
 BENCHMARKING

Involvement in such exercises will enable participants to take a view of the need
for change or review of their own organization's approach to internal auditing in
light of the survey data.

Of course, benchmarking is not an end in itself, but rather one platform used to
identify and subsequently launch the required or necessary processes of change
within a department, function, activity, process or organization.
End of slides
Do you have any questions?

ELIGEN H. SUMICAD JR., CPA

eligensumicadjr@gmail.com
+639508015145