Internal, Management & Operational Audit Flashcards
Moksh Ltd. is a manufacturing company and started its business in the year 2000. The net profit
after tax of the company was 15% up to the financial year 2019-20, but for the financial year 2020-
21 and 2021 -22 the company’s profit declined even when there was increase in the sales and
production of goods by the company. So, the management of AS Ltd. felt a need to get the
management audit conducted with the objective of detecting and overcoming current managerial
deficiencies. Briefly discuss the steps to prepare the management audit report.
Steps to Prepare the Management Audit Report:
- Planning the Audit Report.
- Supporting information.
- Preparing draft report.
- Writing & Issuing the final report.
- Follow-up of the audit report.
- Action/ Response of Management on Audit Report.
- Planning the Audit Report - Before starting the report, the auditor should ask himself, “What do I want to tell the reader about this audit?” The answer will enable him to communicate effectively.
- Supporting information - The management auditor should supplement his report with appropriate audit evidence which sufficiently & convincingly supports the conclusions.
- Preparing draft report - Before writing the final report, the auditor should prepare a draft report. This would help him in finding out the most effective manner of presenting his report. It would also indicate whether there is any superfluous information or a gap in reasoning.
- Writing & Issuing the final report - The final report should be written only when the auditor is completely satisfied with the draft report. The head of the management auditing department may review and approve the final report. Before issuing the final report, the auditor should discuss conclusions and recommendations at appropriate levels of management.
- Follow-up of the audit report - The management auditor should review whether follow-up action is taken by management on the basis of his report. If no action is taken within reasonable time, he should draw management’s attention to it.
- Action/ Response of Management on Audit Report - Where management has not acted upon his suggestions or not implemented his recommendations, the auditor should ascertain the reasons thereof. In cases where he finds that non-implementation is due to a gap in communication, he should initiate further discussions to bridge such gaps. The actions and responses to the Management Audit Report reflect management’s attitude to the audit. In any case, the auditor to retain the usefulness of the audit function should ascertain from the management, preferably in writing, the reasons for non-implementation. It is possible that because of change in circumstances, the observation did not require any action on the part of the management. The auditor should satisfy himself on the appropriateness of such reasons as well to close the issue.
Mr. ‘P’ have been appointed as operational auditor of M/s Books & Magazine Ltd. and observed a totaling error in invoice of ` 1,000. He has not taken care of the same saying that this is out of scope of his work. Comment.
Scope of Operational Audit: Operational auditing is a systematic process involving logical, structured and organized series of procedures. It concentrates on effectiveness, efficiency and economy of operations and therefore it is future oriented. It does not end with the reporting of the findings but also recommends the steps for improvement in future.
The main objective of operational auditing is to verify the fulfilment of plans and sound business requirements as also to focus on objectives and their achievement objectives; the operational auditor should not only have a proper business sense, he should also be equipped with a thorough knowledge of policies, procedures, systems and controls, he should be intimately familiar with the business, its nature and problems, and prospects and its environment. Above all, his mind should be open and active so as to be able to perceive problems and prospects, and grasp technical matters.
In carrying out his work probably at every step he will have to exercise judgement to evaluate evidence in connection with the situations and issues; he will have to get the assistance of norms and standards in every operating field to be able to objectively judge a situation. The norms and standards should be such as are generally acceptable or developed by the company itself.
To a traditional internal auditor, a loss of ` 1,000 caused by a wrong totaling of invoice is important and this is that he looks for. But for an auditor engaged in the review of operations, carrying out of a proper maintenance programme of the machines is of greater importance because considerable production loss due to machine breaks down can thus be prevented. In both the cases, the auditor’s objective is to see that the business and its profitability do not suffer from avoidable loss, but, nevertheless, there is a distinct difference in approach. But it should not be assumed, that, since an operational auditor is concerned with the audit of operations and review of operating conditions, he is not concerned with the financial aspects of transaction and controls.
Hence, contention of operational auditor that totaling error in invoice of ` 1,000 is out of scope is not correct as operational audit is being carried out to ensure that all the management functions like planning, organizing, staffing, directing and controlling are working effectively and efficiently. Such kind of error is very much in scope because such an existence of error indicates that control system (controlling function) is not sound.
The Marketing Department of Charitra Ltd. has been consistently showing a lower performance
whereas the cost of the department is increasing in spurts over the years. The management
believes that since the marketing department is under a regular radar of the CFO, an audit might
result in the employee hostility. Also, an operational audit of Marketing Department was done two
years back however, the recommendations of the previous audit were not followed by the
concerned employees. Please advise the management if another audit is the solution and whether
only one-time operational audit is enough? Further, advise on the ways to deal with the employee
hostility.
The Operational Audit is not one-time activity. It should be viewed as a continuous
improvement cycle:
↗ Plan ↘
Act Do
↖ Check ↗
All the significant operations must be subjected to the scrutiny of operational audit, at least, once
in three years. Therefore, the operational audit should be done in the current scenario. However,
to deal with the employee hostility the participative approach of the audit should be adopted:
In this approach the auditor discusses the ideas for improvements with those managers that have
to implement them and make them feel that they have participated in the recommendations made
for improvements. By soliciting the views of the operating personnel, the operational audit becomes
a co-operative enterprise.
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. T earn spirit is developed. The auditors and the auditee
together try to achieve the common goal. The proposed recommendations are discussed with the
auditee and modifications as may be agreed upon are incorporated in the operational audit report.
With this attitude of the auditor, it becomes absolutely easy to implement the proposed suggestions
as the auditee themselves take initiative for implementing and the auditor does not have to force
any change on the auditee.
