Management Auditing

MANAGEMENT AUDIT

Presented by

H . B . Hamad

BBA-YR-3.

TUNGUU

1 [email protected] (ZIFA-CHWAKA)

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Introduction

Management audit is a tool of mgt control

It is like a periodical medical check of the business to ensure sound and healthy growth of the business.

It covers every activity of the business operation. ( planning, organization and controlling)

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X-ray of business

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Introduction (con’t)

Mgt audit is forward looking and dynamic in its nature.

It is result oriented rather than procedural

It is both preventive and curative (healing)

It detecting and diagnosing the existing troubles

It suggests ways and means to avoid possible danger

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It is not concerned with post-mortem of the business activity, it is future looking

Mgt auditor works as friend, guide and philosopher to the business and not like a spy

Mgt auditor has: To evaluate the effectiveness of the corporate structure

Corporation and coordination btw different executives of

the business.


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Mgt auditor has:

To check economical utilization of the funds of the business

Check marketing and manpower mgt policies of the business

To check contribution and well-being of the society.


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Definitions

A mgt audit is a comprehensive examination of an organization in order to assess efficient use of:

resources and program effectiveness.

to see how well the business is meeting its standards.

may address the organizational structure, finances, or general management and may be broad or narrow in scope


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Definitions con’t

The mgt audit focuses on results, evaluating the effectiveness and suitability of controls by challenging underlying rules, procedures and methods.

Mgt 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


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Definitions con’t

Compliance audits check on the implementation of written manuals, procedures and work instructions. The application of a compliance audit results in stability and assurance that rules are being followed


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Definitions con;t

1. The mgt auditor is principally concerned with the examination of management’s ability to supervise the activities of the client, including its dynamism and flexibility with the changing operating environment, taking advantage of opportunities arising in the course of business operations.


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Definitions con’t

Management audit typically assesses a broad range of management functions:

decision-making and evaluation processes,

policy-making,

resource allocation,

communication procedures, and

goal setting and verification.

The audit can also examine the business’s work environment, improvement process, and relationship with the community.


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Definitions con’t

Social audit is independent appraisals of corporate performance in the social sphere with a view to testy the correctness of published statement of reports regarding its social activities.

Social audit provides for the protection of the interest of the various stakeholders of the society- consumers, employees, investors and in fact all those who are affected by decisions of the company


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Objectives of the mgt audit

The objective of mgt auditing is to

1. appraise, evaluate, and advise clients on how best they should operate their business, including the means to get competitive advantages over competitors and the ability for the client to capture new opportunities.

a complete surgery of the client and a critical study of the operating environment.

The auditor’s competence may be dictated by the background training and education receive and the fundament philosophy of the audit firm it self


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Objectives con’t

Objectives of the mgt audit are:

Appraise

Evaluate

Advice

They can be seen into primary and secondary objectives


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Objectives con’t

Primary objectives.

Appraisal of plans and client objectives.

Appraisal of client’s origination structure.

Evaluation and assessment of client’s performance and

Appraisal of client’s controls of operations.

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Objectives con’t

Secondary objectives.

Advising a client on social welfare values in what may be termed as social audit.

This type of audit involves the examination of the client’s role in the development of social values and the welfare of the society within the vicinity. It covers evaluation of client’s programme for disposal and management of waste, prevention of pollution and environmental degradation, care for the handicapped, contribution towards alleviation of health, poverty, illiteracy, and social hazards


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Mgt audit process

1. Identifying management objectives

2. Determining current facts & conditions that reflect these objectives

3. Defining problems & pointing out improvement opportunities

4. Presenting findings to the board of director.


Distinction btw statutory and management audit

statutory management

Nature

audit Legally compulsory old and well developed, usual regular and continuous, needs absolute precision, immediate benefit to business

is Voluntary and contractual, new and developing, periodical, depending upon needs of management, needs relative precision in the long run.

Objective Check on management to certify truth and fairness or records.

Aid to management to review organizational structure and control procedures

Need Legal requirement mgt audit, Arises out of business exigencies


Distinction btw statutory and management audit….

statutory management

Accountability

Answerable to shareholders

Answerable to management

Independence Outside the circle of management

Operates from within the circle of management

Qualification Accountant expert, independent and honest CPA

an all rounder, knowledge and expertise, any one with good commonsense

report The report of stat. audit is always brief and in a standardized format.

there is no standard format for reporting management audit. The report is always detailed and descriptive 21 [email protected]

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Management consultancy

Examination of business healthy by specialist. i.e independent auditor with the view of making recommendations to facilitate and to promote its more efficient working.

It concern with specific problem in business

Does not cover the entire mgt area


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Management consultancy ( con’t)

MGT AUDIT

Institutional or individual oriented

Overall review of all managerial policies, procedures and actions

Periodical but regular

Internal experts

MGT CON’Y

Problem oriented.

Dealing with specific problems and their solutions.

Casual and adhoc

External experts.


Approaches of mgt consultancy

1. Purchase of expertise model

2. Doctor-Patient model

3. Process consultation model

Source:Mhilu,2002. p. 312-313


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Purchase of expertise model

The client defines the need and conclude that the organization has neither the resources nor the time to fulfill the need.

This approach can work well if: Client has correctly diagnosed its needs

Client has correctly communicated those needs to the auditor

The client has accurately assessed the ability of the auditor to provide the required services.

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Doctor-Patient model

The auditor is brought into the organization to find out what is wrong with which part of the organization and then prescribes the remedial measures.

The client has accurately identified what is the problematic part of org.

The client accurately reveals information about the sickness

The client accept and believes in the diagnosis that the auditor has arrived at.

The client(patient) accepts and implement what the auditor recommends


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Process consultation model

The auditor intends to give the client insight into what is going on around her and within the organization and btw the client and other organization.

Then the client will be able to figure out what should be done.

This is like a counseling aimed at improving the business operation taking into account the external environments

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Objectives of mgt audit

Appraisal of objectives and plans

Depends on the auditor’s experience but the following used a yardstick.

Evaluating objectives.

Objectives are clear and understandable?

No major part of objectives omitted?

Are in due to coy’s responsibility to shareholder, employees, community and government.


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Evaluating plans

Are the plans compatible with the related objectives

Improve coordination btw various objectives

Anticipate trouble spots

Flexible to allow changes to be accommodated

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Appraisal of client’s organization structure

The coy’s organization structure is part of the means by which mgt controls the enterprise's operation.

It include assignment of duties and responsibilities and delegation of authority.


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Objective of mgt audit

Appraisal of client’s organization plan

Is it in harmony with the objectives of the company, division , department or unit.

Established lines of responsibility from top to bottom

Spans of mgt


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Evaluating and assessment of client’s performance

It depends on auditor experience on client operation,

He can hire outside expert if the nature of operation in outside his scope

But mostly he will pay attention on:

Personnel, workload, productivity, quality, cost


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Personnel:

Apply qualitative approaches to work force

Thing like: no. of employee, personnel turnover, total regular hours worked, total overtime hours, ratio of regular hours to overtime hours, ratio of direct to indirect employees


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Work load:

Auditor check on volume of work handled, volume of new work, the amount of completed work,

Kind of qualitative data to use:

Order received, stores requisitions, payroll checks prepared etc


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Productivity:

Auditor uses quantitative measurements to relate unit produce to work done.

Man-hours per customer job, etc


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Quality:

Auditor used quantitative approaches to determine how well the job done

Data used: no. of complain from customers, no. of error per customer bill produced. No of typing error per 100 words. No of rejections


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Costs:

Needed for decision making

Data used: labour costs, materials costs, administration costs,

It depends on auditor's intelligence on how to look data cost in relation to management


Appraisal of controls

Examine and report directly on the control in uses

Checks controls deficiency resulting improper accumulation of the data

Improve controls better reports in future

Targeting long-time rage mgt controls


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Corporate analysis

To check both competition and risk on business environmental changes

What are the factor give client competitive edge over its rivals

Client’s policies in giving value to customers

Used techniques: industry analysis, environment situation and SWOT


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Corporate analysis

Examine competition in the industry, bargaining power of client’s suppliers, bargaining power of buyers, threat of new entrance and substitutes.


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Corporate analysis

Environmental analysis:

Examine client’s policy of responsiveness to the political, economical, social and technological situation exiting at present.


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Corporate analysis

SWOT analysis:

Is technique to pinpoint strength and weakness in the client’s internal operating capabilities and search for new business opportunities and the related threats.

Selection of new strategic to take, depends on environmental, SWOT and financial modeling


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Plan for mgt audit

Organizational approach

Functional approach


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Steps in mgt audit

Familiarization

Verification

Evaluation and recommendations

reporting


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end


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Management Auditing

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