Explain how Management Audit Serves as an Effective Technique for Controlling

Minakshi Bindhani

04 Mar, 2023

Management audit refers to the systematic examination of decisions and overall performance of the management of an organisation. The purpose is to review management’s efficiency and effectiveness and improve its performance in future periods. It helps to identify the deficiencies in the action of management functions in the organization. The effectiveness of audit for controlling is examined from the following heads:

• It helps to identify current and potential deficiencies in the performance of management functions.
• It helps improve the organisation’s control system by continuously monitoring management’s performance.
• It improves co-ordination between the various departments in the organization so that they work together effectively towards achieving organizational objectives.
• It ensures updating existing organizational policies and strategies in light of changes.

Characteristics of Management Audit

Controlling is an end function – A function that comes once the performances are made in conformity with plans.

• Controlling is a pervasive function – It is a pervasive function because managers perform it at all levels and in all types of concerns.
• Controlling is backward and forward-looking – Effective control is impossible without the past being controlled. Controlling always looks to the future so that follow-up can be made whenever required.
• Controlling is a dynamic process – Controlling requires taking revival methods; changes must be made wherever possible. Focus has to be on controlling all the time, which makes it a dynamic function. Controlling is related to Planning – Planning and Controlling are two inseparable management functions. Without planning, controlling is meaningless to exercise.

 Objectives

• To identify the actual progress of the work in the company.
• To facilitate the R&D department to improve efficiency.
• To facilitate co-ordination in the organization.
• To measure the actual performance with the set standard.
• To calculate the actual quantity and quality of the product.
• To eliminate wastage of resources.
• To meet the deadline of the projects.

 Advantages of Controlling

• It helps the plan to be implemented effectively.
• Controlling facilitates co-ordination in organizational functioning by reducing diversity.
• It encourages high morale on the part of employees.
• It ensures order, discipline and obedience on the part of subordinates.
• Controlling helps the organization preserve and promote its identity against environmental changes.
• It effectively uses physical and human resources^[1] to achieve organizational goals.
• It enables an organization to monitor the external environment for better control.
• Control promotes integration between Short Term Goals and Long-term Objectives, Corporate and Departmental Goals.
• It saves time and energy and helps in timely corrective action by the manager.
• Control allows managers to concentrate on essential tasks.
• It also allows better utilization of organizational resources.

Management audit serves as an effective technique for controlling.

The nature  of managerial control techniques is discussed below:

• Statistical control report:
  The statistical reports are prepared and used in large organizations. The variation reports are easily measured so that the management exercises control. A periodic report of sales volume is an example of statistical control report.
• Observations:
  Generally, the manager personally observes the operations of the organization. The manager rectifies the operations whenever the need arises. It is the oldest method of control. Employees work cautiously to get better performance. Personal observation is time-consuming, and the supervisor needs more time to afford personal observation. The observer gives an unbiased performance evaluation.
• Cost accounting and cost control:
  The profit of any business depends upon the cost incurred to run a business. Profit is maximised by reducing the cost of operation or production, so the business concern is essential to cost accounting and control. Management uses several systems to determine the cost of services and products. The cost accounting procedures and methods vary from one organization to another according to the nature of the organization. It is used for effective cost control and cost reduction.
• Analysis:
  It analyses the relationship between the cost of production, production volume, profits, and sales volume. The total costs are divided into two categories, i.e., fixed and variable costs. Fixed costs will never change according to the changes in production volume. Variable cost changes according to the volume of production. The analysis helps to determine the volume of sales and the total cost equal to the revenue generated in the organization.
  The excess of revenue over total cost is described as profit. The point at which sales are equal to the total cost is known as the ‘Break Even Point’ (BEP).
•  Control reports:
  The control report may or may not contain statistical data in an organization. However, this technique investigates a particular operation and for a particular purpose. It is done according to the requirements of management but only sometimes. Handling the complaints of damage is an example of this control technique.
•  Management Audit:
  Management audit is an independent method that points out the inefficiency in management functions such as planning, organising,  directing, and staffing, suggesting possible organizational improvements. It helps the company handle operations effectively. Management audit is neither a compulsory audit nor enforced by law.
• Standard costings:
  • Standard costings are used to control the cost in an organization.
  • The following  is to measure the standard costings:
  • Taking measures to avoid variations in the future.
  • Measurement of actual performance costing.
  • Comparison with standard cost to find variations
  • Determine the cost standards for material, labour, and overhead components.
  • Finding the causes of variations.
• Return on investments:
  The management audit identifies the organization’s profitability rate. The number of profits earned by the company varies from the rate of profitability of the company.
  The difference between revenue and cost is profit. Return on investments is calculated by dividing the net profit by the total investment or capital employed in the business organization.
• Internal Audit:
  The internal audit report is prepared at regular intervals, generally by month. It covers all the areas of operations. The management takes measures to control the performance based on the report and emphasises the degree of deviations from expectations. It is beneficial to attain the objectives on a timely basis.
•  Accounting:
  An employee’s performance is examined by assessing how far they have achieved the pre-determined objectives of an organization. The objectives are framed department-wise, division-wise, section wise and assessed accordingly. Each individual is responsible for the area as he is assigned to a particular section, department or division.
• Managerial statistics:
  Using the managerial statistics technique, the manager estimates previous and current results to know the causes of changes in circumstances. It benefits the management audit in planning and decision-making for future risk.
• Performance Evaluation and Review Technique (PERT):
  This technique resolves the problem that occurs within an organization. The PERT technique is beneficial for construction projects, book publications, etc.
• Production Control:
  The production control technique is necessary for the smooth functioning of an organization. Production control involves planning production, determining the stock level of raw materials, and finished goods, selecting processes, selecting tools in production, etc.
• Management information systems:
  Relevant information is collected and provided to all the persons who are responsible for taking decisions. A communication system is developed to inform everyone about the organization’s growth. The responsible person takes corrective or disciplinary action whenever the deviation is found.
  The management information system emphasises adequate information in time for taking the best decision. Thus, a management information system helps the management in managerial decision-making by giving the correct information timely to control the future risk.
• External audit control:
  The external audit is necessary for all organizations under the purview of statutory control. Therefore, it is otherwise known as statutory audit control. The statutory audit safe the interests of the shareholders and creditors of the company.
  The external auditor certifies that all the books of accounts are kept per the law requirements and supplies all the necessary information for audit. The balance sheet presents an accurate and fair view, and the auditor conducts the external audit.
• Zero-Base Budgeting:
  It is a new approach to budgeting. A zero base budget is prepared without considering the previous year’s figures. This technique requires recalculating all organizational activities to ascertain which should be eliminated,  increased or reduced. Furthermore, the funds are estimated at current requirements. It means determining how much is necessary to complete an ongoing project.
• Standing order:
  Standing order covers rules and regulations, procedure and the like rules, regulations and procedures are framed according to the administration’s requirements. For example, every employee should get prior permission in writing before office time.
• Budgetary Control:
  Budget preparation is also one of the control techniques the management follows.

Conclusion

Controlling is a primary goal-oriented function of management in an organization. It is a method that compares the actual performance with the set standards and rules of the company to ensure that activities are performed according to the statutory rules. If not, take corrective action.

Management needs to monitor and evaluate the activities at all levels. It helps take corrective actions by the manager in the given timeline to avoid contingencies and losses. Controlling is performed at the upper, middle and lower levels of management.

Also Read:
All There To Know About Management Audit
What is the Management Audit and its procedure?