Management Audit

What is the Management Audit and its procedure?

A management audit is an assessment and analysis of the competencies and capabilities of an organisation’s management in carrying out corporate objectives. The purpose of an audit is not only to support the individual executive performance but to evaluate the management team’s effectiveness in working in the interests of shareholders, maintaining good relations with employees, and upholding the organisation’s standards. It is a significant factor to note that the audit not only assesses the overall management of the company but only focuses on the performance of individual employees.

Objectives

The main objectives of a management audit are :

• To provide optimum utilisation of human resources and ensure the physical facilities in the company.
• To verify the deficiencies in objectives, policies, procedures and planning.
• To suggest improved methods of operations.
• Highlight weak output links organisational structure and internal control systems^[1] and suggest improvements in methods.
• Helping the company management by providing early signals of future risk is a way to avoid the risk, work on countering future problems, and provide remedies to solve them promptly.

Features

The essential characteristics of management audits are as follows :

• The audit is a process of examining and evaluating the performance of managerial functions.
• It supports the policies and procedures.
• It provides the proper and healthy growth of the organisation, both preventive and curative. Besides detecting the existing problems, it suggests measures to avoid probable risks.
• It is not an examination of the business activities. Its concept of forward-look; therefore, the audit is more concerned with future problems.
• It is periodic and result-oriented rather than simply procedural. 
• It is a constructive method of helping management improve its business operations. It identifies areas of weakness in the internal control system and suggests measures to improve performance.
• It is an extension of the internal audit; development refers to it and is very close to an operational audit.

Principles

The principles of management audits are as follows :

1. Integrity, Objectivity and Independence: The auditor must look forward to the future, be honest and sincere in his approach to his professional work and maintain an impartial attitude towards the employees.
2. Confidentiality and Neutrality: The auditor respects the confidentiality of information acquired during his audit work must be kept confidential and should not be used for his benefit.
3. Competence and Skills: When the audit is performed, the report is prepared with the due care of professionals with adequate training, experience and competence in auditing.
4. Documentation: The auditor should maintain documents that the audit was carried out by complying with the basic principles and procedures.
5. Planning: The auditor should plan his work to conduct the audit effectively and timely.
6. Evidence: The auditor should obtain sufficient audit evidence to enable him to draw reasonable conclusions from that place on which he can base his opinion on the financial statement record.
7. Internal Control and Accounting System: The auditor should reasonably assure the company that the finance system is appropriately recorded and that all the accounting information is accurate.
8. Conclusions and Reporting: The auditor is to assess and review the conclusions drawn from the audit evidence and submit a data report containing a clear written opinion on the organisation’s financial information.

Procedure

To complete a management audit, the following procedure may be used:

Collection of Information:

Management auditors need the information to appraise various managerial aspects. Therefore, a questionnaire should be prepared to collect the necessary information at the outset of the process. The questions should cover information about objectives, planning processes, control systems, procedures, and functional areas. The questions are framed to gather complete information about every relevant aspect of the business.

Examination of Information:

The  auditors should carefully examine the information to reach certain conclusions. The information is to study carefully to ascertain the absolute position of the organisation.

Authentication of Information:

Information collected from various persons should be authenticated by those supplying it (e.g., through signatures).

Confirmation of Information:

The  auditors may need to confirm the information from different sources (e.g., by asking follow-up questions to key stakeholders). It is essential for reaching reliable conclusions.

 Observation:

The auditors should observe whether certain activities have improved, preparing organisation charts, flow charts, and other valuable insights.

Comparison of Information:

The information should be compared to objectives and standards set earlier (e.g., previous years). It reflects the actual performance of the enterprise, which can help assess the unit’s comparative performance.

Operational Aspects

The operational aspect of management audits are as follows :

1. Objects and Aims of the Organization :
   The auditor should study the aims and objectives of the business Business organisations are formed with the object of fulfilling specific needs besides having the aim of earning profits. The original aims may be varied and expanded. A good business has failed to meet its objectives owing to a change in policy without adequate long-range planning.
2. Plans and Policies :
   It is to be ensured by the auditor whether the decisions concerning financial plans and policies have been implemented reasonably, leading to favourable results or whether these have only been made after a period of stagnation or depression.
3. Production :
   Beyond financial accounting, the auditor should have a thorough knowledge of production techniques and various plans and systems like costing systems. He should see that production policies have been implemented in practice and are in perspective. The aim should be their effective and efficient implementation.
4. Sales and Distribution :
   The auditor is concerned with the basic requirements of the selling section. In a business, information is obtained from sales and the effect of price, style or manufacture changes over time. The market research system is relevant for this task.
5. Organizational Control :
   The auditor will be concerned that the overall planning and organisation are most suitable for the business concerned. He should be capable enough to take an independent view to enable him to recommend the overall adjustment to more economical and effective methods of operation over the whole of the business.
6. Operations :
   He should ascertain whether the organisation has defects or loopholes concerning the manufacturing process and ensure that the system has improved to ensure maximum production. He can suggest ways and means to overcome the difficulties and drawbacks.
7. Layout and Physical Equipment’s :
   The auditor can examine the present position of layout and physical equipment, and to make it more effective, recommendations for better and more excellent use can be made by him.
8. Personnel Development :
   The auditor can suggest ways to use human resources to increase productivity. He is to give suggestions for an improved relationship between management and labour.
9. Regulations :
   The auditor ascertained the rules and regulations of the relevant statute under which a business has been set up. The hiatus, if any, can be brought to the notice of the management.

Conclusion

Management Audits are an essential tool for companies to identify improvement opportunities, efficiency and functions within an organisation. These audits analyse the overall management team supports operations and provide detailed recommendations to improve the team’s effectiveness.

Thus, the audit is an independent and systematic analysis and evaluation of a company’s overall activities and performances.

Read our Article: All There To Know About Management Audit