Management Audit: Considerations and Selection

After reading this article you will learn about Management Audit:- 1. Fundamental Considerations for Management Audit 2. Selecting the Auditors for Management Audit.

Fundamental Considerations for Management Audit:

Management audit is conducted in the same way as that of a scientific investigation.

The basic considerations of a management auditor for the efficient conduct of audit should be as under:

1. Background study and Planning:

(a) The materials for background study should be obtained from the auditee.

(b) In the planning—Establish audit objectives, Define audit scope and areas, Determine work steps and timetable, Establish in advance (wher­ever possible) the report format, etc..

2. Fact Finding:

(a) The methods to be followed are—Study of ex­isting records, Questionnaires, Interviews (with functional heads), Personnel observation,

(b) Make sure that the data collected are adequate and not liable to mis-interpretation.

3. Analysis of data and Observations:

(a) For analysis portion—Separate the chaff from the grain’ in respect of data collected,

(b) For observations—Question current practices, methods of operations and organisation relation­ships; Compare them with Company/Industry/ Government standards and sound management practices.

4. Recommendations:

(a) Identify the problems.

(b) Formulate recommendations in clear and pointed terms as to the action needed to help develop solutions.

5. Preparation of the Report:

(a) Document and synthesize the results of study,

(b) Present facts and recommendations in such a way that—

(i) they create a sense of urgency, and

(ii) they easily warrant executive attention at the shortest possible notice.

6. General:

(a) Consider the constraints imposed by time, cost and knowledge,

(b) Consider team-work to overcome these con­straints.

Management Audit Programme:

Before commencing management audit in connection with any assignment, a manage­ment auditor should briefly outline his programme by listing:

(i) The points to be covered, and

(ii) The procedures to be followed so that the audit work is geared towards the principal objectives.

As a matter of convenience and expediency, a management auditor should adopt the following steps that represent the crux of an efficient management audit programme:

1. Plans and Objectives:

Review and discuss with the management the current condition of their plans and objec­tives.

2. Organisation:

(a) Study the organisation structure in the area under appraisal.

(b) Compare the existing structure with that shown on the company’s organisation chart (if one exists).

(c) Ascertain whether or not full appreciation has been given to the principles of good organisation, functionalization and departmentalisation.

3. Policies and Practices:

Make a study to find out what action (if necessary) must be taken to improve the effectiveness of the policies and practices.

4. Regulations:

Determine whether or not the company has due regard for full compliance with the local, state and central regulations.

5. Systems and Procedures:

(a) Study the systems and procedures for possi­ble defects or irregularities in the elements ex­amined.

(b) Seek out method to bring about possible im­provements.

6. Controls:

Determine whether or not the methods of con­trol are adequate and effective.

7. Operations:

Evaluate operations to ascertain those things necessary for more effective controls, im­proved communication, better co-ordination and more efficient results.

8. Personnel:

(a) Study the man-power requirements.

(b) Examine their application to the work in the area under appraisal.

9. Layout and Physical Equipment:

(a) Determine whether or not improvements could be made in the layout.

(b) Find out greater or better use of modern plant and equipment.

Each management audit programme is unique in regard to each functional area. It should, therefore, be adapted to the particular conditions and problems encountered. For this reason, a management auditor should design a Check-list, at least tentatively, so as to include only those specific questions pertinent to the particular type of audit examination. He should modify the programme, if necessary, because many ideas as a result of specific audit come forth during the course of the audit. Wednesday

Selecting the Auditors for Management Audit:

The Management Audit may be conducted by:

(a) Company talents, or

(b) Outside management consultants, or

(c) A combination of (a) and (b).

Against (a) Company talents may include:

(i) An administrative staff group,

(ii) An already organised Audit Committee,

(iii) A specially organised ‘audit committee’ or team or task force, or

(iv) An individual on special duty.

An administrative staff group is familiar with operations and areas of work. They can be more objective and therefore, can gain confidence of the functional personnel. An already organised ‘audit committee’ is by far the best choice because it is already having necessary expertise.

A specially organised audit committee and task force provide an excellent medium for participation by persons responsible for area to be audited. Such task force can incorporate the specific talent necessary to do a particular assignment.

Against (b)—Specially organised firms of management consultants, for the purpose of Management Audit, have advantages like:

(i) No vested interest,

(ii) No loyalty to any individual,

(iii) An impartial and objective approach,

(iv) Wide range of specialties, and

(v) Already developed necessary kit of ideas to finish the audit job earlier and offer better recommendations. An inherent disadvantage is that the company secrets are susceptible to leakage to the competitors.

Against (c)—Depending upon the prevailing circumstances in a company, a combination of company talent and outside consultant would be a best team to conduct such audit:

The consultant should be used as an adviser to the top management task force and the studies should be preferably conducted according to the advice of the consultant.

The selection process should consider the following factors:

(i) Leadership,

(ii) Persistence,

(iii) Patience,

(iv) Knowledge and

(v) Acceptability of the auditor to the line authorities responsible for the operations under consideration.