Management Audit: Meaning and Objective | Auditing

In this article we will discuss about:- 1. Meaning of Management Audit 2. Objective of Management Audit 3. Scope 4. Weaknesses.

Meaning of Management Audit:

“Management audit can be defined as an objective and independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives and policies. Its aim is to identify existing and potential management weaknesses within an organization and to recommend ways to rectify these weaknesses”. – CIMA Official Terminology.

Management Audit is the systematic and dispassionate examination, analysis and appraisal of management’s overall performance. It is a form of appraisal of the total performance of the management by means of an objective and comprehensive examination of the organization structure, its components such as department, its plans and policies, methods of process or operation and controls, and its use of physical facilities and human resources.

Management Audit is an important tool for the continuous appraisal and evaluation of the methods and performance of an enterprise. The prime objective of Management Audit is to locate defects of irregularities in the areas covered by the audit and to suggest possible improvements. It assists the management in managing the operations of an undertaking in the most efficient manner practicable.

Economic outlook, the adequacy of the organization structure, compliance with policies and procedures, reliability of the system of control, adequate protective methods, causes of variances, effective utilization of manpower and equipment, efficiency of the method of operation etc., all come under the purview of management audit.

Thus Management Audit is concerned with evaluation and appraisal of the control system and information in the entire or in various segments of the organizations. Its scope has been widened to appraise in detail the systems and subsystems, procedures, job separation, authorization, accountability, quality of personnel, quality of informa­tion generation etc.

Objective of Management Audit:

The main objectives of Management Audit are:

(a) To ensure optimum utilization of human resources and available physical facilities.

(b) To point out deficiencies in objectives, policies, procedures and planning.

(c) To suggest improved methods of operations.

(d) To point out weak links in organizational structure and in internal control system and suggesting improvements.

(e) To help management by providing early signals of sickness, ways and means to avoid the same; and

(f) To anticipate problems and suggest remedies to solve them in time.

Scope of Management Audit:

The scope of Management Audit has no limitations. The areas of review depend on the objectives of the business.

Accordingly, the scope of Management Audit may include:

(a) The suitability, practicability and present compliance or otherwise of the organization with its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its own particular industrial or commercial field.

(c) The rate of return on investors’ capital – whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

(f) The relationship between management and staff within the business.

(g) The aims and effectiveness of management at its various levels such as top level, middle level and operational level.

(h) Financial policies and control relating to production, sales and distribution and in other functions of the organization.

Weaknesses Revealed by Management Audit:

The weaknesses that a Management Audit might reveal may include:

(a) Weaknesses among the members of the Board of Directors.

(b) A lack of awareness among directors and managers of the objectives of the organization and the extent to which these are being achieved, failure to define clearly the objectives and responsibilities of individual managers.

(c) Inadequate steps taken to provide adequate finance.

(d) Lack of technical competence of managers.

(e) Retaining authority by managers for matters which ought to have been delegated.

(f) Lack of clear and identifiable management style in the organization.

(g) Lack of proper staff/management training.

(h) Failure on the part of managers to measure and assess the performance of their subordi­nates.

(i) Inadequacy of the management information system.

(j) Lack of enforcement of procedures and too much wastage of time in enforcing such procedures.

Weaknesses revealed by Management Audit should be studied in detail to ascertain the real causes and proper remedial action may be taken by the top management to eliminate such weaknesses.