In recent years, the world has witnessed a rather new type of revolution viz. managerial revolution. This revolution has considerably changed the composition and outlook of management. Auditing has come to be viewed as an essential management tool, among others, for the efficient running of the business and other economic activities. When we speak of auditing as a management tool, we give extended coverage to the term auditing without, however, altering its basic concept. This extended concept of auditing includes operational auditing.
The emphasis of auditing has been changing over the years. “The management audit would therefore concern itself with the whole field of activities of the concern, from top to bottom, starting, as always where management control is concerned, from the top, because we are primarily concerned with whether the general management is functioning smoothly and satisfactorily. If it is not, it may be due to the functional management being faulty and, therefore, we pass on to examine that in its turn, in order to find the missing or faulty link which is causing the trouble”.
Management and Operational Audit
Operational audit is an audit for the management; it is undertaken at the instance of the management for providing it with information and appraisal of operations and activities. A parallel development in auditing is getting shaped as a management audit.
Management audit is an “audit of the management” also. The scope and content of management audit should cover everything that we know as operational audit and, in addition, it should also include a review of the adequacy and competence of the objectives, plans, policies and decisions of the top management.
Desirability of Management Audit
Management Audit is a tool to improve management performance by recognising facts and information about management presented after appropriate examination, verification and evaluation, by professionally qualified and competent people. Management audit focuses attention on a comprehensive and constructive examination of the organisational structure, its components such as divisions, departments, ventures, plans, policies, its financial control system, its method of operation, it’s appropriate use of human, physical and financial resources.
· The principal reason for undertaking a management audit is the need for detecting and overcoming current managerial deficiencies (and resulting operational problems) in ongoing operations. A management audit represents a more positive, forward-looking approach that evaluates how well management accomplishes its stated organisational objectives; how effective management is in planning, organising, directing, controlling and coordinating the organisation’s activities; and how appropriate management’s decisions are for reaching stated organisation objectives. This evaluation of managerial performance is achieved with the aid of a management audit questionnaire.
· In a management audit, the managerial problems and related operational difficulties can be spotted before the fact rather than after the fact as with a financial audit. This forward-looking approach is analogous to the preventive maintenance concept found in production; that is, periodic management audits can pinpoint problems as they are developing from a small scale. In comparison, detecting the same problem at a later time, when they have generally increased in scope, results in higher costs and operational repercussions to the organisation.
· The benefit of management auditing is that it represents another management tool t o assist the organisation in accomplishing desired objectives. The capability of the management audit questionnaire to pinpoint important problem areas that are related to managing an organisation is a real plus factor for its use.
· Management auditing would be clearly helpful in the case of ailing industries, to isolate the problems and account for their ailments. It is especially important if such industries are either to be taken over by the government or to be heavily financed by financial institutions with a view to bring back vigor in them. Before committing public funds, like government funds or the institutional funds, it is important to properly diagnose the financial health and possibilities of a business undertaking and know the specific reasons that have caused or contributed to the decline of the business.
· Often, Management Audits are conducted prior to making investment in an entity, its merger or acquisition, or as a part of planning before entity level strategic decision.
Types of Audit Reports:-
The reporting of results covers a wide spectrum of types. We can describe the more important ones as follows:
1. Oral reports – In many situations, the reporting of results will be on an oral basis. To some extent, this is inevitable since a part of the actual audit effort is carried on in conjunction with company personnel. In other cases, it is a result of emergency action needs. It may also be a prelude to more formal written reports. To some extent, there will always be oral reporting as a means of later supplementing written reports, especially when individuals being served have special needs. Oral reporting, therefore, serves a useful and legitimate purpose, especially the matters covered by emergency oral reporting, should be followed up immediately by a written report giving reference to oral reporting.
2. Interim written reports – In situations where it is deemed advisable to inform management of significant developments during the course of the audit, or at least preceding the release of the regular report, there may be some kind of interim written report. This report may pertain to especially significant problems where there is a need for early consideration or the report may be of a progress nature. All in all, interim reports represent a type of reporting which, when used with judgement can be a good device to improve the total reporting process.
3. Regular written reports – In the typical situation, the particular audit assignment will include the preparation of a formal written report. The form and content of such written reports will vary widely for different audit assignments and companies in terms of their length and depth, quantification and overall presentation.
4. Summary written reports – These summary reports are also referred to as ‘flash’ reports’. In a number of companies, the practice has developed of issuing an annual (or sometimes more frequent) report summarising the various individual reports issued and describing the range of their content. These summary reports in some cases are primarily for audit committees of Boards of Directors, but in other cases for higher level management. They are especially useful to top level managers who do not actively review the individual reports. They are also useful to the general auditor in seeing his total reporting effort with more perspective and on an integrated basis.