When a management audit is undertaken, a review of all the aspects of an organization’s management is undertaken. A single person can’t be an expert in every field of management, which raises the need for a team to conduct a management audit.
The team of auditors should include an accountant, industrial engineer, operations research specialist, social scientist, and other experts. Each member of the team should have received adequate training to take part in the management audit.
To complete a management audit, the following procedure may be used:
1. Collection of Information: Management auditors need information in order to appraise various managerial aspects. Therefore, at the outset of the process, a questionnaire should be prepared to collect the necessary information.
The questions should cover information about objectives, planning processes, control systems, procedures, and functional areas. The questions should also be framed to gather complete information about every relevant aspect of the business.
2. Examination of Information: The management auditors should carefully examine the information in order to reach certain conclusions. The information should be studied carefully to ascertain the real position of the organization.
3. Authentication of Information: If information is collected from various persons, it should be authenticated by those supplying it (e.g., through the use of signatures).
4. Confirmation of Information: The management auditors may also need to confirm the information supplied from different sources (e.g., by asking follow-up questions to key stakeholders). This is important for reaching reliable conclusions.
5. Observation: The management auditors should observe whether certain activities can be improved, preparing organization charts, flow charts, and other useful insights.
6. Comparison of Information: The information should be compared to objectives and standards set earlier (e.g., previous years). This will reflect the actual performance of the enterprise, which can help to assess the comparative performance of the unit.
Information Required for Management Audit
Successfully conducting a management audit depends on having information about every aspect of a business. Information in the following areas should be collected in order to arrive at reasonable conclusions.
- Has the company defined its objectives? If yes, what are they?
- Have the objectives been sub-divided for the benefit of different levels of management?
- Have the objectives been defined in quantitative or physical terms?
- Is there a system to review objectives as demanded by changing situations?
- Can the objectives be translated into policies and performance?
- Are the stakeholders who are expected to work toward the objectives clear about the nature of the objectives?
- Does the business have a proper system of planning?
- Do the plans cover the short or long term?
- Have the plans been linked to the objectives of the enterprise?
- Have the plans been expressed in quantities, units, etc.?
- To what extent have the targets from previous plans been met?
- Can the plans change, if needed?
- What process is used for farming budgets?
- How many people are associated with farming budgets?
- Are the budgets prepared well in advance and conveyed to the different levels of management?
- To what extent are functional managers committed to the targets set in the budgets?
- Does the enterprise have a well-defined organization chart?
- What is the hierarchy of the organization?
- Do any employees report to more than one person?
- What is the span of control?
- Does the organization achieve its business objectives?
- Are all employees properly motivated to increase their efficiency?
- What controls are used in the business?
- Are controls related to plans, etc.?
- Have the controls been fixed in quantity?
- Are the controls properly conveyed and communicated to the different levels of management?
- Is there a system of rewards or punishment attached to the controls?
- Are the controls reviewed periodically?
E. Functional Areas
Management audits also require detailed information about the actual performance of various functions. This information should cover the following areas: 1. Purchase: Method of purchase, quantities procured, procurement problems, methods of dealing with defaulting suppliers, etc. 2. Production: Policy schedules for actual production quantities for different time variances in the production schedule, days in production, frequency of accidents, input-output ratios, ideal time, production control procedures, and others. 3. Distribution: Organisation of sales department, budgeted sales, actual performance incentives offered for sales promotional efforts, effectiveness of distribution channels, etc. 4. Personnel: Personnel policy, recruitment and training methods, cost of manpower development, promotion policy, appraisal method, records of workers, labor welfare activities, man-hours lost, etc. 5. Finance and Accounting: Financial structure, sources of funds, effectiveness of fundraising methods, working capital needs, financial controls, system of accounting, internal check systems, system of costing, effectiveness of cost control devices, etc.
The cases mentioned here give only a broad outline of the types of information that a management auditor may need for their analysis.
Procedure of Management Audit FAQs
The primary objective of carrying out a management audit is to review the current state and suggest improvements in the processes, procedures, systems and controls. In order to make more effective use of resources , it is decided to implement certain changes which would result in costs savings / revenue generation. It also allows managers and employees to be appraised of their performance and makes them more accountable.
The management audit can be conducted by an internal team or an external agency. The important point is that it should be independent and objective.
The scope of a management audit may vary depending on the needs of the enterprise. However, it generally includes an assessment of the overall business objectives and how they have been achieved, review of plans and controls, evaluation of performance in various functional areas etc.
The first step is to prepare a working paper, which includes the questions that need to be answered. It may also include a checklist of issues that need to be examined. This is then shared with an on-site team or an external agency conducting the management audit. After collecting relevant information from different sources, they make use of these data to come up with an assessment.
It is always advisable to conduct a management audit at regular intervals. You can either do it once every year or once every two years depending on the needs of your business. The bottom line is that it will provide you with relevant information which can help in improving operating efficiency and implementation of new initiatives.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.