Management Audit

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Welcome

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Management Audit
 The terms ‘management Audit’ operational
audit and the modern concept of internal
audit often convey more or less the same
meaning .there is no clear –cut demarcation
of the audit activities and the areas which
may fall in the ambit of these three terms. In
an audit assignment to review operations
and performances, it is difficult to say as to
which to management audit.

• In other hand there is a considerable
overlapping in the scope and content of the
audits cover under these three terms. We
have already discussed the definition of
internal audit as given by the institute of
internal auditors. One can easily see how
these terms overlap, when one compares the
same with the following definition of
‘operational audit ‘as given by the federal
financial officers’ institute in Canada.

Need for management Audit:
• Management audit is essentially a review
of the performance of various managers.
• It measures in quantitative terms
various inputs that a manager uses in
terms of labor, materials overheads, or
capital resources.
• It can be particularly useful in situations
like the following -

5
• A progressive management may have
management audit conducted periodically
to assess the performances of various
managers and link a system of incentives
with such an assessment.
• In many circumstances an outside agency
may be interested in getting a
management audit conducted .Thus the
government may order a management
audit with a view to examining the
efficiency of the management of a
particular industrial unit.

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• A bank or financial institution may like
to get a management audit conducted
before advancing loans or before
agreeing to participate in the equity
capital of an enterprise.
• Foreign collaborators may also like to
get management audit conducted
periodically. This would help them in
assessing the managerial abilities of
their associates.

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Systems and procedures
• Who is responsible for designing the systems?
If there is a separate department is it
adequately manned with qualified people?
• Are there proper descriptions flow charts,
and manuals showing various systems?
• Are the systems related to the changing
technology and environment of the business?
Is there a periodic review of the systems to
modify them in this context?

• While recommending a new system are all the
relevant factors taken into account? Are the
new systems properly explained to the persons
concerned before they are put into operation?
What other stems are taken to meet the usual
resistance to a new system?
• Is there a periodic review of the cost and the
related benefits of a particular system?
• What are the various forms in use? Are they
designed to give proper information with
minimum effort?

.
paper works?
•Is the routing of various forms and
statements periodically review
keeping in view the need for
information at the various levels and
the possibility of delay?
•Are the filing and storage
procedures for various documents
properly laid down? Is there a well
defined system of automatic disposal
of documents?

.
• Does the organization have
computerized information systems?
• Is there period review of the
efficacy of computerized systems in
the context of developments in
technology?
• Is there a constant up gradation of
both hardware and software?

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Purchase management
• How is the purchase function organized? Are there
separate purchase departments for various units or
is purchasing a centralized function?
• What is the purchase policy? Does it take into
account the uncertainties in a availability of
materials consequent to the change in market
conditions?
• Are purchase requirements related to reduction
schedules and dependent upon level of inventories?
• Has the organization developed links with suppliers
to ensure regular and dependable supplies?

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• What are the systems of purchase
authorization?
• How are the suppliers selected?
• Is there a list of suppliers with
whom running contracts have been
executed?
• Is there a system of elimination
unreliable suppliers?
• What is the system of executing
emergency purchase?

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• What are the systems of purchase
authorization?
• How are the suppliers selected?
• Is there a list of suppliers with
whom running contracts have been
executed?
• Is there a system of elimination
unreliable suppliers?
• What is the system of executing
emergency purchase?

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• Is there an information system whereby the
latest market information regarding new products
spare parts and machinery items useful for the
organization is automatically collected and
considered?
• Are studies conducted perio9dically to analyze
the price trends in order to form an opinion about
the future prices of major raw materials in use?
• Are regular comparisons made between the
average purchase prices paid by the organization
and the average market prices?
• What are the built –in controls against
misutilisation of purchasing powers?

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Conducting management
audit
Conducting management audit requires an
interdisciplinary approach since it
involves a review of all aspects of the
management function. it should be

 Inquiry
 Examination
 Confirmation
 Observation of pertinent activities and
conditions
 Correlation of information

In the more developed countries the
effect of public opinion and
legislation on health and safety at
work and minimum wages has greatly
improved employment conditions.
However, some international
companies based in highly developed
countries (for example such as the
USA) have been accused of bad
practice in relation to some of
these issues
Social matters

Ethical matters
Charitable donations
Employment policies
Child labor in developing countries
Remuneration policies
Training policies
Example of social issue

• Information to contact groups
and employees
• Contribution to society
• Management of change
• Human rights
• Health and safety.

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 Does the company have a well defined
organizational structure? Has an organization
chart been drawn?
 What are the various levels in the
organizational hierarchy?
 Are t he lines of authority and areas of
responsibility clear?
 Are the principles of formal organization
being followed?
 What is the managerial philosophy in the
organization? Is the decision making
centralize or decentralized?

 What is the philosophy of control?
 Are controls close detailed and frequent or
broad and periodic?
 Is there a list of active and identifiable
controls? Are the control physical or mental
or both?
 Are controls related to plans?
 What are the main parameters of control?
 Are controls acceptable to the various levels
of management?

 Is there a system of rewards and
punishments linked with the control ?
 Has the cost of each control been worked
out? Is it ensured that the cost does not
exceed the benefits?
 Are controls reviewed periodically? Are
inactive controls eliminated?
 What is the procedure for altering controls?
 What is the detailed system of operational
controls over various assets and tractions?

 How is inventory management organized? is
there a separate department looking after
this functions or is it a part of production or
purchase department?
 Are the store keepers well equipped to
grasp the fundamentals of the inventory
control system?
 Is there a well defined policy regarding
inventories?

 What is the system of maintaining stores
records?
 What is the system of receipt and inspection
of stores?
 What is the system of physical stock taking?
 is there adequate control over obsolesce of
materials ?
 How effective is the management information
system regarding inventories.

 : The main objectives of this function are to
create such conditions in the organization
that the employees can give their best
performance. The personnel manage has to
asses manpower requirements select, recruit
train and develop staff ,ensure industrial
peace redress grievances of the workers
maintain discipline ,keep various .personnel
records and negotiate, wage settlements.

 How is the marketing department organized? Is
it adequately staffed? Have specific
responsibilities been fixed for development of
products in various areas?
 What are the steps taken to increase the
market share of the organization?
 Are market forecasts developed regularly?
What is the method of preparing them? Are
they reliable?
 Is there a proper budget for advertising and
sales promotion?

 What are the overall controls on outstanding?
Are they analyzed periodically?
 Is there a proper control over stock of
finished goods? Are slow moving stocks
reviewed periodically?
 What controls exist on the expense incurred
by the salesmen?
 What is the percentage of sales returns and
allowances? Has this percentage declined over
the year?
 It there a constant review of the status of the
order book?

 Kohler’s Dictionary for Accountants defines the
term ‘propriety’ as conformance with
prescribed or accepted values, customers or
procedures” propriety audit refers to .an audit
in which the various actions and decisions are
examined to find out whether they are in
public interest and whether they meet the
standards of conduct. While undertaking a
properity audit, the auditor does not merely
evaluate the evidence supporting a
transaction. He attempts to examine the
regularity. Prudence and impact of various
actions and decisions of the authorities.

 What is the role of accounting and finance department
in the overall management structure?
 Does the organization have proper system of financial
accounts and cost accounts? Are the two integrated or
separated?
 Is the financial accounting system efficient? How
regularly is the trial balance prepared? How much the
time does it take to prepare the final accounts after
the annual closing?
 How effective are the internal cheeks in the accounting
department? Have the systems and procedures been
designed to minimize the possibility of errors, frauds,
and misappropriations? What are the controls on the
flow of cash goods and documents?
 Do manuals and flow charts exist decreibi9ng the
various accounting procedures? Are these reviewed
periodically?

 Does an internal audit department exist to examine
various transactions and procedures and to endure
that actual decision adhere to the managerial policy?
How are the reports of internal auditors dealt with?
 Is the costing system suited to the needs of the
organization?
 Have standard costs been determined? Are they
developing on the basis of time motion and work
studies?
 Are cost statements prepared in time? Are they geared
to meet the requirements of the management? Are
they reviewed periodically?
 Is there a system of budgetary control? How is the
variance between actual figures and budgets dealt
with?
 What are the bases of allocation, apportionment and
absorption of overheads? Are they fair and objective?

Management Audit

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