Types of Operational Audits and Auditors

Types of Operational Audits:

1. Functional Audits
Deals with one or more functions in an organization
Has the advantage of permitting specialization by auditors
Certain auditors with an internal audit staff can develop considerable expertise in an area, such as
production engineering
Auditors can be more efficient and effective by spending all their time auditing in that area
Has the disadvantage of being prone to failure in evaluating interrelated functions
Example: Failure to take into account that production engineering function interacts with manufacturing
and other function in an organization
Example of a functional audit:
Functional audit dealing with the efficiency and effectiveness of the payroll function for a division or for
the company as a whole
2. Organizational Audits
Deals with an entire organizational unit, such as department, branch, or subsidiary
Emphasizes how efficiently and effectively functions interact
3. Special Assignments
Arise at the request of management for a wide variety of audits
Examples: Determining the cause of an ineffective IT system, investigating the possibility of fraud in a
division, and making recommendations for reducing the cost of a manufactured product

Types of Operational Auditors: (Who performs operational audits)
1. Internal Auditors
Because they spend all their time working for the company they are auditing, they can develop considerable
knowledge about the company and its business, which is essential to effective operational auditing
2. Government Auditors
They perform operational auditing, often as part of doing financial audits
Most widely recognized government auditor group is the Commission on Audit (COA)
They usually audit the local and national government units to determine whether taxes have been
collected and remitted in accordance with existing laws and regulations
They usually audit the economy and efficiency in the use of government funds and resources
They usually conduct Program Results Auditing
Audits conducted to determine whether a government project or program has met its stated
objectives
3. CPA Firm auditors
Part of their audit of historical financial statements often consists of identifying operational problems and
making recommendations that may benefit the audit client
The recommendations can be made orally but they are typically included in a management letter
Background knowledge about a clients business, which an external auditor from a CPA firm must obtain while
doing an audit, provides useful information for giving operational recommendations
An auditor who has broad business background and experience with similar businesses is more likely to
be effective at providing clients with relevant operational recommendations than a person who lacks
those qualities
Clients commonly engage a CPA firm to do operational auditing for one or more specific parts of its business
Only when the company does not have an internal audit staff or if the internal audit staff lacks expertise
in a certain area
Note that CPA firms cannot provide the operational auditing services to their public company audit clients


Independence and competence of operational auditors
The two most important qualities for an operational auditor are:
1. Independence
Operational auditor should report to the appropriate level of management to ensure that investigation and
recommendations are made without bias
Independence of (1) Internal auditors
Enhanced by having the internal audit department report to the audit committee of the board directors
of the company
Independence of (2) Government auditors
Enhanced by having the government auditors report to a level above the operating departments
For example, the COA reports directly to the President
Independence of (3) CPA Firm auditors
Seldom a problem because they are not employed by the company being audited

Responsibilities of operational auditors can also affect their independence
Auditor should not be responsible for operating functions in a company or for correcting deficiencies when
ineffective or inefficient operations are found.

2. Competence
Necessary to determine the cause of operational problems and to make appropriate recommendations
When operational auditing deals with wide-ranging operating problems, competence can be a major obstacle
For example, imagine the difficulties of finding qualified internal auditors who can evaluate both the
effectiveness of an advertising program and the efficiency of a production assembly process

Functional areas covered by operational audits
Some areas which operational audits focus include:
1. Organizational structure
2. Asset management and security
3. Staffing
4. Productivity