OPERATIONAL AUDITING vs.

MANAGEMENT AUDITING Operational Auditing is a subset of internal auditing which is concerned with maximizing organizational welfare based on reviews of an entitys activities for efficiency, effectiveness and economy of any type of activity at any level within the organization. Hence, its focus is activities rather than financial assertions. This term is often used interchangeably with management audits, performance auditing, and program results auditing. Management Auditing is a subset of operational auditing concerned with harmonious and nondisruptive attempts to measure the effectiveness with which an organization unit is administrated, and which concentrates more on effectiveness than on efficiency.

Resource Inputs

Product or Service Outputs

effectiveness

efficiency

Efficiency Auditing

Management Auditing OPERATIONS

OPERATIONAL AUDITING

Operating efficiency and effectiveness provides the link between the two terminologies. Efficiency is an input measure related to cost control, and performance of recurring functions at minimum cost while effectiveness is an output measure of productivity in utilizing the entitys resources in terms of long-run profitability.

APPROACHES TO AN OPERATIONAL AUDIT 1. Plan the work to be performed, including the establishment of standards by which the audited operations is to be evaluated. In general, sources of criteria include, among others (a) historical performance, (b) benchmarking, (c) engineered standards, and (d) discussion and agreement. The evaluation criteria that is consistent with company policies, must ascertain the causes of discovered inefficiencies. Risk assessment is a major part of the planning process, thus a preliminary survey is a necessary procedure. Planning also includes selecting the audit team and scheduling the work. 2. Gather evidence with which to measure the performance of the operation. The audit techniques primarily used are inquiry and observation in order to gather factual basis for evaluating the performance criteria previously identified.

3. Analyze and investigate deviations from the standards. Analysis provides a basis for determining the degree to which the auditee is meeting specified objectives. The operational auditor should be prudent enough to distinguish between insignificant and significant deviations. The operational auditor should be careful in dealing with typical situation. 4. Determine corrective action, where needed. In developing the recommendations for improvement, the operational auditor should consider such factors as (a) cost-benefit relationships, (b) effect on employee morale, and (c) consistency with other company policies.

5. Report the results to the appropriate level of authority. There is no standard report format. However, the report should include (a) a statement of the objectives and scope of the audit, (b) a general description of the work done in the audit, (c) a summary of the findings, (d) recommendations for improvement, and (e) comments of the auditee. The auditors findings basically result in constructive criticism. 6. Perform follow-up. The objective of this phase is to follow-up on the auditees response to the audit report including determining the adequacy of the measures taken in implementing the recommendations. If no appropriate response is received within a reasonable timeframe, this should be communicated to senior management.