Management Audit

What is Management Audit ?

Meaning of Management Audit

Management Audit is the total examination of transactions of an organization or part of it, and includes checks on the effectiveness of managers, their compliance's with company or professional standards, the reliability of management data, the quality of performance of duties and recommendations for improvement.

Management audit is the systematic and dispassionate examination, analysis and appraisal of management's overall performance. It is a form of appraisal of the total performance of the management by means of an objective and comprehensive examination of the organization structure, its components such as department, its plan and policies, method of process or operation and controls, and its use of physical and human resources.

Definition of Management Audit

According to William P. Leonard :
"The management audit may be defined as a comprehensive and constructive examination of an organization structure of a company and its plans and objectives, its means of operation and its use of human and physical facilities".

According to Churchil and Cyert :
"Management audit is performed with the object of examining the efficacy of the information control system, management and management procedures towards the achievement of enterprises goals".

According to CIMA Terminology :
"Management audit is an objective and independent appraisal of the effectiveness of managers and effectiveness of the corporate structure in the achievement of company objectives and policies. Its aim is to identify existing and potential management weakness within an organization and to recommend ways to rectify these weaknesses".

Thus, management audit is concerned with evaluation and appraisal of the control system and information in the entire or in various segments of the organization. Its scope has been widened to appraise in detail the systems and subsystems, procedures, job separation, authorization, accountability, quality of personnel, quality of information generation, etc.

Objectives of Management Audit

The main objectives of management audit are :
  • To ensure optimum utilization of human resources and available physical facilities.
  • To point out deficiencies in objectives, policies, procedures and planning.
  • To suggest improved methods of operations.
  • To point out weak links in organizational structure and in internal control system and suggesting improvements.
  • To help management by providing early signals of sickness its ways and means to avoid the same; and
  • To anticipate problems and suggest remedies to solve them in time.

Features of Management Audit

The characteristics of management audit are as follows : 
  • Management audit is a process of examination and evaluation of the performance of managerial functions.
  • It is an appraisal of both policies and actions. 
  • It ensures the sound and healthy growth of the business organisation. 
  • It is both preventive and curative. Besides detecting and diagnosing the existing problems, it suggests measures to avoid probable dangers.
  • It is not a post-mortem examination of the business activities. Its concept is forward looking and therefore management audit is more concerned with future.
  • It is dynamic and result oriented rather than simply procedure bound. 
  • It is a constructive method of assisting management to improve the operations of its business. It identifies areas of weakness in internal control system in operation and suggests measures to improve performance.
  • It is an extension of internal audit and is a development over it and is very close to operational audit.

Principles of Management Audit

The principles of management audit are as follows :

1) Integrity, Objectivity and Independence : 
The auditor should be straight forward, honest and sincere in his approach to his professional work and should maintain an impartial attitude. 

2) Confidentiality : 
The auditor should respect the confidentiality of information acquired in the course of his audit work. 

3) Skills and Competence : 
The audit should be performed and the report should be prepared with due professional care by persons who have adequate training, experience and competence in auditing. 

4) Documentation : 
The auditor should maintain documents which are important in providing evidence that the audit was carried out in accordance with the basic principles. 

5) Planning : 
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. 

6) Audit Evidence : 
The auditor should obtain sufficient appropriate audit evidence to enable him to draw reasonable conclusions there from on which he can base his opinion on the financial information.

7) Accounting System and Internal Control : 
The auditor should reasonably assure himself that the accounting system is adequate and that all the accounting information which should be recorded has been recorded intact.

8) Audit Conclusions and Reporting : 
The auditor should review and assess the conclusions drawn from the audit evidence and submit a report that contains a clear written opinion on the financial information of the organisation.

Process of Management Audit

The process of Management Audit can involve the following main steps : 
  • To identify the objectives of the organization. To start with, it would be a very important step to perceive clearly and identify exactly the objectives of the organization. 
  • To break down the objectives into detailed targets and plans for various activities of the organization.
  • To assess the adaptability of the organizational structure to achieve effectively the targets. After all, it is the organizational structure to attain goals and to implement plans of an enterprise.
  • To evaluate the performance of the functional areas. Above all, each functional area is expected to contribute its maximum for the attainment of targets.
  • To suggest a more concrete and realistic course of action. This is the main purpose of management audit to ensure that the management. operates effectively and efficiently by suitably adjusting its operations with the pre-determined objectives.

Operational Aspects of Management Audit 

The operational aspects of management audit are as follows :

1) Objects and Aims of the Organization : 
The management auditor should study the aims and objects of the business Business organizations are formed with the object of fulfilling certain needs besides having the aim of earning profits. The original aims may be varied and expanded. A good business has failed to meet its objectives owing to change in policy without adequate long-range planning and organization.

2) Financial Plans and Policies : 
It is to be ensured by the management auditor whether the decisions in regard to financial plans and policies have been implemented at opportune times, leading to advantageous results or else whether these have only been made after a period of stagnation or depression.

3) Production : 
Beyond the area of financial accounting, the management auditor should have a thorough knowledge of production techniques and various plans and systems like costing systems. He should see that production policies have been implemented in practice and are in right perspective. The aim should be their effective and efficient implementation.

4) Sales and Distribution : 
The auditor is concerned with the basic requirements of selling section. In a business, information must be obtained as to sales on the market as a whole and the effect of changes in price, style or manufacture over a period of time. Market research system is relevant for this task.

5) Organizational Control : 
The management auditor will be concerned to see that the overall planning and organization are most suitable for the business concerned. He should be capable enough to take an independent view so as to enable him to recommend the overall adjustment to more economic and effective methods of operation over the whole of the business. 

6) Operations : 
He should ascertain whether there are defects or loopholes in the working of the organization in regard to the manufacturing process and how the system can be improved to ensure maximum production. He can suggest ways and means to overcome the difficulties and drawbacks.

7) Layout and Physical Equipment's : 
The present position of layout and physical equipment's can be examined by the auditor and in order to make it more effective, recommendations for better and greater use can be made by him. 

8) Personnel Development : 
The management auditor can suggest ways and means for the utilization of the manpower in order to increase productivity. He is to give suggestions for improved relationship between management and labour.

9) Regulations : 
It is to be ascertained by him that the rules and regulations of the relevant statute under which a business has been set-up are being followed in Toto. The lacuna, if any, can be brought to the notice of the management.

Techniques of Management Audit

The following techniques / types of management audit may be used by the auditors to evaluate management functions : 

1) Preliminary Survey : 
Before the commencement of a management audit, the auditor should ascertain the following :
  • Objectives and goals of the enterprises with a view to assess the possibilities of getting the desired results through them.
  • Suitability of policies, plans and procedures laid down by the management. 
  • Effectiveness and credibility of the communication system including management information system of the organisation.
  • Adequacy of internal control system in operation. 
  • Standards of performance set by the management.
  • Actual performance.
  • Efficiency and economy of resource input.

2) Enquiry : 
Management auditor gathers most of the information and seeks explanation by asking questions For this he can make the use of standards questionnaire specifically designed for the purpose. 

3) Detailed Inspection of Relevant Documents : 
A management auditor may resort to detailed inspection. i.e., examination of relevant documents and records if his inquiry necessitates the examination of original source of information for clarification of certain facts. 

4) Studying the Work Environment : 
Another productive source of collecting pertinent information coupled with its examination is the direct observation by the management auditor. Through studying the work environment the auditor becomes aware of many problems that may not be recorded elsewhere or the analysis thereof is not possible through data.

5) Review of Internal Auditor's Report : 
Management audit in fact is extension of internal audit. Therefore. the reports submitted by the internal auditor enable the management auditor to identify the problem areas without much difficulty. Management auditor then forms his opinion on the basis of evaluation of such reports. In particular, he should pay his attention towards those reports, which highlight significant problem areas where the management so far has not taken any action. Investigation into the reasons and/or justification for inaction on part of the management in such cases should be made by the management auditor. Such a review of internal auditor's report could throw light on weaknesses in internal control system that may not have been referred to the top management previously.

6) Physical Inspection : 
The management auditor sometimes conducts physical inspection of activities of the enterprises. It proves to be very useful tool to identify incompetence. Remedial measures can only be suggested after identifying the areas of weakness or incompetence.

7) Test Examination of Some Transactions : 
The management auditor selects some transactions of varied nature on random basis and test the efficiency of procedures by thoroughly studying the transactions so selected right from their initiation to the final disposal.

8) Personal Discussion with Officials and Employees : 
With a view to have first hand information on problem areas warranting audit attention, management auditor should hold discussion with the officials and employees of the enterprise, who are concerned with the operations under examination. 

9) Analysis and Suggestions for Improving the Performance of Management : 
During the course of audit, the management auditor identifies areas of problem or weakness in the system. He then investigates into it and analyses the adequacy, and efficacy of procedures, and suggests remedial measures for further improvement in the performance of management and the enterprise.

Advantages of Management Audit 

The importance of management audit are as follows :
  • Management audit attests the quality of the management in the similar way as financial audit attests the accuracy of the records and financial statements. 
  • It permits more objective and complete evaluation of the total management and operating structure.
  • It enables the management to find specific problem areas where managers are unable to come out with fruitful solutions.
  • Identification of major areas needing shoring up is made possible by the management audit.
  • A check can be made on new policies and practices for both their suitability and compliance.
  • It provides adequate measure for the extent to which the current managerial controls are effective.
  • It provides mechanism for continually updating the total management and operating structure of the firm.
  • Management audit does not concentrate on individual performance.

Disadvantages of Management Audit

The limitations of management audit are as follows :
  • Management auditor cannot understand the practical problems. So, the suggestions provided by them is theoretical but not practical.
  • Scope of management audit is vague. So, it does not help to achieve specific goal.
  • Generally management gives more emphasis on maintaining books of accounts rather than concentrating on other factors. So, it consumes time of farsighted management.