Management Audit

The managerial revolution has been the biggest revolution that the world has faced during recent years. The outlook and composition of the management have also been greatly impacted due to this revolution. All the streams of activities of an organization are being monitored and audited under a management audit. It starts from the top management to ground levels and vice versa. Management audit aims at keeping a check on the smooth and satisfactory functioning of the general management in an organization.

Management audit is said to be “Audit of Management”. It is a check and review of plans, objectives, decisions, and policies of the top management. It is a test for review of the quality of managing. The management audit aims at checking if the management uses techniques and relevant information for evaluating the options to take operative and strategic decisions.

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Management audits are concerned with appraising management’s accomplishment of organizational objectives, the management functions of planning, organizing directing and controlling, and the adequacy of management decisions and actions in moving towards its stated objectives.

Thus it is rightly said, management audit is analyzing the ability of the manager to manage an organization.

The primary objective of management audit is to ensure that the efficiency is maintained at all the levels of management, from higher level to low level of management. Through this process we can access whether or not the efficiency of the management is aligned with the organisational goals.Also, the auditor ensures the effectiveness and relevance of all these procedures at various levels.For the management audit, the following are the essentials:
  • The purpose of the creation of an entity
  • Structure of management detailing the delegation of authority, budgeting, and planning
  • Standard Reports that are a must for efficient management versus the actual reports
  • Internal controls
  • Nature of production of a business namely understanding techniques, raw material, formulae and requirement of personnel
  • Production planning
  • Factory design, layout and the capacity that is installed
  • Personnel management and policy that includes training, requirement, welfare, and incentives to the personnel
  • Material management which requires to cater to issues like the source of raw material, quantity and quality of the material received, storage, safe custody and supervision, the procedure of issue of material, insurance
  • Sales planning and management
  • Advertisement policy
  • Decision-making process
  • Books and records which include both cost accounting records and systems as well as financial records and policies
  • Financial management of the entity
To be precise, management audit is about checking efficiency and effectiveness in each and every transaction of the entity.

The management audit is an examination, evaluation, and verification of facts and information about the management done by professionally competent and qualified people to improvise the functioning and performance of management. 

A detailed, constructive, and comprehensive study of organizational structure, departments, divisions, ventures, policies, plans, financial control, method of operation, significant use of physical, human, and financial resources is conducted in the course of management audit. 

Following are the reason for conducting the management audit:

  • Management audit questionnaire evaluates the accomplishments of management regarding organizational objectives, effective planning, organizing, controlling, and directing organizational activities, the relevant impact of management decisions to achieve the objectives. This kind of evaluation helps to detect and overcome any managerial deficiencies
  • Due to a management audit, a forward-looking approach is adopted by the organization which prevents the maintenance concept found in production which in turn results into having control on costs
  • Management audit provides a management tool that aids the entity to achieve and accomplish the set objectives
  • Management audit is specifically important to diagnose the financial health and operational efficiency of a business undertaking which is going through a rough patch and has been taken over by the Government or financed by Financial institutions.

The management audit can be carried proficiently only with the management’s approval. Hence it is important to take the management in confidence with the management audit plan. The basic features of the management audit plan include statements on personnel requirements, staff training programs, the basis of control over time, and cost.

The other features of the management audit plan are discussed below:

  • Devising the statement of policy

The policy statement should be specific about the scope and status of management audit, authority for conducting an audit, report issuance and recommendations, and also evaluation of corrective actions. The statement must categorically say that the management auditor is capable of reviewing administrative and management controls over any activity within the enterprise

  • Location of the audit function

Many entities provide a separate department for management audits wherein the head of this department reports directly to the top executives. However, it is very important to set the location of the auditing department in such a manner that it can work efficiently and effectively independent of other departments

  • Allocation of personnel

The personnel conducting audit should be thorough in the understanding of audit theory, fundamentals of organization, principles of control, requirements for conducting the scientific appraisal

An expert management auditor possesses the required technical and technological knowledge and commercial practices relevant to the entity. He also is updated with all other laws and subjects like commerce, taxation, law, cost accounting, quantitative methods, EDP systems, and economics. He would always have an analytical, pragmatic, and imaginative approach towards the management audit

  • Staff training program

Staff training programs stimulate additional responsibility and advancement for an entity. Such a program helps to pool capable people to the department and sustaining them

  • Time and other aspects

Time to be devoted and the estimated cost depends upon the factors like nature of the assignment, required number of personnel to conduct an audit, etc

  • Frequency

The frequency for a management audit is decided by the nature of the entity. A fast-changing entity with a greater accent to technology would require a management audit more frequently than the others

However, it is suggested that normally the management audit should be conducted at an interval of three years at least.

Once all the other factors like scope, staff requirement, frequency, etc are decided, a management auditor conducts a management audit by undertaking the following steps:

  • A management auditor is well prepared to ask and investigate through a set of questions to get the desired information
  • He begins the audit by explaining the management about the purpose of the audit, and then eventually collects facts and information for review and appraisal of the department understudy
  • To ensure a free exchange of information an auditor always have an open and friendly atmosphere for audit
  • Then the auditor analyses this information collected by applying his expertise and knowledge
  • A constructive and comprehensive examination is done of the overall aspects concerned
  • The management auditor highlights the weakness and deficiencies of the entity along with possible improvements and suggestion
  • The major purpose of all these steps is to synthesize those elements that cause difficulties to the entity and suggestions for improvement are focused upon
The audit assignment is concluded by the preparation of the management audit report which includes details of management auditor’s findings and recommendations for improving the control system if any.A management auditor always meets and discusses the findings of the audit before the preparation of the audit report. All the alternative recommendations and possible consequences of the same are discussed thoroughly in such a meeting.However, the type of report varies with different levels of investigation

The management audit reports are divided into four main categories namely

  • Reports by audit staff on the visit of the entity
  • Periodic reports for the concise review of the entity by the senior members of the audit team
  • Reports depicting special investigation and inquiries
  • An annual audit report

These reports are then classified into a wide spectrum of types, the major ones being:

  • Oral Report

The oral report serves a legitimate and useful purpose for the matters covered by emergency oral reporting. But this should be immediately followed by a written report giving a reference to an oral report

  • Interim written report

This type of reporting is done when significant development during the course of the audit or an early reporting or a progress nature report is to be reported. Interim reports when used with judgment is said to be a good tool to improve the total reporting process

  • Regular written report

This is a formal written report whose content and form vary from assignment to assignment. The quantitative or financial data impacts the way the reports are presented

  • Summary written report

Also known as flash reports this report gives a gist of various individual reports that is issued and also describes the range of their content.

Change is inevitable however, accepting change is very difficult and the same happens in management audit. A skillful management auditor will overcome all the fears and resistance of the management by being friendly and informative towards the work. He would discuss the changes and recommendations skilfully and convince his point of view tactfully. He would create an atmosphere of trust so that his reports get a positive and desired response from the management. Constructive criticism and participative approach are the two methods that are adopted by a professional maestro management auditor.
VJM & Associates LLP management helps majorly with the external audit. External Audit is a process in which an organisation hires external auditors for the auditing purpose. Following are the ways in which VJM & Associates LLP help you:-
  • VJM & Associates LLP makes sure that the organisational objectives and efficiency is acheived.
  • Well researched management audit strategy for the clients to get maximum results.
  • Critically verifies the audit reports and procedures of the auditing process.
  • Decode and resolve complex auditing issues.
  • Proactively engaged with clients and managers to for successful audit reports.
  • Meticulously planned and process oriented approach.
  • Combine in depth knowledge and experience of the VJM professionals to bring out the best Audit strategy for the organisation.
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FAQs on Management Audit

Detailed scrutiny of the actions and decisions of the management for investigation and inspection of the performance of the entity is called management audit. It includes analysis of managerial factors like plans, procedures, policies, objectives, structure, control system to check the coherence and competence of the entity.

A management audit is conducted successfully through the following steps:

  • Planning the audit
  • Collecting relevant information through various measures
  • Executing the audit and conducting fieldwork
  • Audit report and recommendations
  • Discussion with management
  • Final report
  • Follow up of the report
  • Actions by the management
Management audit is a device for improvising the management performance in favour of the entity by analyzing the current deficiencies and weaknesses in recommending preventive and corrective actions. It increases the efficiency of management and suggests guidelines for restructuring of organization or entity for better performance.

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