Need and Scope of Management Audit

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

The management of business at present becoming more and more complex. The use of specialised techniques such as operational research, statistical sampling, electronic data processing, production control etc. require the services of experts. The directors are not experts in every field of Management. If anything goes wrong then directors have to face the criticism.
This has necessitated the need for management consultancy. The management auditors are often called upon to advise the firm as to how to maximise the production of quality goods. Management audit or consultancy helps in improving the operations of the business. The benefits derived from his service are for more than the cost incurred on it following are some of the benefits of Management Audit.
The need for management Audit can be felt by studying the following points:
1. Useful for performance appraisal: Management audit enables appraisal of performance of various managers. The standards for every manager are predetermined and their performance has to be judged in view of these targets. There should be a regular system of evaluation for keeping efficiency standards. Various Incentive plans may also be linked with such reports.
2. Result oriented: Management audit is result oriented. The performance is judged on the basis of rates of inputs and outputs. It does not give much importance to the procedures followed and formalities completed which is generally said that when Management audit is introduced then managers be more particular about completing the file work only.
3. Satisfies Financial Institutions: When a concern approaches various financial institutions for loans then they will like to see the performance of the business. Management Audit System is already undertaken then lending institutions will not find any difficulty in taking a decision. Moreover, outside agencies will feel satisfied that the management is constantly evaluating its performance.
4. Helpful in entering Foreign Collaborations. Whenever there is a proposal to enter into a foreign collaboration then collaborators will not find any difficulty in assessing the managerial potentials of the party. They can be provided with management audit report which will enable the parties to form a judgement about the concern.
5. Necessary for Government Organisations. There is an urgent need for management audit in govemment organisations. The present system of audit is not useful in curbing ineffciency. It gives more importance to formalities and ignores performance. Management audit will emphases results and when performance be judged pre-determined standards then officials will try to improve there efficiecy.
6. Basis for Critical Evaluation. Management Audit is needed for dynamic management to know what are the deficiencies and how to get them to remove.
7. Mirror of Organisation Progress. The management Audit is useful in knowing the reasonable retum on capital employed.
8. The Management Audit needed for Change. The cost Audit is very useful for knowing the effect of changes in organisational structure such as : change is useful or not.
9. Helpful in Loan/Advances. The management Audit is working like a guide to a person who wants to give loan or invest his money in any company.
10. Knowledge of efficiency and Productivity. The management Audit is useful in knowing the efficiency and Productivity of any organisation. When these are not within the satisfactory limit the suggestions for efficient running can be suggested.
11. Helpful of Foreign Collaboration. The management Audit is useful to foreign investors: They can know the profitability of the organisation can take decision regarding investment.
12. Suitable to Public Sector Units. The study of management Audit is very desirable to public sector units, these can improve their working efficiency for their existence.

Technique of Management Audit

Before starting the work of management Audit, the Auditor should special note of the following:
Aims and objects of the organisation, policies and procedures, planning, communication and its effectiveness, managerial control devices.

Audit Programme

(i) The management Audit should make sure of the policies that these are suitable or not in achieving organisational objectives.
(ii) He should make sure that all levels of management are following these policies or procedures.
(iii) He should test the effectiveness of the system of communication.
(iv) He should also see that all levels of management follows the techniques of management control.
(v) He should give special attention to the following.

  • Policies with regard to capital expenditure.
  • Policies with regard to purchases.
  • Policies With regard to selection, Recruitment and training.
  • Price policies of commodities and services.
  • Effectiveness of Research and Development.
  • Return on capital employed.
  • Intemal check to control errors and fraud.
  • Proper insurance coverage of Assets.
  • Inventory management, Product Planning, and Product control, Marketing Management Personnel Records etc.

Scope of Management Audit

The primary object of Management audit is to find out the efficiency of every segment, from low level to high level of the business. Thus, the study of each and every aspect of the enterprise. The following aspects of Management Audit.
1. Study of Demand of Business: The present organisational structure is reviewed in relation to current and prospective demands of the business. The study of organisation should be undertaken in relation to the aims and objectives of the enterprise to be charished.
2. Study return on Capital employed: It will include the study of present return on investors capital. Whether the return is adequate, fair or poor should be determined by the Management auditor.
3. Established relation to outsiders: Management audit also requires the study of relationship of the business with the shareholders and investing public in general.
4. Performance Comparison: The performance of the organisation should be compared with other firms in the same field. The ratios like operating returns on sales and return on Capital should be compared to find out the Comparative position of a similar organisation.
5. Study Management duty: The aims, objectives and duties of the management should also be studied by management auditor. This exercise should be undertaken at the Board of Directors level to keep them within the limit.
6. Financial Planning: The study of financial planning and control also forms the part of management audit. The efficacy of sources of finance and the use of funds for capital and other expenditure should be evaluated to determine the efficiency in raising and utilising the funds. The cost of each source of capital be taken into account.
7. High Right production and sale: The review of production and sales function is also an important aspect of management audit whether the production is as per schedule or not similarly, then the performance of sales department should be judged by looking at its post performance and future possibilities. The sales should be quick and efficient and distribution channels should be as economical as possible to meet the demand of preset and prosective buyers.

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