Procedure of Management Audit

True Tamplin

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

Management Audit requires a review of all aspects of Management. One person cannot be an expert in every field of Management, so their should be a team to conduct Management audit. The team of auditors should include on account, an industrial engineer; an operations research specialist, a social scientist and so on. Each member should have proper training for conducting Management audit.
The Management auditors may not need the verification of accounts since his object is to evaluate the performance of Managerial functions and not the study of accounting accuracy. The following procedure may be followed for conducting Management Audit.
1. Collection of Information: Management auditors requires information for the appraisal of various Managerial aspects. A questionnaire should be prepared for collecting relevant information. The questions should cover information about objectives, planning process, organisation, control systems: procedures, functional areas etc. The questions should be so framed that they provide full information about every aspect.
2. Examination Of Information: The Management auditors should carefully examine the information may also be required to reach certain conclusions. The information should be carefully studied to ascertain the real position of organisation.
3. Authentication of Information: The Management auditor may collect information from various persons. The information collected should be authenticated by the persons supplying it. when they get information from any source then the persons supplying it must put their signatures so to authenticate information.
4. Confirmation of Information: The management auditor may like to confirm the information supplied by different sources. It may be counter-hecked from other sources etc. It can be confirmed by putting oral or written ques ions to certain persons. This is very important for reaching reliable conclusions.
5. Observation: The management auditor may observe certain activities himself If he sees the things being done himself then he can undertake his work in a better way. He may prepare organisation charts, flow charts etc. himself after making observations. This will give him more insight in to the activities undertaken.
6. Comparison of Information: The information collected by management auditor should be compared with the objects and standards set earlier. Sometimes, information is compared with that of previous years. This will give on idea of actual performance of the enterprise. This will help in assessing the comparative performance of the unit.

Type of Information Required for Management Audit

The conduct of Management audit requires every type of information about the enterprise. The information about the following aspects should be collected to arrive at correct conclusions.

(A) Objectives

1. Has the company defined its objects? If yes what are the main objectives?
2. Have the objectives been sub-divided for the benefit of different levels of management?
3. Have the objectives been defined in quantitative or physical terms?
4. If there a system to review objectives as demanded by the changed situation?
5. Are the objectives translated into policies and performances?
6. Are the persons, who are expected to work for the objectives, clear about the objectives?

(B) Planning

1. Has the concem a proper system of planning?
2. Are the plans for short or long periods?
3. Have the plans been related to the objectives of the enterprise?
4. Have the plans been expressed in quantities, units etc.?
5. How far the current targets were received.
6. Are the plans changed, if needed?
7. What is the procedure for farming budgets?
8. How many persons are associated with farming budgets?
9. Are the budgets prepared well in advance and conveyed to different levels of management?
10. How far functional managers feel committed to the targets set in the budgets.

C. Organisation

1. Does the concern have a well-defined organisation chart?
2. What is the hierarchy in organisation?
3. Do the person report to more than one persons?
4. What is the span of control?
5. Is the organisation effective to achieve the business objectives?
6. Are all employees properly motivated to increase their efficiency?

D. Control

1. What type of controls are used in business?
2. Are controls related to plans etc.?
3. Have the controls been fixed in quantity?
4. Are the controls properly conveyed and made clear to different levels of management?
5. Is there a system of rewards or punishment attached to the controls?
6. Are the controls reviewed periodically?

E. Functional Areas

Management audit will require detailed information about the actual performance of various functions.
1. Purchase: Method of purchase, quantities procured, problems in procurement, method of dealing with defaulting suppliers etc.
2. Production: Policy schedules of production actual quantity produced at different times variances in the production schedule, days in production, frequency of accidents, input-output ratios, ideal time, production control procedure etc.
3. Distribution: Organisation of sales department, budgeted sales, actual performances incentives offered for Sales promotional efforts, effectiveness of distribution channels etc.
4. Personnel: Personnel policy, method of recruitment and training, cost of manpower development, promotion policy, appraisal method, records of workers maintained, labor welfare activities, man-hours lost etc.
5. Finance and Accounting: Financial Structure followed, sources of raising funds, effectiveness of methods of raising finances, extent of working capital needs, financial controls followed, system of accounting, internal check system followed, system of costing followed, effectiveness of cost control devices etc.
The informational case as discussed here give only broad outlines of information required, in addition, management auditor may need more information for his analysis.

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