Professional Documents
Culture Documents
1. INTRODUCTION
We have learnt about the nature and characteristics of financial audit and cost audit in the previous chapters. Let us
now discuss a relatively new concept of auditing viz., Management Audit.
For last few decades, we have been watching that volume of business growth is not in proportion to the rise in
expenditure and investment in the new projects and the expansions of the present industrial projects. Unless
increase in the productivity, in line with high capital ratio, is achieved, improvement in the economy is not possible.
In the modern age, it has been realized that efforts must be made to set up aggregate growth per performance of the
business enterprises, a progressive reduction in the incidence of poverty and unemployment. To achieve the set
goals, the productivity has to be improved and thereby the performance of the business unit has to be increased. It
has therefore been suggested that induction of the management audit in every business enterprise has become
essential in the present era.
It is the audit conducted to examine all aspects of management in business. It includes the examination of plans,
objectives means of working, utilization of physical resources, organizational patterns, and coordination of various
activities at all levels and control of the entire business. Management audit takes into accounts both financial and
non-financial factors. Thus, management audit signifies critical assessment of the enterprise from the broadest
possible point of view. It reviews the companys past, present and future. Management audit now widely practiced to
evaluate managements objectives, the extent to which they have been achieved and company policies and producers
complied with, especially in large scale business organizations.
2. HISTORY
Management audit as a concept in management literature evolved over a period of nine decades. It was T.G. Rose, an
industrial consultant from the United Kingdom who had first introduced the concept of management audit in a paper
he presented in 1932 before the Institute of Industrial Management (now merged with the British Institute of
Management). The management audit concept, however, received greater attention in the United States of America.
Jackson Martin dell, an investment consultant and founder President of the American Institute of Management
(incorporated in 1948) developed a logical system of the concept of management and employed it for evaluating 52
publicly owned companies from 1948 to 1960. These studies were published under the title, Investment Value of
Management Excellence.
b) The inefficiencies and ineffectiveness on the part of the management can be brought to light.
c) The techniques of management audit are not only applicable to all factors of productions, but also to all
elements of cost.
d) Proper management audit techniques can help the business to stop capital erosion.
e) It increases the overall profitability of a concern through constant review of solvency, profitability and
efficiency position of the concern.
f) It helps the top management in arriving at correct management decisions without any delay.
g) It helps the management in strengthening its communication system within an outside the business.
h) It can help management in the preparation of budgets and resources management policies.
b) Examination: In many cases, the management auditor may have to conduct an examination of documents and
records. This may be necessary in case his inquiries reveal certain information that needs corroboration or that
suffers from internal contradictions.
c) Confirmation: A management auditor may also obtain written or oral statements from various persons in order
to confirm the information obtain by him.
d) Observation of Pertinent Activities and Conditions: In many cases, the management auditor may have to rely
upon his own observation of pertinent activities and conditions in the organization. A management auditor may
prepare organizational charts and flow charts as a result of his observation of pertinent activities and
conditions.
e) Correlation of Information: The information through the various techniques has to be correlated so that proper
conclusions can be drawn. The management auditor has to compare the actual performances with the standards
laid down or with the performances in the previous years. A good deal of skill is required in correlating the
relevant information so as to reach meaningful conclusions.
The scope of management audit can be widened to appraise in detail the systems and sub-systems, producers, job
separation, authorization, work-quantity studies, accountability, quality of personnel, quality of information
generation etc. Management audit is a measure of control designed to improve performance, eliminate inefficiency
and increase effectiveness and profits of an organization. The circumstances that have led to the development of
management audit may be pointed out as follows:
a) The suitability, practicability and present compliance or otherwise of the organization with its designated
objects and aims.
b) The current reputation of the organization in relation to the general public and within its own particular
industrial or commercial field.
c) The rate of return on investors capital whether poor, adequate or above average.
d) Relationship of the business with its own shareholders and the investing public in general.
e) The ratios of operating returns and the rate of return on capital projects.
f) The relationship between management and staff within the business.
g) The aims and effectiveness of management at its various levels such as top level, middle level and
operational level.
h) Financial policies and control relating to production, sales and distribution and in other functions of the
organization.
For a better success, a management audit team needs an amicable rapport with the management, effective
communication throughout the course of the audit process and a full disclosure of facts by the management.
Meaning
A financial audit is an audit conducted to present Management audit is a systematic evaluation of
an opinion whether the company financial capabilities of the companys management with
statements reflect a true and fair view. regard to effectiveness in achieving the strategic
objectives of the company and quality of decision
making.
Nature of Audit
A financial audit is quantitative in nature as it Management audit is a qualitative audit that
only evaluates the financial information. assesses both financial and non-financial
information.
Party Conducting
Financial audit is conducted by the external An employee of the company or an independent
auditor. consultant conducts the management audit.
Time of Conducting Audit
Financial audit is conducted at the end of each Management audit is conducted when the company
financial year. is on the verge of a change in strategic direction.
The difference between financial audit and Management audit can be easily understood based on the elements that
are being audited in each audit. The integrity, completeness, and accuracy are audited in a financial audit where the
auditors provide their opinion whether the statements present a true and fair view. Management audit assesses the
quality of decision making and efficiency of the management. The success of these audits always depends on how
objectively they can be conducted.
Management Audit
It uses the techniques of It examines the records of
determines the adequacy of
vouching, Verification and materials, labour and other
4 Technique procedures and control
valuation for the purpose expenses as components of
adopted by the
of forming an opinion total cost of operation
organisation
It is a policy audit and
It is an audit of cost
5 Status It s a statutory audit efficiency audit, but not a
ascertainment and control
statutory obligation.
Conducted as per the
Conducted regularly every Conducted as per the needs
6 Frequency instructions issued by the
year and desires of the company
Central Government
It examines systems,
Financial Audit is a
policies, performance and
verification of Cost Audit evaluates economy
7 Method organisation to identify
transactions recorded in and output
weaknesses and suggest
the books of account
remedy
It reports about the actual
Cost Audit confines itself to It is concerned with the
state of affairs pertaining
8 Responsibility cost implications of performance profitability of
to financial position as on
operations the organisation.
a particular date
Cost Audit covers both the
record of actual expenses Management Audit begins
Task It begins where the work
9 incurred as well as the where the work of financial
of accountancy ends
estimated cost of materials, audit ends
labour and other items
It is conducted by a qualified
Financial Audit is It may be conducted by any
chartered or cost accountant
10 Appointment conducted by a qualified independent expert or
with the prior approval of the
Chartered Accountant consultant
Central Government
It is an appraisal of
It is interested in the activities, identification of
It checks the correctness of
accuracy of operational possible areas of
11 Emphasis costing system and
results rather than in their inefficiency and measures
techniques
adequacy to improve future
performance
15.MANAGEMENT AUDITOR
A management auditor is expected to offer special skill and expertise to his clients. He, therefore, has a special
responsibility to exercise special care in the performance of his duties to ensure positive response to his opinion to
motivate action thereon. A management auditor should be competent in the exercise of his audit function and
formulation of his opinion based on such audit. He should be a man of independent thinking, who can maintain an
unbiased view, without any influence, financial, sentimental or otherwise. He should be technically competent in
the discharge of his duties, having had education, training and experience all round. The management auditor
should be supported by a good organisation i.e. a team of people who can competently execute his audit.
16.QUALIFICATIONS AND QUALITIES OF MANAGEMENT AUDITOR
Generally, no qualification has been prescribed for a management auditor. But generally s/he should CA having
knowledge of accountancy, financial administration and management. However, A management auditor should
have the following specific qualities:
a) Ability to understand and gauge business problems.
b) General understanding of the organisation.
c) Expert knowledge on the principle of delegation of authority, management by objective, management by
exception, management planning and control and the different budgetary systems, and those of internal
control devices (viz. flow chart, flow of work, analysis of work scheduling, use of computer, etc.).
d) Sufficient knowledge and experience in preparing various reports for presentation.
e) General understanding of different laws: general laws, company law, tax laws FERA, MRTP, etc. that affect the
functioning of the whole of the organisation.
f) Background knowledge about Engineering, Statistics, Costing, Management accounting, financial accounting,
Industrial psychology, Managerial economics, etc.
g) Tactfulness, perseverance, and
h) Lastly, pleasing and dynamic personality.
6. After obtaining the necessary information it should be correlated that he may be able to draw conclusions.
7. He has to compare the actual performances of the organisation
a) With the actual standards laid down by the top management;
b) With the performance during the previous year.
8. While correlating the relative information, he should be very careful in doing so, so that he may arrive at
meaningful conclusions.
9. Above all what has been stated in the foregoing paragraphs; he may have to rely on his own observation
regarding the activities and conditions of the organisation. For this purpose, he may have to prepare charts
and flow charts.
19.MAJOR AREAS OF EXAMINATION INVOLVED IN MANAGEMENT AUDIT
If the management auditor is satisfied as to the condition of the general management of the business he may
proceed to check the items on the following lines:
l. Production
a) Buying: Materials of right specification, right quantities right time, right prices.
b) Planning: Receipt of customers orders execution of their orders.
c) Processing: If he is not a technical hand, he should be very careful in the critical analysis of the manufacturing
process; he should inspect the factory or the workshop anal see whether it is clean, materials are not lying in
the gangways as to hinder the free movement of the workers and thus causing delay.
d) Storage: Proper inspection, of materials before storage; storage conditions; whether storage conditions will
damage, or deteriorate the materials; whether placed properly; safety measures; etc.
e) Internal transport and despatch: Movement of materials: whether quick or delayed; packing problems;
whether packing cases regularly supplied or not.
2. Distribution
f) Sales Records: Whether' adequate sales records are maintained: whether sales service is satisfactory; selling
costs.
g) Sales. Policy; Critical examination of sales policy; sales agents; sales depots; sales reports from: the agents
and depots.
h) Services: Whether there have been complaints from customers; after-sale service; whether interest of
customer is waning whether goodwill of the concern is maintained.
i) Publicity: Whether scrap book is maintained in regard to publicity; As media for publicity satisfactory;
whether results of advertising analysed:
j) Sales control: Whether orders are executed promptly; whether there are complaints by customers delays;
'whether there arecoml3laints regarding quality of goods and so on.
20.MANAGEMENT AUDIT PROGRAMME
Before the management auditor begins his work, he should chalk out the audit programme. It may be pointed out
here that it is not necessary that he should rigidly adhere to the audit programme which he had chalked out.
Outlines of management audit programme
a) Organisation: He should study the structure of the organisation in the area of the management audit, work
assigned to him. In this connection he should compare the company's organisation chart, if any. He should
ascertain whether careful attention has been paid to the principles of good organisation.
b) Plans and objectives: He should discuss the plans and objectives of the concern with the management.
c) Policies and practices: He should find out whether the policies as laid down are properly adhered to.
Whether any improvement can be made to the existing policies and practices so that they may be more
effective.
d) Systems and procedures: He should study the systems and procedures with a view to find out whether there
are certain defects in them. If he finds such a thing, he should suggest improvements to the existing systems
and procedures.
e) Controls: He should find out whether these controls are adequate and effective. If not, he should make
suggestions to make them more effective.
f) Operations: He should ascertain whether there is any loophole in the working of the organisation in
connection with the manufacturing process which hinders the achievement of the maximum production. If
this is the case, he should suggest ways and means to overcome these drawbacks and difficulties.
g) Layout and physical equipment: He should study the existing layout and see whether any improvement can
be made therein in order to take maximum advantage of it. Similarly in regard to the physical equipment,
whether better and greater use of modern physical equipment can be derived.
h) Personnel: He should see whether manpower is fully utilised and if not, what can be done to increase
productivity. He should see whether there-is co-operation between the workers and the management. How
can better and improved relationship between them be established?
i) Regulations: He should ascertain whether the concern complies with not only its own rules and regulations
and the Companies Act but also those of the municipal and local authorities.
The efficiency of the management audit will depend upon the management auditor as to how he handles the audit
work; how cleverly and tactfully he extracts information: how he conducts investigation and how he analyses the
data collected by him. He should bear in mind the following points while conducting audit:
a) He should look for, irregularities which might have been committed.
b) He should see whether there has been any conflict and any disagreement amongst the members of the
management about the planning, objectives and functions.
c) He should pay special attention to the cost element and obtain complete details in regard to this element.
d) He should be alert for weaknesses in the organisation, systems, methods, controls, objectives and personnel.
e) He should go deeper into details if he comes across any incomplete, inaccurate or inadequate data or
statement.
f) He should see whether: procedures, policies, etc are properly followed.
g) He should ascertain whether or not duties and responsibilities, are being carried out.
h) He should pay attention that the manpower, equipment, materials, etc., have been fully utilised
i) He should pay attention to any bottlenecks, wastes, unnecessary work, lack of coordination and other defects
in all the areas of the study.
21.MANAGEMENT AUDITOR'S REPORT
After conducting management audit, the management auditors are required to prepare a report to be submitted to
the management of the organization. On the basis of findings and definite information, the auditors prepare a
report making recommendations for improvement in the functioning of the management. He should not hesitate in
criticizing the management. His recommendations should be constructive and adequate for the improvement of the
overall efficiency of the management. Nevertheless the report must be clear and unambiguous, either making the
point at efficiency is such that no change is advocated, or if organization is considered and advisable, then the
management auditor must be sufficiently confident of his own ability to have assessed the situation he can make
adequate proposals which will lead to improvement and increased profitability.
Broadly, however, reports may be divided into four main categories:
1. Reports prepared by the management audit staff after their visits to a unit.
2. Periodical reports prepared by senior members of management audit department which summarise the
main audit findings and recommendations for the period under consideration and which afford a concise
review of the departments activities for that period.
3. Reports on the results of special investigations and inquiries.
4. An annual audit report.
The right of the management auditor to report to the highest level is now well established in many organisations
but in all cases responsible officials of the different units which have been subjected to audit should be afforded the
opportunity of discussing matters in the report concerning their departments before this is passed in final form to a
higher level.
21.1 TYPES OF REPORTS
The reporting of results covers a wide spectrum of types. We can describe the more important ones as follows:
21.1.1 Oral reports
In many situations, the reporting of results will be on an oral basis. To some extent, this is inevitable since a part of
the actual audit effort is carried on in conjunction with company personnel. In other cases, it is a result of
emergency action needs. It may also be a prelude to more formal written reports. To some extent, there will always
be oral reporting as a means of later supplementing written reports, especially when individuals being served have
special needs. Oral reporting therefore, serves a useful and legitimate purpose. It is recognised that it has a major
limitation that there is no permanent record. As a result there are more likely to be later misunderstandings. What
is important, therefore, is that this type of reporting be used carefully and for all significant matters, specially the
matters covered by emergency oral reporting, should be followed up immediately by a written report giving
reference to oral reporting. For example, a management auditor, if he has come across any embezzlement, should
immediately inform the concerned management orally, so that steps may be immediately taken to prevent further
embezzlement.
21.1.2 Interim written reports
In situations where it is deemed advisable to inform management of significant developments during the course of
the audit, or at least preceding the release of the regular report, there may be some kind of interim written report.
This report may pertain to especially significant problems where there is a need for early consideration. or the
report may be of a progress nature. In either case, they may be quite formal in nature or of the more informal type
of current memoranda. They can be reserved for very exceptional developments, or issued on a more extensive
basis. Often, their distribution is limited to this audit management, but this is not necessarily the case. All in all,
interim reports represent a type of reporting which, when used with judgment, can be a good device to improve the
total reporting process.
21.1.3 Regular written reports
In the typical situation, the particular audit assignment will include the preparation of a formal written report. The
form and content of such written reports will vary widely, both as between individual audit assignments and
individual companies. They may be short or long. They may be presented in many different ways, including the
extent to which quantitative or financial data are re-included. We will in the later pages discuss in more detail the
organisation and planning of this type of report.
21.1.4 Summary written reports
These summary reports are also referred to as flash reports. In a number of companies the practice has developed
of issuing an annual (or sometimes more frequent) report summarising the various individual reports issued, and
describing the range of their content. These summary reports in some cases are primarily for audit committees of
Boards of Directors, but in other cases for higher level management. They are especially useful to top level
managers who do not actively review the individual reports. They are also useful to the general auditor in seeing his
total reporting effort with more perspective and on an integrated basis.
21.2 ESSENTIALS OF GOOD MANAGEMENT AUDITOR'S REPORT
a) The report should be correct, i.e., the statements which he makes in the report should be correct and should
be based upon definite information he receives while engaged in the audit work.
b) It should be concise, but clear-cut and- comprehensive of facts.
c) It should be courteous i.e., even if it has to criticise the management it should be so worded as to avoid
unnecessary sharpness or implication.
d) It should contain the recommendations if any, which should be constructive and not condemning in nature.
21.3 MATTERS TO BE DEALT IN THE REPORT
Though there is no prescribed form of management audit report, it should normally incorporate the opinion of
the auditor on the following matters:
a) Is the return on the investments of the shareholders poor, adequate or above average?
b) Comparison of the rate of return on investment between the current year and the previous year/years.
c) Comparison of the operating costs of 'the concern with .other' concerns conducting the same type of
business.
d) Whether plan and machinery in use is suitable or otherwise to get the maximum amount of production.
e) Whether the relationship between management and the staff and the worker's has been cordial.
A management audit report, therefore, should be an aid to future control and performance effectiveness.
21.4 FORMAT OF MANAGEMENT AUDIT REPORT
Though it is difficult to lay down a format applicable to all situations, yet the following general guidelines may be
observed:
a) Title - The management audit report should have a short but descriptive title so that its subject matter can be
easily identified.
b) Objectives - The management auditor may describe the objectives of the audit assignment.
c) Scope - The management auditor may give a brief description of the activities audited by him.
d) Findings, conclusions and opinions - These may be given either department wise or in the order of
importance. All the facts and data pertaining to the, situation should be assembled, classified and analysed.
Each finding should be discussed comprehensively and correlated with other findings. Conclusions and
opinions should normally follow the findings. Tables or graphs may be used for the presentation of statistical
data in appendices.
e) Recommendations - A management audit report may include recommendations for potential improvements.
However, care should be taken in making recommendations in order that the auditors own objectivity may
not become subject matter of question. He may point out defects and make recommendations in a broad
manner on how to overcome them. He should avoid providing detailed procedures in the capacity of an
auditor. Normally specifying procedures etc. should rest with consultants.
f) Auditees views - The auditees views about audit conclusions or recommendations may also be included in
the audit report in appropriate circumstances.
g) Summary - A summary of conclusions and recommendations may be given at the end.
QUESTIONS
1. What do you understand by management audit'? How does it help management in improvement of its
effectiveness?
2. Define Management Audit. What benefit may one derive from management audit? Draft a programme for
management audit of a large industrial undertaking?
3. Define Management Audit and discuss its importance.
4. What are the objectives of management Audit? Show the distinctions between statutory audit and
management audit.
5. Who should conduct management audit?-Give reasons for your answer?
6. What are the preliminaries to be adhered to before conducting management audit? Give an outline of
management audit program.
7. What are the major areas of examination involved in management audit'?
8. What ate the duties of management auditor?
9. What are the essential aspects of management auditor's report? State the matters to be dealt with in the
report.