Auditing - Management Audit

Management audit is a new concept in auditing. Area of Management audit is beyond conventional audit; it reviews all aspects of management. It is an audit of overall performance of management. It covers planning, organizing, co-ordination and control, etc. Management audit detects and diagnoses the problem and suggests various means to avoid and solve the problems.

Need of Management Audit

These days, reports on matters of policies and their implementation is very important to improve the efficiency of the management. Management Auditors advise the management on various matters related to performance of various departments as well as of the organization as a whole. Management Auditors may or may not be any finance and accountancy person. Management Auditors evaluate the actual performance by comparing it with predetermined standards. Auditors reveal any kind of defect and irregularities in the working of management. It can be said management audit helps in improving the performance and efficiency of management.

Objectives of Management Audit

  • It helps management in setting sound and effective targets.

  • To suggest management to obtain desired results and to reveal any defect and irregularities in the process of management.

  • Management audit help in effective discharge of their duties.

  • To help in co-ordination of various department.

  • To help in training of personnel and marketing strategies.

  • To compare input with outputs.

  • To ensure strong relations with outsiders.

  • To ensure most efficient internal organization.

Advantages of Management Audit

  • It is helpful in making plan, objectives and policies of the management.

  • It is helpful to efficiently achieve the set objectives of the management by coordinating with the personnel.

  • It is very helpful to create strong communication system with outsiders and within the various departments.

  • It is helpful to evaluate the performance of management.

  • To establish good relations with employees.

  • To elaborate duties, rights and liabilities of staff members and to make market strategies.

  • It is helpful in preparation of budgets of organizations.

  • It is helpful in preparation of budgets.

  • It is helpful in resource management.

Appointment of Management Auditors

This team has experts with expertise in different fields of Management. Management audit team coordinates with the other levels of management and runs a smooth audit process. It is a team of experts with full knowledge about management science. Most of the team members have practical working experience of being a part of management. Such experience helps them handle actual work situations in a better way.

Qualities of Auditor

Following are a few important qualities of a Management Auditor −

  • Good knowledge and experience of Managerial functions.

  • An Auditor should have good knowledge of the financial statements analysis techniques.

  • Knowledge of social accounting.

  • Knowledge of human resource accounting.

  • Good knowledge about economics and business laws, etc.

  • Understanding about the working of organization and its problems.

  • An Auditor should have sound knowledge of preparation and understanding about financial statements.

  • He should know and understand the objectives of organization very well.

  • He should understand about planning, budgets, rules and procedures to be applied in management.

  • He should be well-versed with the entire production process.

  • He should have enough knowledge and experience to understand the reason behind the lack of co-ordination between different departments.

  • He should have the quality to give practical and achievable solutions instead of providing bookish suggestions.

Scope of Work of Management Audit

It is not possible to define complete working of management audit and the scope of work and the areas covered by management audit. Following are a few important areas covered by Management Audit −

  • Administration
  • Sales Management
  • Purchase Management
  • Distribution Management
  • Stores and Inventories Management
  • Production Management
  • Personnel Management
  • Finance and Accounts Management
  • Management Information System
  • Advertisement and Sales promotion

Management Audit Program

Audit Program means the planning of the outlines for the whole process and procedures of management audit from the beginning to the end. Following examples depict the outline of an Audit Program −

  • Study about the organizational structure.

  • Study to see whether the principles of a good organization have been followed or not.

  • Detailed discussion with the top management about the objectives and the plans.

  • Study of current policies adopted to achieve the desired objectives and also to study if there is any chance to improve them for better results.

  • To decide the area of improvement whether it is planning or its implementation or both.

  • Recommendations for improvements.

  • To study whether the control system of an organization is adequate and effective.

  • Study of the manufacturing process to locate the factors which are hindering the maximization of production.

  • Study of personnel departments about policies, training, motivational schemes adopted currently for employees of the organization and what can be done further to improve the relations between employees and department.

  • Study about the optimum utilization of the space available and also of the physical equipment.

Audit Report

The report submitted by an Auditor should give true and correct assessment of the working of the organization and should contain suggestions for improvements as required in management policies, procedures or any other area. He should not hesitate in criticizing the management but on the other hand his report should not be merely condemning in nature. Although there is no fixed Management Auditor Report as per statute but still an Auditor should cover the following areas in his report −

  • An Auditor should also see whether the relations between staff members and the management is healthy or nor. He should also highlight the areas of weakness and the suggestions for improvement, if any.

  • About Methods and procedures of production.

  • About operating efficiency.

  • About rate of return on investment.

  • About return to shareholders whether adequate or not.

Criticism of Management Audit

In spite of the various advantages of management audit in modern business world, it has faced criticism too

  • According to managers and accountant it is just a vague concept which serves no material purpose at all.

  • Management Auditors usually pin point shortcomings of managers in action, therefore they hesitate to take initiative.

  • Normal practice of managers is to keep their record up to date instead of improving efficiency and reducing costs.