INSTITUTE OF COST AND MANAGEMENT
ACCOUNTANTS OF INDIA
Presentation on :
Practical Approach to ‘Operational Auditing’
Presenters : C P Bagchi and M K Paul
Dtd. 05.09.2016
1
Acknowledgement
We are acknowledging the use of freely available graphics in this presentation with
the objective of propagating knowledge and clearer understanding.
The examples in ‘case study’ and views expressed herein are not having any
bearing on the past and present professional engagement of the authors.
Discussion Flow :
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What is ‘Operational Audit’
Why ‘Operational Audit’
Types and nature of ‘Operational Audit’
Difference with Financial Audit
Process of ‘Operational Audit’
Walkthrough ‘case study’
Operational Audit ?
“It is an independent, objective assurance and consulting activity
designed to add value and improve an organisation’s
operations ”.
Operational Audit ….. Contd.
On critical appraisal of IIA definition , two specific goals are
clearly emerging viz.
(1) ‘add value’ and
(2) ‘improve an Organization’s operations’.
However, IA activity is mostly confined in assessing control
effectiveness and overall governance process with very little
effort to spare on ‘Review of Operations’ and suggest
improvement( improvement in operations- cost savingsidentification of process redundancy- re-alignment of
manpower requirement etc.) by way of value-add.
Operational risk ( opposed to effectiveness) is the risk of loss
resulting from inadequate internal processes, people, and systems
or from external events.
“People”, who performs the ‘operation’. Deviation from operating
guideline and or inadequacy in operating guideline increases the
risk of shortcoming.
“Processes” and “Systems”, business activities consist of processes.
When there are discrepancies in an existing procedure, or if
procedure is not defined, this could result in losses(lowers
effectiveness).
Objectives of Operational Audit
D – Detailed understanding for existing process to suggest
improvement
E – Eliminate Waste, Duplication of work
M – Merge Operations/Processes to reduce Turn Around Time
I – Improve /Increase Quality, Volume, Revenue
N – New Methods, Techniques, Devices for better result
/throughput
G- Govern Man, Machine, Methods and Money
Operational Audits
Comprehensive examination of an operating unit or a complete
organization to evaluate its systems, controls and performance
as measured by management’s objectives (Activity Based)e.g
– Purchasing
– Production
– Receiving
– Shipping
– Engineering
– Office services
– Advertising
– Data processing
Strategic View of Operations
“A company’s operations is
either a competitive weapon
or
a corporate milestone.
It is seldom neutral.”
Role of Strategy in Operations
• Operations Strategy is a plan for the design and management of
operations /functions
• Operation Strategy developed after the business strategy
Linking the Strategic role & Process view:
Strategic Operational Audit
Existing
Desired
Feasible
Business Strategies
Strategy Gap?
Desired
Business Strategy
Existing
Capabilities
Capability Gap?
Desired
Capabilities
Operations Strategy
Operational Structure:
Processes &
Infrastructure
Process Gap?
Desired Oper’l Structure:
Processes & Infrastructure
Measures
Maximize
Goals
Operating
Efficiency
Marketing, …,
Financial Strategy
Process
Attributes
Product-Process Matrix
Process
Flexibility
High
JOB SHOP
Jumbled Flow.
Process segments
loosely linked.
(Commercial Printer,
Architecture firm)
Disconnected Line
Flow/Jumbled Flow
but a dominant flow
exists.
BATCH
(Chemical, Heavy
Equipment)
i
LINE FLOWS
Connected Line
Flow (assembly line)
Continuous, automated,
rigid line flow.
Process segments tightly
linked.
Low
(Auto Assembly,
Car lubrication shop)
CONTINUOUS
FLOW
Product
Variety
(Refinery, Chemical,
Fertilizer)
Low
High Standardization
High volume
High
Few
Major Products
Low Standardization
Many Products
One of a kind
Low Volume
Why ‘ Operational Audits ’
 Economy, Effectiveness & Efficiency ( 3E) in ‘Operation’/ ‘Process’
 ‘Value for Money’ in the areas of ‘Operation’
 Reliability of outcome : - Time/Suitability/Standard
 Fixing Standards ( Benchmarking) :
-Industry-wide
-Company-wide
-Parameters (Quality , Cost , Throughput etc.)
 Process/Operational deviations
 Resultant outcome for Strategic direction – Strength , Weakness
Scope for ‘Operational Audit’
Ap
pr
oa
ch
A
c
t
i
v
e
P
a
s
s
i
v
e
Prevention
-Wasteful Activity
-Actively Promoting compliance with
Internal Control
Solution
-Reduce Revenue Leakages
-Cost Savings
Detection
-Identify Problems
Find Solutions
Prevention
-Benchmark performance of
operating Processes against
best practices
Audit Assignments
Scope
Business Performance
Mind-set for ‘Operational Audit’
Positive usage of ‘WASTE’
W = What is deficient? Or, What is the problem?
A = Ascertain the conditions for logical end.
S = Significance of deficiency (in monetary value terms).
T = Targeted solution.
E = Effective measures to pre-empt deficiencies.
Operational Audit Process Flow
h. Report
Findings with
Recommendation
s
f. Conceptualization of
Observations ,g. Process Owner
Buying in
d. Programme Development , e. Field work
a. Define Purpose, b. Familiarization , c. Survey
Takeaways
:
Focused Operations & Strategic Fit
Process View
We need to see operations as a transformation process of inputs into
outputs.
Strategic View
Align operational decisions with the overall company goals.
Develop Operational Capabilities that support the positioning of a company.
Identify and Link between business strategy, operations strategy, and
operations structure.
Capabilities defined by operational structure.
Apply strategic operational audit to evaluate fit and areas for improvement.
Look
for operational performance measures (time, inventory, throughput,
.
flexibility) which are leading indicators of financial performance.
Types of Operational Audits
- Function Based : Function based audit deals with one or
more functions in an organization e.g Payroll , Logistics,
Production, Collection etc.
- Activity Based : A portion of Function based audit ,
where an activity having greater importance e.g
Transporter selection ( Logistics) , Plant Maintenance
( Production ) etc.
- Organizational Audits : an organizational audit deals with
an entire organization and how efficiently and effectively
functions interact
- special assignments arise at management’s request and
can take a variety of forms
What defines a “good process performance”?
Absolute measures:
– revenues, costs, operating income, net income
– Net Present Value (NPV)
– Relative measures:
– ROI, ROE , ROA
Survival measure:
– cash flow
Few Case Studies : Results Achievable
through Operational Audit
 Bagging Plant Operations – Impact on
Manpower - Cost
 Transportation – Post bagging despatches :
Impact on Truck Turnaround Time - Cost
Process Structure: Bagging Operations
Material Handling
Silo
Bagging
Palletizing
Pneumatic
Conveying
Vehicle/ Rail
Loading
Despatch
Plan
4 Way
Vehicle
Entry
Invoicing
5 Way
Loading
Despatch
22
Process Structure: Material Movement
Brief Description of Case Study Scenario- I
A ‘bulk packing’ centre operates with two Packing Machines on three shift basis.
Daily deployment schedule is of 18 Operators (3/Shift/Packer) in three Shifts
( Shift I : 6 a.m to 2 p.m and so on ) for the two Packing Machines. Job
descriptions and work content of Operators are given hereunder.
Bag feeding in nozzles - one operator each at each discharge end of double
discharge facility.
Rotation-wise off is taken by the workmen to ensure continuity of discharge
operation.
The aforesaid modus of on and off/rest is mutually settled by the gang.
Our proposition indicates uninterrupted production with 5 workmen denoted as
1,2,3,4,5 (instead of 6 per shift) by maintaining the prevalent off/rest time
mutually agreed upon amongst workmen. It is pertinent to mention here that
recesses not being planned/ projected at the start and last lap of the eight hour
shift as per prevalent system.
Considering continuity of effective working time span e.g half an hour, one hour
and so on; many such propositions can be build. Based on wage rate, savings can
be achieved through modified matrix.
Bagging Plant Comparative – Manpower Deployment
Time
A
Proposition : I
Proposition : II
Discharge Facility
Discharge Facility
B
C
6.00
6.30
1
5
7.30
4
8.00
3
2
9.00
1
9.30
Rest
4
3
2
7.00
8.30
D
5
Time
5
6.00
4
6.20
3
6.40
2
7.00
1
7.20
5
7.40
4
8.00
3
8.20
1
B
2
C
3
D
Rest
4
5
4
5
4
2
5
2
4
1
5
3
2
8.40
4
4
1
9.00
3
1
3
5
11.00
5
9.20
2
2
4
11.30
4
9.40
1
1
3
5
12.00
4
2
3
1.00
2
1
3
5
10.00
12.30
1.30
3
1
3
2
10.00
10.30
A
4
2
10.20
1
10.40
5
11.00
3
5
2
4
11.20
11.40
3
5
12.00
1
12.20
4
3
2
1
5
12.40
1.00
1
4
1
1.20
2
1.40
3
4
5
3
2
Brief Description of Case Study Scenario- II
The Turn Around Time (TAT) for ‘Gate In’ to ‘Gate Out’ was found
to be very high. This implicates strain on logistic for arranging
Vehicles for evacuation of material from ‘Packing Centre’ as well as
timely availability for end Customer. On the other hand ‘truckers’
are also looser due to high TAT, as number of trips gets reduced
impacting capping of revenue.
Time between “ Loading In ” to “ Loading Out ”
No. of Trips
p. c
Cum. %
( Hours )
4917
15.7
Upto 1
12143
38.8
1–2
7859
25.2
2–3
6338
20.3
>3
31257
100
Total
15.7
54.5
79.7
100.0
Brief Description of Case Study Scenario- II… contd.
Loading operation of about 70% Vehicles were completed within
2 Hours of ‘Loading In’. ‘Time and Motion Study’ conducted for
actual time taken in loading; a maximum of 45 minutes for the
highest capacity of Vehicle i.e 60 Mt. was noted. In view of the
same, scope for further time reduction in loading operation
exists.
The prevalent average rate of Rs. 200 per MT/Kilometre, TAT
improvement of at least 20% of vehicles through proper
monitoring in each of the stages i.e between ‘Reporting’ to
‘Loading Out’ will result in a savings* of Rs. 4.2 Crores ( on 50 %
sharing basis with Transporter).
*Rs. 200 x20%x50% x300 Km. average for 7000 trips (approx.)
Process Owner’s Typical Resistance
o “We always did it this way, now (of late ) only following a
different way”
o “We are testing many alternates will settle with the best”
o “This is not the RIGHT time to change, wait till…..”
o “ Local issues, can’t go for change ”
o “ You tell Chairman to decide, when we are not there ”
o “We will do it as suggested, but don’t put savings on record /
Report”
o “We can’t do it in prevalent scenario”
o “ We know this exercise failed somewhere, will not work here
also “
o “Give us some time to think through”
o “We don’t have desired trained staff to follow your guidance”
o “ We agree, but you are to convince our Promoter”
Empirical Formulae : Operational Audit Objective
EV = f [VA*(PA*PE)]
EV = Economic Value Add
VA as savings made through cost reduction over previous
base (say 1% of cost of operation)
PA as multiplicity of review in the said operational area
PE as post reviews newer engagements ( say 1 for each
self-inflicted review)
The heightened expectations from Internal Audit
necessitated fundamental modifications in audit’s
approach ………. Journey towards “ Operational Audit ”