Types of Operational Audits and Auditors
Types of Operational Audits:
1. Functional Audits
 Deals with one or more functions in an organization
 Has the advantage of permitting specialization by auditors
 Certain auditors with an internal audit staff can develop considerable expertise in an area, such as
production engineering
 Auditors can be more efficient and effective by spending all their time auditing in that area
 Has the disadvantage of being prone to failure in evaluating interrelated functions
 Example: Failure to take into account that production engineering function interacts with manufacturing
and other function in an organization
 Example of a functional audit:
 Functional audit dealing with the efficiency and effectiveness of the payroll function for a division or for
the company as a whole
2. Organizational Audits
 Deals with an entire organizational unit, such as department, branch, or subsidiary
 Emphasizes how efficiently and effectively functions interact
3. Special Assignments
 Arise at the request of management for a wide variety of audits
 Examples: Determining the cause of an ineffective IT system, investigating the possibility of fraud in a
division, and making recommendations for reducing the cost of a manufactured product
Types of Operational Auditors: (Who performs operational audits)
1. Internal Auditors
 Because they spend all their time working for the company they are auditing, they can develop considerable
knowledge about the company and its business, which is essential to effective operational auditing
2. Government Auditors
 They perform operational auditing, often as part of doing financial audits
 Most widely recognized government auditor group is the Commission on Audit (COA)
 They usually audit the local and national government units to determine whether taxes have been
collected and remitted in accordance with existing laws and regulations
 They usually audit the economy and efficiency in the use of government funds and resources
 They usually conduct Program Results Auditing
 Audits conducted to determine whether a government project or program has met its stated
objectives
3. CPA Firm auditors
 Part of their audit of historical financial statements often consists of identifying operational problems and
making recommendations that may benefit the audit client
 The recommendations can be made orally but they are typically included in a management letter
 Background knowledge about a client’s business, which an external auditor from a CPA firm must obtain while
doing an audit, provides useful information for giving operational recommendations
 An auditor who has broad business background and experience with similar businesses is more likely to
be effective at providing clients with relevant operational recommendations than a person who lacks
those qualities
 Clients commonly engage a CPA firm to do operational auditing for one or more specific parts of its business
 Only when the company does not have an internal audit staff or if the internal audit staff lacks expertise
in a certain area
 Note that CPA firms cannot provide the operational auditing services to their public company audit clients
Independence and competence of operational auditors
The two most important qualities for an operational auditor are:
1. Independence
 Operational auditor should report to the appropriate level of management to ensure that investigation and
recommendations are made without bias
 Independence of (1) Internal auditors
 Enhanced by having the internal audit department report to the audit committee of the board directors
of the company
 Independence of (2) Government auditors
 Enhanced by having the government auditors report to a level above the operating departments
 For example, the COA reports directly to the President
 Independence of (3) CPA Firm auditors
 Seldom a problem because they are not employed by the company being audited
Responsibilities of operational auditors can also affect their independence
 Auditor should not be responsible for operating functions in a company or for correcting deficiencies when
ineffective or inefficient operations are found.
2. Competence
 Necessary to determine the cause of operational problems and to make appropriate recommendations
 When operational auditing deals with wide-ranging operating problems, competence can be a major obstacle
 For example, imagine the difficulties of finding qualified internal auditors who can evaluate both the
effectiveness of an advertising program and the efficiency of a production assembly process
Functional areas covered by operational audits
Some areas which operational audits focus include:
1. Organizational structure
2. Asset management and security
3. Staffing
4. Productivity