APT Financial Consultants
CPA REVIEW HANDOUTS
P18
By Sako Mayrick M
Covered :
Management audit
Social audit
HR audit
Environmental audit
Sako Mayrick - APT
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MANAGEMENT AUDIT
 Other names
 Operational audit
 Organizational audit
 Technical audit
 Efficiency audit
 Meaning
 Examination of managements operation
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Supervision of activities of the client
Dynamism and flexibility of changing environment
Opportunities grasping
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MA - Meaning
 It is the examination, review and appraise of
various policies and functions of management on
the basis of certain standards
 It evaluate the performance of various
management processes of an organization
 It is a comprehensive examination of an
enterprise to appraise its organization structure,
policies, procedures in order to determine
whether sound management exists at all levels,
ensuring effective relationship with the outside
world
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MA - Meaning
IIA defines MA as future oriented,
independent and systematic
evaluation of activities of all levels
of management for the purpose of
improving organizational
profitability and increasing the
attainment of the other
organizational objectives
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Advantages of MA
 It helps the management in preparing plans, objectives
and policies and suggests the ways and means to
implement those plans and policies.
 The inefficiencies and ineffectiveness on the part of the
management can be brought to light.
 The techniques of management audit are not only
applicable to all factors of production, but also to all
elements of cost.
 Proper management audit techniques can help the
business to stop capital erosion.
 It increases the overall profitability of a concern through
constant review of solvency, profitability and efficiency
position of the organisation.
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Disadvantage of MA
 The introduction of management audit technique involves
heavy expenditure.
 Managers will hesitate to take initiative, as the
management auditor will always pinpoint some
shortcomings in the action.
 Managers will always try to keep the records up to date
rather than improving efficiency and reducing the costs.
 Due to ineffectiveness and inefficiency of the management
auditor, in all cases, management audit cannot provide
result-oriented service.
 Management auditors are sometimes engaged in some
activities detrimental to social objects of auditing, for
example, evasion of tax.
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MANAGEMENT AUDIT
 It considers
 Policies and procedures in operation
 Future plans
 Previous trends
 Discharge of fiduciary responsibility
 Responsiveness to stakeholders interests
 Use of resources
 Opportunities
 Furtherance of organizational objectives
 Efficiency, economy and effectiveness of operations
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General Objectives of
Management Audit
 To assist management in establishing good
relations with the employees and to
elaborate duties, rights and liabilities of the
entire staff.
 To recommend changes in the policies and
procedures for a better future.
 To ensure most effective relationship with
the outsiders and the most efficient internal
organisation.
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General Objectives of
Management Audit
 To assist management in achieving co-ordination
among various departments.
 To assist management in establishing good relations
with the employees and to elaborate duties, rights and
liabilities of the entire staff.
 To recommend changes in the policies and procedures
for a better future.
 To ensure most effective relationship with the
outsiders and the most efficient internal organisation.
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Steps in MA
1. Examination of management performance
2. Reporting defects and irregularities
3. Presenting suggestions for improvement
These basic steps can further be broken down into
the following stages: (1) study of the activities, (ii)
detailed diagnosis, (iii) determination of purpose
and relationship, (iv) looking for deficiencies, (v)
analytical balance, (vi) testing of effectiveness,
(vii) searching for problems, (viii) ascertainment
of solutions, (ix) determination of alternatives,
(x) seeking out methods of improvement.
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Management audit
 Objectives
 Appraisal of Plans and clients objectives
 Appraisal of client’s organizational
structure
 Evaluation and assessment of client’s
performance
 Appraisal of client’s control of operations
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Management auditor qualities
 Analytical skills
 Ability to see the organisation from different
angles
 Sufficient knowledge of the industry which the
client operates
 Auditing skills
 Interview and inquisitive skills
 Objective
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Management auditor qualities
 Sufficient knowledge about the functions of
management
 Ability to understand different management
activities of the organisation i.e. internal control,
production planning and control, personnel
management techniques
 Generally should have ability to understand
problems of the organisation
 He should have the ability to determine the
progress of the organisation
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Scope – Terms of Reference of
MA
 Whether the basic aims and objectives of the
enterprise are being fulfilled in practice.
 Whether the enterprise is being successful in
adapting itself to technological change.
 Whether the management structure is
suitable.
 Whether management is efficient at all levels
and to extent to which economies are possible.
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Scope – Terms of Reference of
MA
 Whether the policies with regard to staff
recruitment and training are adequate, and
whether staff morale is satisfactory.
 Whether there is a proper communication system
both upwards and downwards throughout the
enterprise including a proper management
information system.
 Whether the enterprise's share of the market is
increasing or declining and how it compares with
its main competitors.
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Management Audit
appraisal of objectives and plans
 Evaluating of objectives
 SMART
 Sufficient and reasonable
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Reflects company responsibilities
Compatible
Communicated
Easily understood
Rigid
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Management Audit
appraisal of objectives and plans
 Evaluating plans
 Compatible with objectives
 Anticipates trouble spots
 Flexible for efficiency
 Permits delegation of responsibility
 Supports uniformity
 Communicated
 measurable
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Management Audit
appraisal of clients Organisational
Structure
 It is a means for management control of operations
 Includes assignment of duties and responsibilities
together with delegation
 Organisation structure in harmony with objectives
 Structure comensurate with responsibility
 Spans of management
 Unity of command
 Proper balance of functions
 Simple and economical
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Objectives of MA
Evaluation and Assessment of
client’s performance
 Possibility of getting an expert support
 Issue is to measure efficiency, economy and effectiveness
 Issues
 Personnel - staffing, turnover, qualification of employees, working
conditions, overtime
 Workload - volume of work, customers, payroll check, productivity
levels, backlog, critical maintenance
 Productivity units expended/units produced, past
performance, mechanization , man-hour per customer,
 Quality – expectation/performance, improvement, work methods
 Cost - labor costs, material costs, administrative costs, equipment
costs, trends, necessity of activities. Forecast, variance, cost
conscious,
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Objectives of MA
Appraisal of Control
 Administrative controls of operations to accomplish
management objectives or plans of operation
 Information and assurance to management on
adequacy and effectiveness of controls, not only at the
time of audit but also for the future
 The purpose is not cost control but procedural
compliance
 For example, procurement system
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MA
Corporate Analysis
 Study of client’s business in view of both competition
and changing business environment.
 Clients exploration of strategic core – assets for
competitive edge e.g. brand name, technology,
research and development, financial and capital
structure, product costing and pricing policies,
managerial skills, production systems and
communication
 Synergy of the above
 Competitive edge over rivals
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MA
Corporate Analysis
 Value chain analysis – how the policies giver value to
the customers e.g. marketing , logistics; cost and
marketing strategies
 Examine high input cost of marketing strategies to
determine grey areas
 Examine pricing policy for value adding to customers,
margins for covering operational costs
 Analysis of overall clients business strategy, SWOC
analysis and environmentalf analysis
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MA
Corporate Analysis – Industry
Analysis
 Competition in the industry, bargaining
power of client’s suppliers, buyers,
 Threat of new entrants,
 Threat of substitutes
 Purpose is to determine level of
competitiveness of rivalry and competitors
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MA
Corporate Analysis –
Environmental Analysis
 PEST analysis
 Trade barriers,
 Business trends – recession, boom and per
capital incomes, market demand and supply
conditions
 Price sensitivity
 Product taste, branding, relationship with local
society
 Technological analysis – modern technology
and impact on current business.
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MA
Corporate Analysis – SWOT
Analysis
 SW – Internal operating capabilities
 Competitive edge
 Minimizing weaknesses
 OT- External
 Entrepreneurship skills
 Threats are killer missions therefore clients must have
strategies e.g. interpersonal skills to manage uncertainties
 SWOC and PEST Analysis results into new strategy
development through financial modeling (NPV, IRR and
cash flow)
 The new strategy must be able to change with changes of
environment.
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MA - Approaches
 Organizational approach
 Administrative structures
 Framework of the organization – staffing, reporting ,
personnel evaluation, budgets
 Microcosm picture of company structure and study it from
many angles
 Concentration of administrative activities rather than
product
 Functional approach
 Following up major activities from inception to conclusion,
 Less concerned with adminstration
 It is more complex with long and devious trail
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MA - Steps
 Familiarization
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Discussions with knowledgeable people about the
organization – activities, performance evaluation, reporting
Walkthrough the departments or follow function
Objectives and their implementation
Examine organizational structure
Review of policies and procedures
Review of records generated
Performance appraisals
 Familiarization leads to development of workable audit
program
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MA - Steps
 Verification
 Controls functioning through sample transaction
 Internal checks
 Documented vs Actual controls
 Standards of performance
 Evaluation and Recommendations
 Audit tests of initial survery
 Recommendations based on facts not feeling
 Consider all factors affecting operation
 Effectiveness of operation
 Deviations form procedures
 Structure of accounts, records and repors
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MA - Steps
 Evaluation and Recommendations
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Risks and loss
Technical issues to be recommended to management
 Reporting
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No reservations
Minor matters should be cleared through discussion
Lower matters to be discussed with the lowest cadre in mgt
The auditor should note that the responsibility of correcting
defects ultimately rests with operating management.
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Past Examination – May 2010
Management audits involve the investigation of the entire
management to ascertain the decision making process of
the top management and such it is kind of overhaul of the
company’s top management to ascertain attitudes towards
the internal control system and also personal relations
with employees and their ability to manage an efficient
and viable company.
(a)
Explain the conditions under which these audits are
ideal (4 marks)
(b) Explain the advantages of Management audits
(8 marks)
(c)
Describe the disadvantages of Management audits
(8 mark)
(Total =20 marks)
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Social Audit
 It is based on concepts of Social Responsibility
 Corporates must consider social well being rather than
profit
 They have high responsibility to the society such as
 Extending staff benefits such as provident fund, gratuity,
bonus, insurance, leave salary, medical benefits, housing
facility, recreation and entertainment
 Keeping the environment of the factory and its
surrounding clean and non harzadous
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Social Audit and Social
Accounting
 The term ‘social accounting’ and ‘social audit’ are used
sometimes in the literature interchangeably. But social
accounting is concerned with the development of
measurement system to monitor social performance,
and social audit is the use of an independent auditing
system to verify a firm's records of social performance.
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Social Audit and Social
Accounting
 John Crowhurst in his book Auditing Guides to
Principles and Practice has clearly explained these two
terms. According to him, ‘[s]ocial accounting is the
process of determination of social performance of an
organization”, while ‘social audit’ is the enquiry into
the corporate social accounting records by an outside
agency that can opine with a view to attestation and
authentication of such results and reports.
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Objectives of Social Audit
 To make an assessment of social performance by an
organisation.
 To inform the management of an organisation of the
accuracy and fairness of its social accounts.
 To evaluate the socio-economic contributions made by an
industry.
 To bring to light for public knowledge how far an
organisation has discharged its responsibility to the society.
 To advise the management in the preparation of social
accounts.
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HR Audit
 Touche Ross and Co., a Canadian CPA firm has introduced
for the first time the concept of human resource accounting
as a part of its management information system in the
belief that a good human resource accounting system can
provide information of vital importance for short term as
well as long-term decision-making and performance
measurement.
 According to Eric Fl amholtz, “Accounting for people as an
organizational resource involves measuring the costs
incurred by business firms and other organizations to
recruit, select, hire, train and develop human assets”,
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HR Audit
 The decision of the investor to invest in the company is
greatly influenced by the working of the managerial
staff of the company. So, disclosure of information
regarding human capital in the annual report of the
company may help prospective investors in forming an
opinion whether to invest in the organisation or not.
This may remove the standing criticism of the
financial reporting that ‘one of the outstanding
omissions is information concerning the human
capital employed.'
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HR Audit
 But before including human capital employed as a part
of annual account, it has to be ensured that the human
capital as included is reliable and computed on the
basis of generally accepted principles for the valuation
of human capital. In order to get reliable value of
human resources, the necessity of human resource
audit is felt. The Human Resource Audit examination
should not relate the rightness to the process of
valuation of the asset, but it should see that the
information upon which the calculations are based
upon are reliable and authentic
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Steps in HR Audit
 The nature of the organisation should be
thoroughly examined to know whether it is a firm
of professionals or of the general business.
Interview with the top managerial personnel
should be taken to acquire information regarding
the valuation of human resources. It should be
seen that provision for depreciation of human
assets has been adequately provided. It should be
confirmed that the correct value has been placed
in the balance sheet.
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Steps in HR Audit
 The internal control system as regards
various information of human resources
should be reviewed to evaluate its
effectiveness. It should also be ensured that
all contingencies that have the effect on the
valuation of human resources are duly
considered in the value measurement of
human resources
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Green or Environmental Audit
 An environment audit is a management tool
comprising a systematic, documented, periodic
and objective evaluation and objective evaluation
of how well organizations, management and
equipment are performing with the aim of
contributing to safeguarding the environment by
facilitation
management
control
of
environmental
practices,
and
assessing
compliance with company policies, which would
include meeting regulatory requirements and
standards applicable.
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