Definition, Objective, Functions, And Steps of Management Audit

In this tutorial, we will learn about the definition, objective, functions, and steps of management audit through a goal and comprehensive examination of the organization structure, its components such as department, its plans and policies, methods of processor operation, and controls.

It is a form of appraisal of the management’s total performance. It employs an objective and comprehensive examination of the organization structure, its components such as department, its plans and policies, methods of processor operation and controls, and its use of physical facilities human resources.

“The management audit has been defined as a comprehensive critical review of all aspects of the management process.” T.G. Toke

“Management audit is an investigation of a business from the highest level downwards to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient organization and smooth running internally.” Leslie R. Howard

OBJECTIVES OF MANAGEMENT AUDIT:

Reveal defects or weaknesses in any of the elements examined by the management auditor and to suggest improvements to obtain the best possible results of the operations of the concern.
To ensure the most efficient administration of the operations essential for the smooth running of the business.
To obtain the efficiency and effectiveness of the management.
To assist the management in establishing good relations with the staff to enable it to elaborate on the duties, rights, and liabilities of the entire personnel.
To suggest the ways and means and for the achievement of objectives and targets set forth by the management.
To evaluate by relating inputs (human and physical both) with outputs.
To facilitate the most effective relationship with the outside world and the most efficient organization and smooth running internally.

FUNCTIONS OF MANAGEMENT AUDIT:

A management audit is a complicated and challenging task. It performs the following functions:

This audit identifies the objectives of an organization if such targets are not set up.
In this audit allocates the overall objectives of an organization in small parts.
This audit reviews the structure of the organization and asset of an organization and decides whether goals are obtained or not.
This audit provides valuable suggestions to the management after the evaluation of all the above facts.
This audit examines all the scope of work and liability centers.

MAIN STEPS IN MANAGEMENT AUDIT:

The process of management audit can involve the following main steps:

To identify the objectives of the organization, to start with, it would be an essential step to perceive clearly and determine precisely the goals of the organization.
To break down the objective into a detailed organization.
To assess the adaptability of the organizational structure to achieve the targets effectively. After all, it is an organizational structure to attain goals and implement plans for an enterprise.
In evaluating the performance of functional areas. Above all, each functional area is to contribute its maximum for the attainment of targets.

Other Forms Of Audit

In this tutorial, we will learn about other forms of the audit through which the auditors have to certify the statement of accounts of the bank as at the closure of the financial year reveal an accurate and fair view of the bank financial position.

We think of auditing, and we tend to focus on financial audit, internal audit, or cost auditing. However, various other forms of inspections occur in the economy.

Some of these are very crucial for the existence of the organization. Some such audits are – bank audit, tax audit, insurance audit, etc.

Bank Audit:

The vast amount of public monies handled by the banks makes it imperative that the activities of the without strangulating the spirit of entrepreneurship. Audit forms an integral and essential part of such monitoring and regulation.

The auditors have to certify the statement of accounts of the bank as at the closure of the financial year reveal an accurate and fair view of the bank financial position, adequate provision for nonperforming assets, or bad debts in the books. All expenses and income have accounted for, and profit correctly worked out.

Co-operative Society Audit:

The affairs of co-operative societies are often managed by persons who do not possess adequate managerial, technical, or accounting skills.

The independent financial auditors of co-operative societies are therefore required to report on some aspects also. The following points must in the audit of the co-operative society:

The auditor should go through the rules and regulations of the organization and see how far they are being followed by it.
We should also examine the internal check system in operation in society.
He should vouch for the receipt of interests and return of loans from the borrowers. Proper records must remain for this purpose.
He should vouch for the loans granted to the borrowers by reference to the agreements.
He should verify the assets and see that the stock is valued correctly.
He should especially verify the cash in hand and investments of such a society.
He should also check other management and establishment expenses.

Insurance Audit:

The insurance audit is the examination of operations, records, and books of accounts of the insurance company. The auditor performs a check to ensure that the customer has paid the appropriate premium for the risk cover provided to him.

Government Audit:

This audit aims to ensure that the government’s financial transactions are correctly executed under sanctions and authorities and recorded in the books of accounts. Comptroller and Auditor

General of India must audit the receipts and expenditure of the Union Government and State government. Further, the Government audit also includes the verification of government companies conducted by C&AG.

Management Audit:

An emerging concept of auditing, it has originated from an America management audit. It is an act of evaluation of all departments’ activities to provide appropriate suggestions to the management to help their work.

Management audit is a new concept and goes beyond the regular inspection. It is a comprehensive and critical review of all aspects of management. It is concerned with the approval of the efficiency of management. It can be said to be an expansion of the internal audit, and the idea has developed recently.

Management auditing is the future-oriented task that is evaluated on time in management, sales management, etc. The main objective of a management audit is to improve the profit earning capacity, work of management, objectives of the program, social purposes, and human resource development so that organizational goals can easily be attained.

It refers to the existence of a control system, compliance of rules and regulations, the process of managerial decisions, etc. Generally, management audit and operational audits are mandatory, but it re-commendatory certainly.

Audit Program Advantages And Disadvantages

In this tutorial, we will learn about audit program advantages and disadvantages is a set of instructions that are followed for the proper execution of the audit.

A detailed written audit program contains the various steps and procedures required after the development of the audit plan. The audit program includes that are generally employed to determine what and how much evidence must be collected and evaluated. It also lays down the responsibilities for the whole audit team for carrying out different tasks.

The prepared audit program may be revised if needed by the prevailing circumstances. An audit program largely depends on the size of the organization and other relevant factors. Minimum essential work to be done in the standard plan and rest is according to the circumstances. Auditing will be carrying out in both the public and corporate sectors.

Advantages of Audit Report:

That helps in ensuring all the essential areas appropriately covered during an audit.
The audit program is instrumental in distributing the audit work properly among the audit team members according to their talent.
It helps in setting all the things in advance, so the uniformity of work can be achieved.
It helps in distributing the work among the assistants by their competence and experience level.
It provides the instructions to the audit staff and reduces the scope for misunderstanding.
It helps fix the responsibilities for the work done among the audit staff as the job done may be traced to the individual staff member.
Before signing the report, the final review, and the auditing program is also beneficial for this purpose.
It helps in assessing the progress work by ascertaining what part of audit work has completed and how much work is left.
It serves as evidence against the charge of negligence.
On completion of an audit, it serves the purpose of an audit record, which may be useful for future reference.

Disadvantages of Audit Program:

Various problems of audit program are as follows:

Rigidity:

The audit program loses its flexibility as it cannot be the same for different types of organizations. Each business has separate problems, so a single or same audit program cannot be laid down for every kind of business.

Reduces the initiative of efficient staff:

It kills the effort of capable persons. The Assistant cannot suggest any improvements in the plan.

Audit work becomes mechanical:

The audit program is automatic that ignores many other aspects like internal control.

New areas may overlook:

That time, new problems arise during the audit that ignored in the audit program.

The remedy of disadvantages:

The solution in such situations is that the audit program should be flexible must always be open to changes and improvements.
Audit staff should be encouraged to draw the auditor’s attention to any defects in the program.
The audit staff should be encouraged to explore thoroughly unusual transactions and not get restricted to the audit program.

AUDIT PLAN	AUDIT PROGRAM
Lays down the audit strategies for conducting business.	It is an outline of how the audit is to be done, who is to do what works, and within what time.
Plans should be made to cover, among other things.	It lays down the following audit procedures to be followed.
Acquiring knowledge of accounting systems, policies, and internal control procedures.	Checking of overall disclosure and presentation of all items in the final accounts.
We are establishing the expected degree of reliance to be placed on internal control.	verification and valuation of assets, liabilities, and ledger scrutiny.
We are determining the nature, timing, and extent of the audit procedures to be performed.	Evaluation of internal control and preparation and submission of an audit report.

Advantages Of An Audit Report

In this tutorial, we will learn about the advantages of an audit report. It is a report prepared by the auditor covering its assets and liabilities to show its current financial position and future.

It shows the accurate financial position of your company. Audit reports help prove management integrity to their shareholders – whether the company is honest and precise towards their shareholders or not.

Advantages of an audit report prepare by the auditor covering the company assets and liabilities to show the company’s current financial position and future. It covers all the financial aspects of a company. The audit report generally covers financial statements for 12 months. An audit report is an essential document, and the law requires it.

If the company is publicly traded on the stock exchange.
If the company lies under the industry regulated by the securities & exchange commission (SEC).

The audit reports are used by various individuals who are having an interest in the organization, and it includes the following:

Investors –

Audit reports are used by investors to identify the company’s financial position for investment purposes.

Shareholders & board of directors –

Audit reports are used by shareholders and board of directors to access the transparency of financial statements and management’s integrity.

Bank –

Banks use audit reports to know the company’s liquidity position and know whether the company can repay the loan (In case the loan is taken from a bank).

Government –

The government uses an audit report to check the completeness and accurateness of the tax.

That helps in ensuring that all the essential areas are appropriately covered during an audit.
Here helps in distributing the work among the assistants by their competence and experience level.
It provides the instructions to the audit staff and reduces the scope for misunderstanding.
It helps fix the responsibilities for the work done among the audit staff as the job done may be traced to the individual staff member.
It helps in assessing the progress work by ascertaining what part of audit work has been finished and how much work is left.
It serves as evidence against a charge of negligence.
In completion of an audit, it serves the purpose of an audit record, which may be useful for future reference.

Advantages of an Audit Report:-

It shows you the accurate financial position of your company.
The audit reports help in proving management integrity to their shareholders – whether the company is honest & reliable towards their shareholders or not.
Many parent companies having subsidiaries in the same or other countries want their subsidiary’s financial statements to get audited. Hence, it helps in managing the subsidiary more effectively.
The auditor report helps in identifying the financial & non-financial problems of a company, which may save the company from facing bankruptcy issues in the future.
An essential legal requirement to get your accounts audited to provide information about annual turnover, the value of assets, number of employees, etc. to the government and auditor is like evidence that can prove to the government that the particular entity is working correctly and by the law.
It is the requirement of shareholders. They want their company’s financial statements audited. Then, the same report is examined by the experts and expressed in such a way that it can be understood by most of the shareholders who do not have strong finance or audit background.

Auditing

In this tutorial, we will learn about auditing the process of examining an organization’s financial records to determine if they are accurate and by any applicable rules, regulations, and laws.

Principles Of Auditing:

Fundamental principles governing an audit describe the basic law which governs the auditor’s professional responsibilities and complies with wherever an inspection is carried. They are as given below:-

Integrity Objectivity And Independence:

Any professional should be straightforward, honest, and sincere in his approach. An auditor should be fair, truthful, impartial, and have access to the organization’s entire financial records. He is also entrusted with funds of other persons for audit. They should be a man of high integrity and objective.

Confidentiality:

The auditor should respect the privacy of information acquired during his work and not disclose the information without the client’s prior permission unless there is a legal duty to disclose certain information, he may do so with specific authority. The auditor should not use the information for his gains or the advantage of the third party.

Skill And Competence:

The auditor must acquire competent, skillful, and keep himself abreast of the latest developments, including pronouncements of ICAI on accounting and auditing matters. As the professionally qualified persons act as auditors, their specialized knowledge, skills, and competence acquired through study and formal courses help them perform flawlessly. The skill and expertise gained by the auditor should be applied with due care.

Work Performed By Others:

The auditor delegates some work to others and use the work performed by others, including that an expert, he continues to be responsible for forming and expressing his opinion on the financial information. An auditor may have to rely on the work and report of another auditor. Then he should ensure the adequacy of the nature and purpose of the work.

Documentation:

The auditor should document matters essential in providing evidence to ensure that the audit is carried out following basic principles.

Planning:

The auditor should plan his work to enable him to conduct the audit in an effective, efficient, and timely manner. He should acquire knowledge of the client’s accounting system—the extent of reliance that could be placed on internal control, and coordinate the work.

Audit Evidence:

The auditor should obtain sufficient appropriate shreds of evidence through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions from an opinion on the financial information.

Accounting System And Internal Control:

The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business. The auditor should assure himself that the accounting system is sufficient and all the information should record. The internal control system contributes to such assurance.

Audit Conclusions And Reporting:

Based on the audit evidence, he should review and assess the audit conclusions. He should ascertain:

As for whether accounting policies have consistently applied.
Whether financial information complies with regulations and statutory requirements.
There is adequate material of disclosure of material matters relevant to the presentation of financial information subject to regulatory requirements.

The auditor’s report should contain a clear written opinion on the financial information. A clean audit report indicates the auditor’s satisfaction in all respects. When a qualified, adverse, or disclaimer of view or reservation of advice on any matter is to made, the audit report should state the reasons.