Operational Audit

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NATURE OF OPERATIONAL AUDIT


Also known as management audits and performance
audits.

Conducted to evaluate the effectiveness and/or
efficiency of operations.

Examinations of all or part of an entity to determine the
degree of its operational efficiency, effectiveness and
economy.

Also refers to the auditor’s study of business operations for the purpose of making recommendations about
economic and efficient use of resource, effective
achievement of business objectives and compliance with
company policies.

The term operational auditing is the most widely used
today.

Definition of terms
o
OPERATIONAL – implies a focus on operations, as
opposed to financial position.
o
MANAGEMENT – implies that the information
obtained in the audit process is useful to
management decision making.
o
PERFORMANCE – implies an evaluation of the
performance of persons or units in executing the
entity’s objectives.
OBJECTIVES OF OPERATIONAL AUDIT


Primary objective: to assess the quality of operations
and whether it is in line with the company’s prescribed
polices/plans

Also help to facilitate the granting of loan from lenders,
facilitate insurance claims, facilitate the decision to
invest, determination of purchase consideration of a
business, discovery of errors and fraud, etc.
OPERATIONAL AUDITING vs. FINANCIAL AUDITING

OPERATIONAL FINANCIAL
AUDITING (OA) AUDITING (FA)
PURPOSE OF


Emphasizes •
Emphasizes
THE AUDIT
effectiveness, whether
efficiency historical
and information
economy. was correctly


Concerned recorded.
with •
Past-oriented
operating
future
performance.
NATURE AND


Reports are •
Report
DISTRIBUTION
intended typically goes
OF REPORT

primarily for to many
management. users of FS.


Reports vary •
Wordings are
considerably well-defined
from audit to because of
audit of the widespread
diverse distribution
nature of of the report.
audits for
efficiency
and
effectiveness.
INCLUSION OF

•Covers any
aspect of
efficiency
and
effectiveness
in an
organization
and can
therefore
involve a
wide variety
of activities.

Limited to
NON-
matters that
FINANCIAL

directly affect
AREAS the fairness
of FS
presentation.

EFFICIENCY vs. EFFECTIVENESS

EFFICIENCY EFFECTIVENESS

Refers to how well an
entity uses its resources
to achieve its goals.

Refers to an entity’s or a
unit of an entity’s success
in actually achieving its
goals and objectives.

Also described as
reducing cost without
reducing effectiveness.

CRITERIA FOR EVALUATING EFFECTIVENESS & EFFICIENCY


Different approaches can be used to evaluate efficiency
and/or effectiveness.
o
One approach is to look at an entity’s overall level
of profitability.

There are several sources that the operational auditor
can utilize in developing specific evaluation criteria.
o
Historical performance

Based on actual results from prior periods (or
audits).

Idea is to determine whether things have
become “better” or “worse” in comparison.

Advantage: they are easy to derive

Disadvantage: they may not provide much
insight into how well or poorly the audited
entity is really doing.
o
Comparable performance

An excellent source for developing criteria.
o
Engineered standards

Often time consuming and costly to develop
as they require considerable expertise but

may be very effective in solving a major
operational problem and well worth the cost.

o
Discussion and agreement

Sometimes difficult and costly to obtain and
criteria are developed through simple
discussion and agreement.

Parties involved in the process: management
of the entity to be audited, the operational
auditor, and the entity or persons to whom
the findings will be...
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