Management Audit

Management audit means ‘an Audit of Management’ wherein various tools are used to assess the performance and progress of the management toward the process of best decision-making. The focus here is on management's quality of decision-making instead of focusing on the operational aspects. It involves appointing appropriate personnel, and drafting audit programs.

Management audit report findings and recommendations should yield better results for the organization. The recommendations of the findings can be executed with a mutual understanding between the audit team and top management for the establishment's success. In the same way, findings are also to be reported in better terms, which should avoid further conflicts the management.

A management audit is a comprehensive evaluation of an organization's management processes, practices, and overall effectiveness. It focuses on assessing how well an organization's management team functions and how efficiently they use resources to achieve the company's objectives.

This audit provides valuable insights into the strengths and weaknesses of an organization's management practices, enabling leaders to make informed decisions and improvements. Assessing the quality of leadership within the organization, including the effectiveness of senior management and their ability to set and execute strategic goals.

The management accounting scope helps in evaluating the efficiency and effectiveness of operations and processes, looking for areas where cost savings or process improvements can be made. Moreover, examining how resources, including finances, personnel, and technology, are allocated and utilized to meet organizational goals also becomes more straightforward.

Ensuring that the organization adheres to legal and regulatory requirements and has effective risk management procedures in place. Evaluating communication and collaboration across all levels of the organization to identify areas that may require improvement.

A well-executed management audit can help an organization identify areas for improvement, enhance decision-making processes, and ultimately lead to increased efficiency, productivity, and overall success. It is an essential tool for organizations looking to adapt to changing market conditions and maintain a competitive edge in their respective industries.

Let us understand the objectives behind the curation of a management audit report through the explanation below.

#1 - Establishing Proper Strategies

The team must ensure the ability of the management whether it has proper strategies to obtain the required information for better decision making. Again the team also ensures that the collected data is sufficient to achieve the organization's objectives without hassles. Usually, the strategies are the key to achieving the goals of any establishment.

#2 - Implementation of Required Internal Control

The audit team should verify the effectiveness of the organization's Internal Control to overcome the management deficiencies. If the Implemented Internal Controls are not effective enough, it will lead to unnecessary problems in the process.

Example: In a reimbursement policy of a company, first, an accountant verifies the documents, and then the Senior Accountant will review the same documents. Finally, the cashier pays the cash, ensuring a triple check on the transaction. Here the internal control is so strong that it avoids any manipulation of cash.

#3 - On-time Report Generation

• The management Audit team should confirm whether the management placed proper control to generate and provide the reports on time.
• Report generation will be called an essential tool for the identification of errors. Sometimes it will also act as a whistleblower to control the greater mistakes during the process.
• Generally, the reports of the audit should improve the efficiency of the management for the betterment regularly.

Below is a step-by-step process for unlocking the ultimate potential of management audit scope. Let us understand each step in detail through the discussion below.

#1 - Appointment of Proper Personnel

In the audit process, a proper person should be appointed to execute the plan under a management audit. Proper in the sense that he must be professionally qualified, knowledgeable, and experienced to perform the audit plan without ambiguities.

#2 - Drafting Audit Programme

• Collection of required documents
• Assessment of policies and procedures
• Monitoring the Strategy
• Inspection of Books and other supporting documents
• Investigate with available Information
• Inquiries with staff/team
• Observing the internal control
• Test check of the transactions and their results
• Scientific method evaluation and review (If necessary)
• Preparing the reports with solutions

#3 - Training Programme

Proper training must be provided to the team before executing the audit.

Example: Management audits on Construction industries require specific evaluation skills and techniques, which must be provided before the execution.

#4 - Time Concern

Every plan of the audit program must be executed on a proper timeline to get the exact results of it.

Example: Observing the manufacturing process can identify normal and abnormal wastage, which should be executed during the process.

#5 - Frequencies of Audit

An audit should be conducted frequently to identify the mistakes occurring during the decision-making process.

Frequencies may be decided based on the nature of business and also to be considered with the duration of understanding of business and its transactions

#6 - Reports with Solutions

• Usually, the audit report consists of errors that interrupt the management from making the proper decision.
• The team should provide their findings and the required solutions to overcome the issues.
• Every report should provide a detailed analysis of its repercussions in the future.

Management audit reports come in various types, each focusing on different aspects of an organization's management processes. The main types include:

• Operational Audit: Assesses the efficiency and effectiveness of an organization's day-to-day operations. Identifies areas for process improvement and cost reduction.
• Financial Audit: Evaluates an organization's financial systems, including accounting, budgeting, and financial reporting. Ensures financial accuracy, compliance with regulations, and sound financial practices.
• Compliance Audit: Examines an organization's adherence to legal and regulatory requirements. Helps identify and rectify any non-compliance issues.
• Performance Audit: Measures the effectiveness of an organization's programs, projects, or activities in achieving their objectives. Focuses on outcomes and results.
• Information Systems Audit: Reviews an organization's IT systems, data security, and information management. Aims to ensure data integrity and safeguard against cyber threats.
• Strategic Audit: Evaluates the alignment of an organization's strategies with its long-term goals. Assesses the effectiveness of strategic planning and implementation.
• Human Resources Audit: Assesses HR policies, practices, and compliance with labor laws. Identifies areas for improving talent management and workforce productivity.
• Environmental Audit: Evaluates an organization's environmental impact and sustainability practices. Helps identify opportunities for reducing the environmental footprint.

Now that we understand the basics, process, and types of a management audit scope, let us apply the theoretical knowledge to practical application through the examples below.

Example #1

M/s ICI information technology services face a lot of trouble finishing their projects on time. They incurred huge losses due to the delay in the management decisions and related processes. They have appointed an auditor recently to do an audit on the management and their decision-making process.

Based on the audit, the following are the findings:

• No Proper internal control in the management to finalize the projects on time;
• No proper communication with clients to finalize the projects on time;
• No coordination between management and teams to complete projects.
• No proper report generation software for internal control;

The above findings are to be cleared out to get good feedback in the future.

Example #2

Nepal’s ministry of federal affairs and general administration directed their local bodies to get a management audit conducted at regular intervals based on the Management Audit Guidelines, 2022.

The circular, which was also circulated through the official websites of the government, cited the importance of these audits to ensure efficiency in management audit is conducted through inspection, supervision, monitoring, evaluation, inquiry and examination of services to be delivered by public entities. The impetus is placed on this function to ensure public entities are working as per the annual plan, program, and budget.

Management audit reports are a critical aspect of sound corporate governance. Below are some key points highlighting their importance.

• Management audits assess operations, identifying inefficiencies and suggesting improvements, ultimately leading to cost savings.
• They help in identifying and mitigating risks by assessing compliance with regulations and the effectiveness of risk management practices.
• Management audits evaluate whether an organization's strategies align with its objectives, ensuring that the company is on the right path.
• By providing valuable insights, management audits enable better-informed decision-making at all levels of an organization.
• Financial and compliance audits within management audits ensure that financial reporting is transparent and accurate.
• Management audits ensure that the organization complies with all relevant laws and regulations, reducing legal risks.
• They assess resource allocation, making sure that finances, personnel, and technology are used efficiently.

Let us understand the advantages of concentrating on the management audit scope through the points below.

• Proper Strategy Preparation and formation to achieve the objectives.
• Proper Placement of Internal Controls for effective decision making;
• Improvisation of the management decision-making process;
• To overcome the deficiencies of the management.
• Deployment of proper human resources.
• Rectification of Errors with the least cost or less damage;
• Avoid abnormal wastage of resources such as men, materials, money & machines.
• Timely results without delay.

Despite the various advantages discussed in the section above and throughout the article, there are a few factors of management audit reports that prove to be a disadvantage. Let us understand them through the discussion below.

• Lack of Investments and Technology - Generally, the suggestions may involve high investments in 4M resources such as Men, Machinery, Materials, or Money, which will be an issue for most organizations. Sometimes the classical process may require change with a technological update. Still, the organization's management or staff may have trouble undergoing the new or required updates.
• Lack of Management support for the change - The organization's management may have some trouble changing from their classical process to the latest one for many reasons.
• Staff Behavior is a problem sometimes in executing the audit plan because they may resist providing the basic information for the audit at the time of discussions, interviews, or inquiries. They used to feel that their mistakes would come out during the audit process if they provided all the necessary details for the audit.
• Tackling top management is also an issue in certain situations where senior management will be against the audit process.

This has been a guide to Management Audit and its definition. Here we explain its objectives, process, types, examples, importance, and advantages. You can learn more from the following article –

• Audit Risk Meaning
• Internal Audit
• Audit Committee
• Audit Objectives
• Expanded Accounting Equation