Management Audit: Scope, Advantages and Disadvantages

“Management is doing things right; Leadership is doing the right things.”

- Peter Drucker

 

With the world progressing in leaps and bounds, business management has become increasingly complex. Many businesses use specialized techniques to bring in more profit, in such cases experts in management are required. 

 

Thus management consultancy is required and management auditors are assigned to improve business operations. In this blog, you will learn more about Management Audit.

 

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What is Management Audit?

 

Audit is the inspection of reports and books by an auditor and then physical checking of inventory to ensure that all the inventory is well documented by a particular organization. This proves the accuracy of the financial records provided by the organization.

 

Audit can be conducted internally by a person of the organization or externally by an independent auditor. Management Audit is a form of Audit which is done internally.

 

Management Audit is a process of evaluation of work done at all levels of Management. This ensures that the efficiency and productiveness of the management team is maintained.

 

Evaluation is done from the highest level to the bottom to make sure that the work is going smoothly at all levels. It reviews all aspects of management from planning, organization, implementation and control. This also shows whether the managerial team is efficient in handling their employees or not and shows weaknesses of the company, if any.

 

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Management Audit vs Financial Audit

 

People often get confused between Management Audit and Financial Audit. The key differences between Management Audit and Financial Audit are given below.

 

Management Audit

 

Management Audit reviews the operating procedures of the organization and determines the efficiency of those procedures. This shows the strengths and weaknesses of management. It is qualitative in nature. 

 

It is useful for management. It can be conducted at any time. It is not compulsory. It is conducted by a team of employees.

 

Financial Audit

 

Financial Audit focuses on the evaluation of financial affairs of the organization through the financial records. This shows the mathematical accuracy of financial records. 

 

It is quantitative in nature. It is useful for shareholders. It is generally conducted at the end of the accounting period. It is compulsory. It is conducted by professional Chartered Accountants.

 

 

Overview of Management Audit

 

Scope of Management Audit

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Scope of Management Audit

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Management Audit has a wider scope than Financial Audit. It covers financial as well as other aspects of the organization. The scope of Management Audit covers the key responsibilities of the audit team. The main scopes of Management Audit are given below.

 

1. Evaluation of efficiency of Management

 

Management Audit does analysis of the management at all levels of the organization to determine the efficiency.

 

2. Policy Implementation of Management

 

Management Audit reviews the policies and procedures implemented by the management and ascertains whether the policies were successfully implemented or not.

 

3. Detection of variance

 

Management Audit detects the deviation or variance of efficiency from the standards set up by Management.

 

4. Analysis of variance

 

Management Audit analyzes the reason for variance, which caused the organization to deviate from the standards set up by them.

 

5. Suggestions for Improvement

 

After detection and analysis of variance, Management Audit offers suggestions for areas of improvement in order to increase the efficiency and bring it at par with the standards.

 

 

Objectives of Management Audit

 

The objectives of Management Audit are given below.

 

1. Efficiency verification

 

Management Audit aims to improve the efficiency and verify the implementation of policies.

 

2. Suggestions for increase in efficiency

 

Management Audit provides suggestions in different areas of management to overcome inefficiency.

 

3. Assess effectiveness of policies

 

Management Audit aims to assess whether the policies and plans adopted to improve efficiency are effective or not.

 

4. Helps to increase Profitability

 

Management Audit aims to increase the organization's profit by utilizing the resources allocated to different levels of the organization in an effective and efficient manner.

 

5. Helps to coordinate activities

 

Management Audit reviews the relationship between different activities and provides suggestions to improve efficiency by allocating tasks which match the skill set of the employees.

 

6. Gives fruitful advice

 

After assessment of all the policies and relationships between the employees, the audit teams advise the management on how to proceed in case of increasing inefficiencies and help to build a plan for future course of action.

 

7. Analysis on all aspects of management

 

Analysis is done on all aspects of the organization in Management Audit. Production management, finance and accounts management, personnel management, sales purchase and distribution management, advertisement and promotion, every aspect is covered.

 

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Qualities of a good Management Auditor

 

A management auditor should possess the qualities given below.

 

1. Proper experience and knowledge of Managerial functions.

 

2. Proper knowledge of techniques for analysis of financial statements.

 

3. Proper knowledge of social accounting and human resource accounting.

 

4. Proper knowledge about business laws and economics.

 

5. Proper understanding of the organization and knack for solving problems.

 

6. Proper knowledge about the objectives of the organization.

 

7. Proper knowledge about rules, procedures, planning and budgeting in management.

 

8. Knowledge about the production process in the organization.

 

9. Knowledge to acknowledge and determine the lack of relationships, if any, between different departments in the organization.

 

10. Ability to give just and accurate solutions for all the problems encountered.

 

Management Audit Process

 

The process of Management Audit should be followed in a systematic manner to ensure maximum profit. Evaluation is done by applying both quantitative and non quantitative approaches. 

 

Quantitative methods include EBIT margins, operating cash flows, EPS, organic sales and segment margins. Non quantitative methods include efforts for matters like acquisition integration, etc. Areas like planning, organization, coordination and control are covered. The overall process may be carried out as given below.

 

1. Study of the organizational structure.

 

2. Discussion with management about the objectives of the organization.

 

3. Study whether principles and procedures have been implemented or not to meet desired objectives.

 

4. Study of the areas of improvement in policy making and implementation.

 

5. Providing guidance and recommendations for improvement.

 

6. Study of the control system of the organization.

 

7. Study of each department in the organization and their plans for talent management of employees, like training and motivational schemes.

 

8. Study whether physical resources allocated to the organization are properly utilized or not.

 

9. Study of the manufacturing process and whether maximum production is obtained or not. 

 

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Management Audit Report

 

The management audit would be considered useless without a proper report to shine light on all the happenings in the company. A proper report should have a correct assessment of the company and recommendations for improvement. 

 

One should provide justified criticisms in the report and not merely condemn people. A good report should cover the areas mentioned below.

 

1. Relationship between employees and management.

 

2. Areas of weakness in the company and suggestions for Improvement.

 

3. Operating efficiency of the company.

 

4. Methods  and procedures of production.

 

5. Analysis about the rate of return of investment.

 

6. Analysis of return to shareholders.

 

Training, timely execution and frequency of audits

 

1. Proper training must be given to the audit team before management audit so that they are able to carry out their duties fruitfully.

 

2. Management Audit should be carried out in a timely manner to obtain maximum benefit.

 

3. Management Audit should be conducted frequently by the organization so they can know if they have ever gone astray.

 

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Advantages and Disadvantages of Management Audit

 

Conducting a Management Audit in an organization has many benefits. The importance of Management Audit and the advantages it provides to an organization is given below.

 

1. Systematic evaluation of efficiency

 

Efficiency of the organization can be evaluated systematically and independently and achievements can be compared to the standards set up by the company.

 

2. Scrutiny of policies and procedures

 

Policies and procedures undertaken by management are scrutinized in order to ascertain whether organization goals have been reached.

 

3. Correction of policies and procedures

 

Ineffective policies and procedures are corrected and revised to better suit the organization's needs.

 

4. Rectification of decision making

 

Ineffective decisions made by management are rectified and help is provided to management to make better decisions in the future.

 

5. Helps to get loan

 

In order to get a loan from financial institutions, an organization needs to showcase its efficiency and profitability, which can be done by a Management Audit.

 

6. Helps to get subsidy

 

In order to get a subsidy from the government, an organization needs to showcase its efficiency and functionality, which can be done by a Management Audit.

 

7. Helps to increase profitability

 

A Management Audit helps an organization in the long run by increasing its profitability. This can be done by proper resource allocation and funds.

 

8. Helpful in securing foreign investors

 

Foreign investors are more prone to investing in those companies which provide management audit reports since they are able to know the profitability of the organization.

 

9. Results-oriented

 

Management Audits are result oriented and they prioritize the end performance and results over procedures followed.

 

In spite of its many advantages, Management Audit has some limitations too.

 

Some limitations of Management Audit are given below.

 

1. Since the auditing teams consist of members by the management, of the management and for the management, they might not be able to grasp the situation correctly and make adequate decisions for the profit of the organization.

 

2. Since the auditors comprise the management itself, they might not be able to stay professional and may bring their personal feelings into account. The auditors may favor the people with whom they have a good relationship and might disfavor those with whom they do  not have a good relationship.

 

3. The audit team might not make deep investigations to find out discrepancies and may take information they have been given at face value.

 

4. Time and cost are two factors which might hamper an audit. A company might not have proper resources to conduct a good audit.

 

5. The audit team might have conflicts among themselves since it is a part of human nature. This will hamper the course of the audit moving forward.

 

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Management Audit should be carried out to yield better profit for the organization. The suggestions and recommendations given by the audit team should be carried out by the organization to achieve success. The audit should be carried out in a wise and friendly manner and not focus on harassing employees and management for shortcomings.