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OTHER CONSULTANCY

SERVICES

OPERATIONAL AUDITING

OPERATIONAL AUDITS
Management/Performance Audit
Conducted to evaluate the degree
of effectiveness, efficiency and
economy of operations
Making recommendations on
economic and efficient use of
resources, effective achievement
of business objectives and
compliance with company policies.

EFFECTIVENESS
Entity or its units success in
achieving its goals and objectives
Before an operational audit for
effectiveness can be performed,
there must be specific area for what
is meant to by effectiveness.

EFFICIENCY
Refers to how well an entity uses its
resources to achieve its goals.
Described as reducing cost without
reducing effectiveness
ECONOMY- refers to entitys success in
maximizing the use of its limited
resources to achieve its goals and
objectives.

Objective of operational audit: give


assurance to the management that every
component of an organization is working to
attain the organizations goals.
Scope of operational audit:
a. Economy and efficiency audit- determine
whether an entity is acquiring, protecting,
and using its resources economically and
efficiently; determine the causes of
inefficiencies and uneconomical practices;
and whether the entity has complied with
laws and regulations concerning matters of
economy and efficiency.

b. Program audits- to determine the


extent to which the desired results or
benefits established by the
legislature or other authorizing body
are being achieved; the effectiveness
of organizations, programs, activities,
or functions; and whether the agency
has complied with laws and
regulations applicable to the
program.

c. Compliance audit: testing and


reporting whether an organization
has complied with the requirements
of various laws, regulations and
agreements.

Distinction Between Operational


Auditing (OA) and financial
Auditing (FA)
Purpose of the audit
a. FA emphasizes whether historical
information was correctly recorded;
OA emphasizes effectiveness,
efficiency, and economy.
b. FA is past oriented ; OA is
concerned with operating
performance for the future

Distinction Between Operational


Auditing (OA) and financial
Auditing (FA)
Nature and Distribution of Report
a. FA report goes to users of financial
statements; OA report are intended
primarily for management.
b. FA report disclosures are well-defined
due to widespread distribution of report;
OA reports vary considerably from audit
to audit of the diverse nature of audit
for efficiency and effectiveness.

Distinction Between Operational


Auditing (OA) and financial
Auditing (FA)
Distinction of Non-financial Areas
FAs are limited to matters that
directly affect the fairness of
financial statement presentation;
OAs cover any aspect of efficiency
and effectiveness in an organization
and can therefore involve a wide
variety of activities.

TYPES OF OPERATIONAL AUDITSa. Functional- deals with one or more functions


of an organization. Functional audit has the
advantage of permitting specialization by
auditors. The disadvantage is the failure to
evaluate interrelated functions.
b. Organizational- deals with an entire
organizational unit, such as a branch,
department or subsidiary.. It emphasize on
how efficiently and effectively functions
interact. The plan of the organization and
the methods to coordinate activities are
important for this kind of audit.

TYPES OF OPERATIONAL AUDITSc. Special assignments-arise at the


request of management. This
includes determining the cause of
ineffective EDP system,
investigating the possibility of fraud
in a division, and making
recommendations for reducing the
cost of manufactured product.

Activities of Internal Auditors in an Operation Audit

Review on the reliability and integrity of


financial and operating information and
the means used to identify, measure,
classify, and report such information.
Review the internal control structure
established to ensure compliance with
those policies, plans, procedures, laws and
regulations which could have significant
impact on operations and reports should
determine whether the organization is in
compliance.

Activities of Internal Auditors in an Operation Audit

Review the means of safeguarding assets and,


as appropriate, verify the existence of such
assets.
Appraise the economy and efficiency with
which resources are employed
Review operations or programs to ascertain
whether results are consistent with established
objectives and goals and whether the
operations or programs are being carried out
as planned.

Who Performs Operational Audit?


The internal auditors do perform internal auditing
and operational auditing interchangeably. An
advantage that internal auditors have in doing
operational audit is that they spend all their
time working for the company they are auditing
and considerably develop knowledge about the
company and its business.
To maximize effectiveness, internal audit
department should report to the board of
directors or president and acquires access to
and ongoing communication with audit
committee of BOD. This helps internal auditor
remain independent.

GOVERNMENT AUDITORS- concerned with


both financial and operational audit,
referred as performance audit which
includes economy and efficiency audit and
program audit.
CPA FIRMS- the background knowledge about
a clients business that an external auditor
must obtain in doing an audit provides
useful information for giving operational
recommendations. The management
consulting staff of CPA firms usually
performs operational audit for one or more
specific business parts of the client.

IMPORTANT QUALIFICATIONS OF OPERATIONAL AUDITORS

Independence
Auditor should not be responsible for performing
operating functions in a company or for correcting
deficiencies when ineffective or inefficient operations
are found.
It is acceptable for auditors to recommend changes in
operation, but operating personnel must have the
authority to accept or reject the recommendations.
If auditors had the authority to require
implementations of their recommendations, the
auditor would actually have the responsibility for
auditing his or her own work the next time an audit will
be conducted. Independence would therefor be
reduced.

IMPORTANT QUALIFICATIONS OF OPERATIONAL AUDITORS

Competence
Necessary to determine the cause of
operational problem and make
appropriate recommendations.

CRITERIA FOR EVALUATING EFFECTIVENESS


AND EFFICIENCY

Sources that operational auditor can


utilize in developing specific
evaluation criteria:
Historical performance- simple set of
criteria is based on actual results from
prior periods (or audits) to determine
whether things have become better or
worse in comparison. It is easy to
derive, however, they may not provide
much insight into how well or poorly the
audited entity is really doing.

CRITERIA FOR EVALUATING EFFECTIVENESS


AND EFFICIENCY
Sources that operational auditor can utilize in
developing specific evaluation criteria:
Comparable performance-performance data of
comparable entities are the source of developing
criteria
Engineered standards- criteria is developed based on
engineered standards. These criteria are often time
consuming, costly to develop and requires expertise,
however, may be very effective in solving major
operational problems and well worth the cost
Discussion and agreements- parties involved in these
process includes the management of the entity to be
audited, the operational auditor, and the entity or
persons to whom the findings will be reported.

GENERAL APPROACH TO OPERATIONAL AUDIT

THE OPERATIONAL AUDIT PROCESS


1. PLANNING
Definition
of Purpose

Familiariza
tion

Preliminary
Survey

Program
Developme
nt

2. EVIDENCE ACCUMULATION & EVALUATION


FIELDWOR
K

3. REPORTING AND FOLLOW-UP


Follow-up

Reporting
the
Findings

1. Planning Phase
1.a. Definition of Audit Purpose- the
purpose is to appraise the
performance of a particular
organization, function, or group of
activities. The scope of audit and
nature of report must also be
specifically stated. The auditors
must determine specifically which
policies and procedures to be
appraised nd how they relate to the
specific objectives of the
organization.

1. Planning Phase
1.b. Familiarization- acquisition of comprehensive
knowledge of the objectives, organizational
structures and operating characteristics of the
unit being audited. This begins with study of org
charts, statement of functions and
responsibilities assigned, mgt policies and
directives and operating policies and procedures.
This background information equips the auditor
to visit the organizations facilities and interview
supervisory personnel to determine their specific
objectives, the standards used to measure
accomplishments of these objectives, and the
principal problems encountered in avhieving
these objectives.

1. Planning Phase
1.c. Preliminary the auditors preliminary
conclusions about the critical aspects of the
operations and potential problem areas are
summarized as the auditors preliminary survey
which serves as guide for the development of the
audit program.
1.d. Development of the Audit Program- it is tailormade for a particular engagements. It contains all
the test and analyses the auditors believe are
necessary to evaluate the organizations
operations. based on nature and difficulty of the
audit work, appropriate personnel will be assigned
to the engagement, and the work will be
scheduled

2. Evidence Accumulation and Evaluation


The auditor must gather evidence to provide a
basis for believing that managements
assertions are valid. If management has not
stated any assertions, the auditor must assist in
developing them.
The auditor should document in her or his
working paper the audit plan, procedures and
evidence obtained. Auditors should supervise
staff to ensure that they exercise due care in
the performance of the audit and must obtain
sufficient support for the findings and
recommendations to allow a determination
whether any assertion is fairly valid.

3. REPORTING AND FOLLOW-UP


Differences between operational
auditing (OA) and financial auditing
(FA):
1. OA findings and recommendations
vary significantly from one
engagement to another. It includes
conference between auditor and
management so that the operational
audit report can be reviewed before
it is issued
FA reports are highly standardized

3. REPORTING AND FOLLOW-UP


Differences between operational
auditing (OA) and financial auditing
(FA):
2. OA reports contain no overall
opinion on the result of
engagement, instead, identifies
specific findings.
FA audit reports expresses opinion
on the statement taken as a whole.

3. REPORTING AND FOLLOW-UP


Differences between operational
auditing (OA) and financial auditing
(FA):
3. OA reports are sent only to
management and to organizational
unit being audited
FA reports are released to other
parties such as prospective
investors outside the entity.
OA reports are dated as of the
completion of field work, and they

3. REPORTING AND FOLLOW-UP


The final stage of operational audit, the
follow-up action ensures that any
deficiencies disclosed in the audit report
are satisfactorily handled. This follow-up
responsibility may be given to a line
organization or staff group , but most
frequently is held to be responsibility of the
audit staff. In some instances, the auditors
find it desirable to make a brief
reexamination after reasonable lapse of
time to ensure that all significant
recommendations have been implemented.

BUSINESS PROCESS IMPROVEMENT


AND RE-ENGINEERING

BUSINESS RE-ENGINEERING/ PROCESS


RENOVATION
Refers to performance of a process in a
radically new way with the objective of
achieving dramatic improvement in
response time, quality and efficiency.
A management tool that can help
organization to achieve and maintain a
competitive position in the global
economy. It has the potential to
significantly improve the operations and
effectiveness of the organization

BUSINESS RE-ENGINEERING/ PROCESS


RENOVATION
Involves developing new ways to perform existing
activities and ways to stop non-value-adding
activities.
An activity analysis which is the process of
identifying, describing and evaluating the
activities an organization performs
In activity analysis, emphasis is placed on
identifying non-value added activities and
eliminating them.
Value-added activities are further scrutinized and
studied to discover possible improvements in
performing them at the minimum costs.

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