BCom 3rd Year Management Audit Notes Study Material

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BCom 3rd Year Management Audit Notes Study Material

So far we have confined ourselves mainly to the rights and duties of the auditor arising either out of the written agreements between him and his clients or under statutes and case laws. But the latest developments which are visible in the field of auditing have forced the auditor to adopt the techniques and procedures so as to enable him to prove deeply and intelligently into the internal organization of a business concern than heretofore. (BCom 3rd Year Management Audit Notes Study Material)

He is no more confined to examining whether the balance sheet and the profit and loss account have been properly drawn up as per the provisions of the Companies Act and that they exhibit a true and fair view of the state of affairs of the company. He can do much beyond his duty of conventional routine nature. (BCom 3rd Year Management Audit Notes Study Material)

Limitations of Financial Audit. A financial statutory auditor is not expected to go into question whether the policies which have been laid down by the management are being carried out in their proper perspective and in the right direction. He has not advised and suggested to the management the ways and means through which the profits of the concern can be maximized and wastes avoided.

Thus, he is not required to point out the changes and improvements in the system of running the business which may produce better results in the future. He has no legal right to do all this. (BCom 3rd Year Management Audit Notes Study Material)

There are limitations of internal audits. It is very often argued that the internal auditor is bestowed with the task stated above. But in practice, he is confined only to the financial aspect for the prevention and detection of errors and fraud, or misappropriations and manipulations. Undoubtedly, all the activities, and operations major or minor in nature, of the business have financial implications. For this, financial auditing cannot serve the purpose. It cannot cover the management auditing which can prevent financial loss before it occurs, the financial audit can only establish the fact that a loss has been made.

Management consultancy firms. Today, the business has become so large and complicated that most of the unhealthy situations are attributable to the basic defects of the organizational structure and ineffective and inefficient type of the organization. The firms of professional accountants are being called upon to render management consultancy services. The object of management consultancy services is to improve the operations of an organization. The presence of management service amounts to a practical guarantee that the work will be satisfactory. Management consultancy firm offers recommendations and its job is over.

Thus, management audit is a new concept and goes beyond the conventional audit. It is actually a comprehensive and critical review of all aspects of management. It is concerned with the appraisal of the efficiency of management. It can be said to be an expansion of internal audit and the idea has developed recently. (BCom 3rd Year Management Audit Notes Study Material)

Definition of Management Audit

1. T. G. Tokhe: “The Management Audit has been defined as a comprehensive critical review of all aspects of the process of management.”
2. William P. Leonard: “A comprehensive and constructive examination of an organizational structure of a company, institution or branch of Government, or of any component thereof, such as a division or department, and its plans and objectives, its means of operations and its use of human and physical facilities.

These definitions point out that the management audit deals with the management process as a whole. It facilitates the most effective relationship with the outside world and the internal efficiency of the business.

A long, but comprehensive definition has been given by L. R. Howard as given below:

3. Leslie R. Howard: “Management audit is an investigation of a business from the highest level downwards in order 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. (BCom 3rd Year Management Audit Notes Study Material)
4. Taylor and Perry: “Management auditing is a method to evaluate the efficiency of management at all levels throughout the organization, or more specifically, it comprises the investigation of a business by an independent body from the highest executive level downwards, in order to ascertain whether sound management prevails throughout and to report as to its efficiency or otherwise with recommendations to ensure its effectiveness where such is not the case.”

From the above definitions, it would be evident that the management audit is an examination, scrutiny, and appraisal of the plans, policies, objectives, means of operation, and the use of physical facilities. It reviews the policies and actions of the management in turn. It will normally be so revealing as to encourage the action of a perspective nature that will put into effect the objects for which it was originally demanded. (BCom 3rd Year Management Audit Notes Study Material)

Objectives of Management Audit

(1) To 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.

(2) To ensure the most efficient administration of the operations essential for the smooth running of a business.

(3) To obtain the efficiency and effectiveness of the management.

(4) To suggest ways and means for the achievement of objectives and targets set forth by the management.

(5) To assist at all levels of management in the effective discharge of their duties and responsibilities.

(6) To facilitate the most effective relationship with the outside world and the most efficient organization and smooth running internally.

(7) To evaluate performance by relating inputs (human and physical both) with outputs.

(8) To assist the management to establish a good relationship with the staff to enable it to elaborate the duties, rights, and liabilities of the entire personnel.

The distinction between the Statutory Audit and Management Audit

As has been emphasized earlier, the management audit is concerned with the appraisal of the operations of a business while the statutory audit is to examine accounts in a way as has been laid down by the statute.

Management Audit and Cost Audit

The cost audit is a regular feature in the lives of the financial audit. Both the financial audit and cost audit (in many cases) are governed by State regulation in some way or the other. The cost audit is concerned with the cost aspects of the working of a business. With the analysis of cost records, a guideline is sought out to go ahead and affect the economy and avoid wastages, if possible. Management auditing is concerned mainly with the evaluation of the objectives and policies in relation to the activities of the management.

Management Auditor

Appointment. It is to be noted that the management audit is not prescribed by and hence, a company is free to take its own decision in regard to the appointment and selection of a Management Auditor. The Board of Directors or the shareholders of command can appoint a firm of practicing Chartered Accountants or Management Consultants under- take the management audit. Such a decision will, of course, depend upon the circumstances of a particular case. (BCom 3rd Year Management Audit Notes Study Material)

It is argued that the internal auditor is fit enough to conduct a management audit and he is familiar enough with the procedures and performances of the management. Further, It is also suggested that the work of management audit should be entrusted to the O & M (Organization and Methods Study) personnel who have an analytical bent of mind in regard to the organizational structure and the methods of operations. Much will depend upon the circumstances of each particular case but a note should be made of the technical efficiency needed for conducting the management audit. (BCom 3rd Year Management Audit Notes Study Material)

Qualities of Management Auditor

No specific qualities can be narrated for a management auditor but as his task is related to the investigation and appraisal of the objectives of a business in relation to the activities of the management, he must be capable enough to put all his professional skills in the task of evaluating and advising the board members on the various aspects of organizational operations.

Some of the qualities of a Management Auditor can be given as under:

1. He should have the ability to understand the purposes and problems of the organization.
2. He should have a good understanding of the nature and objects of the organization and also of its area of operation.
3. He should be competent enough to assess the progress of the organization.
4. He should be well familiar with the principles of delegation of authority, management by objectives, management by exception, framing management planning and control, and preparation of different types of statements, financial and others, and also of the budgets of different types.
5. He should have a thorough knowledge of different internal control devices and modern techniques of job analysis.
6. He should know the techniques and devices for making effective and efficient use of modern office equipment including flow charts, work schedules, use of computers, etc. (BCom 3rd Year Management Audit Notes Study Material)
7. He should see that the plans as prepared by the management are suitable and practicable to achieve the objectives set forth by the management.
8. He should be conversant with the nature of production activities in the organization.
9. He should have the ability to assess the adequacy and efficacy of controls in use in the organization.
10. He should be well familiar with the personnel procedures and the personnel development programs so as to ensure whether or not proper allocation of duties has been made to the staff according to their qualifications, experience, and aptitudes.
11. He should be humble, pleasing, and cooperative in nature.
12. He should be conversant with different types of laws relevant to the functioning of a business concern.
13. He should be an expert in drafting various reports to be presented to the management.

Functions of Management Auditor

The functions or duties of a Management Auditor can be explained in brief as given below:

1. The management auditor helps the management in the preparation and execution of plans and policies. His job is not that of fault-finding but he should point out the weaknesses and defects with the sole objective of making the management more dynamic in the future.
2. He assists the management in taking the best decisions which are very vital for the smooth running of a business. Wrong and faulty decisions can lead to a great loss to the business and sometimes jeopardize the basis on which the business functions.
3. He helps the top management in designing the authority and delegating the responsibilities to every core of the managerial cadre in the organization. The defects in the channels of communication can be removed and friction avoided if the responsibility area is well defined. Management auditing can ensure it. (BCom 3rd Year Management Audit Notes Study Material)
4. The management auditor can assist in strengthening the business communication system within and outside the business. He can recommend and advise the most suitable system of flow of information internally and externally.
5. He can recommend to the management the best measures and devices for evaluating the performance of the business. As a result, its operations can be improved and the profits maximized. (BCom 3rd Year Management Audit Notes Study Material)
6. He can help the management in the preparation of tax plans and budgetary policies. He appraises the rightness of different information and data and thus, helps the management in the preparing sales budget, purchase budget, cash, and capital budget, etc.

Operational Aspects of Management Audit

1. Objects and Aims of the Organization. The management auditor should study the aims and objectives of the business. Business organizations are formed with the object of fulfilling certain needs besides having the aim of earning profits. The original aims may be varied and expanded. Even a good business can fail to meet its objectives owing to changes in policies without adequate long-range planning and organization. (BCom 3rd Year Management Audit Notes Study Material)
2. Financial Plans and Policies. It is to be ensured by the management auditor whether the decisions in regard to financial plans and policies have been implemented at opportune times, leading to advantageous results or these have only been made after a period of stagnation or depression.
3. Production. Beyond the area of financial accounting, the management auditor should have a thorough knowledge of production techniques and various plans and systems like costing systems. He should see that production policies have been implemented in practice and are in the right perspective. The aim should be their effective and efficient implementation.
4. Sales and Distribution. The auditor is concerned with the basic requirements of the sales section. In a business, information must be obtained as to sales of the market as a whole and the effect of changes in price, and style of manufacture over a period of time. The market research system is relevant for this task.
5. Organizational Control. The management auditor has to ensure that the overall planning and organization are most suitable for the business concerned. He should be capable enough to take an independent view so as to enable him to recommend the overall adjustment to more economic and effective methods of operation for the whole of the business.
6. Operations. He should ascertain whether there are defects or loopholes in the working of the organization in regard to the manufacturing process and how the system can be improved to ensure maximum production. He can suggest ways and means overcome the difficulties and drawbacks.
7. Layout and Physical Equipment. The present position of layout and physical equipments can be examined by the management auditor and in order to make it more effective, recommendations for better and greater use can be made by him.
8. Personnel Development. The management auditor can suggest ways and means for the effective utilization of manpower in order to increase productivity. He is to give suggestions for an improved relationship between management and labour.
9. Regulations. It is to be ascertained by him that the rules and regulations of the relevant statute under which a business has been set up are being followed in toto. The lacuna, if any, can be brought to the notice of the management.

Main Steps in Management Audit

The process of Management Audit can involve the following main steps:

1. To identify the objectives of the organization. To start with, it would be a very important step to perceive clearly and identify exactly the objectives of the organization. (BCom 3rd Year Management Audit Notes Study Material)
2. To break down the objectives into detailed targets and plans for various activities of the organization.
3. To assess the adaptability of the organizational structure to achieve effectively the targets. After all, it is the organizational structure that has to attain the goals and implement plans of an enterprise. (BCom 3rd Year Management Audit Notes Study Material)
4. To evaluate the performance of the functional areas. Above all, each functional area is expected to contribute its maximum for the attainment of targets. (BCom 3rd Year Management Audit Notes Study Material)
5. To suggest a more concrete and realistic course of action. This is the main purpose of a management audit to ensure that the management operates effectively and efficiently by suitably adjusting its operations with the pre-determined objectives.

Management Audit Report

The report of the management auditor should be correct, concise, clear-cut, and comprehensive. The report should be courteously worded and the criticism made therein about the functioning of the management should be constructive and healthy, i.e., without bias on his part.

The auditor while suggesting a reorganization of the business, must be sufficiently confident of his own ability to have assessed the situation so that he can make adequate proposals that will lead to improvement and increased profitability.

BCom 3rd Year Management Audit Notes Study Material

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