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Unit 12: Cost Audit

12.3.1 Concept of Management Audit Notes

Management audit is an emerging concept of auditing. It has been originated from America.
Management audit is an act of evaluation of all the activities of all the departments with a view
to provide appropriate suggestions to the management to help their work. In other words,
management auditing is a future oriented task which evaluates timely in all the levels of
management like production management, sales management etc. The main objective of
management audit is to improve the profit earning capacity, work of management, objectives of
program, social objectives and human resource development so that organizational goal can be
easily attained. It refers to the existence of control system, compliance of rules and regulations,
process of managerial decisions etc.
Three basic evaluation methods exist for any work activity: inspection, compliance auditing and
management auditing. The first method, inspection, measures a process’s output against certain
characteristics. These characteristics, generally identified as form, fit and function, are specified,
and the process output either possesses those characteristics or it doesn’t. As a result, an
inspection’s outcome is always binary: pass or fail.
In contrast, compliance audits check on the implementation of written manuals, procedures and
work instructions. The compliance audit evolved in the 20th century as business practices became
more complex. The first use of compliance auditing appeared in financial transactions, because
tax collectors and bank examiners needed assurance that the financial data were correct. This
concept of verifying compliance was picked up by the quality profession in the 1960s and
applied to the military and the nuclear power industry. Compliance audits are still used in
high-risk activities; where there is a desire to verify that the activities are being performed in
strict compliance to approved requirements. Third-party registration audits, regulatory
inspections and most supplier audits measure compliance. The application of a compliance
audit results in stability and assurance that rules are being followed.
The management audit is a more recent concept. It focuses on results, evaluating the effectiveness
and suitability of controls by challenging underlying rules, procedures and methods. Management
audits, which are generally performed internally, are compliance audits plus cause-and-effect
analysis. When performed correctly, they are potentially the most useful of the evaluation
methods, because they result in change.
Management Audit is the systematic recognition, analysis and assessment of competencies and
the actual behavior of both individual executives as well as complete executive teams particularly
with regard to the business’ strategic requirements. The basis of Management Audit is structured
interviews and reference checks conducted by external experts to be documented in expert
opinions.
Management Audits focus on personal attributes and business skills. Personal attributes can be
sub-divided into:
1. Ethical values and attitudes
2. Intellectual Capability

3. Charisma
Business skills can be sub-divided into:
1. Professional and methodical competencies
2. Leadership behavior

3. Entrepreneurship

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