Page 252 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes As psychological tests cannot adequately cope with above mentioned criteria (issues) the
Management Audit should be conducted by experienced and well-trained interviewers. It is the
objective of the process not to assess the individual manager in isolation but in context to their
competitors and comparable roles outside the company. This benchmark information is most
valuable and delivers conclusions as to the effectiveness of the management team.

Simply defined, the management audit is a comprehensive and thorough examination of an
organization or one of its components. The audit is implemented to identify problems or
significant weaknesses in the organization or corporation, thus providing management with a
tool to address and repair the problem area.

Did u know? The audit is not a new or recent idea. History tells us of the presence of
auditors in Pharaoh’s Egypt and the classical periods of Greek and Roman history. As
businesses developed and grew over the centuries of recorded history, the need for controls
became increasingly important. Financial auditing became a standard in American
businesses and, following the lead of New York State, certification for accountants was
enacted as legislation in many states. The financial audit is now fully integrated into
business practices.

The internal audit follows the spirit of financial auditing and surpasses it to examine operational
matters as well. Another natural extension is operational auditing. While internal auditing is
conducted by employees within the organization, an operational audit is generally completed
by an internal task force or external analysts.

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Caution As psychological tests cannot adequately cope with above mentioned criteria
(issues) the Management Audit should be conducted by experienced and well-trained
interviewers.

The management audit is now widely accepted in the business field. For more than 40 years,
corporations and nonprofit organizations have utilized the management audit as a
comprehensive tool. In 1932 T. G. Rose, a lecturer in management at Cambridge University and
former manager for Leyland Motors, embraced the concept of an annual organizational and
management audit; Queens University School of Business professor William P. Leonard followed
suit, urging a comprehensive examination of the business entity. Additional credibility stemmed
from the General Accounting Office of the federal government, an office charged with independent
audits of government agencies.

The management audit is defined by its scope and objectives. The scope is broad and generally
includes all functions of the organization, including objectives and strategy, corporate structure,
organizational planning, the budgeting process, human and financial resources management,
decision making, research and development, marketing, equipment and operations, and
management information systems. This breadth extends to recent, present, and future operations
and covers external issues as well as internal concerns. Objectives of the management audit
include the development of recommendations and improvements, as well as increased awareness
of the credibility and acceptance of the audit’s results. The process is more an audit of management,
in order to enhance corporate profits and financial stability.
The audit follows a logical, step-by-step format, including initial interviews with key managers.
A study team uses the interview process to define the scope of the audit, including the areas or
functions to be studied. Next, the team requests various forms of documentation, including
budgets, planning documents, corporate reports, financial statements, policy and procedure
manuals, biographical material, and various other documents. Following this stage, the study

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