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Unit 12: Cost Audit

team then prepares a schedule and detailed plan of study, all aimed at proceeding to the internal Notes
fact finding step. Fact-finding relies once again on interviews, documentation, and personal
observation of facilities and organizational work patterns. By the time these steps are completed,
the study team develops a thorough understanding of organizational structure and operations.
The team generally turns next to an external review, using interviews to determine the opinions
and attitudes key people outside the organization have about its operations. Examples of those
interviewed are customers, representatives of financial institutions, and employees of federal
agencies having contact with the audited organization. These interviews provide the team with
more objective evaluations, and lead to an analysis of all the information and data now gathered.
Organizational performance is profiled, then efficiency and effectiveness are evaluated and
compared against industry norms. While many criteria can be measured quantitatively, team
members have to use sound judgment and objectivity when evaluating issues that cannot be
measured. In turn, the organization’s management has to be receptive to the audit process and
demonstrate clear acceptance of audit findings.
The study team then develops conclusions and recommendations which are communicated to
the organization’s management. These final two stages—conclusions/recommendations and
communication—are essential to the management audit process. The audit is expected to identify
corporate strengths and weaknesses, sources of problems, and potential problem areas.
Recommendations for correction are presented to top management. The final report comes in
the form of an overall plan of action, which includes prioritized recommendations, the specific
units and individuals expected to carry out the recommendations, a schedule for action, and
expected results. When conducted with thoroughness, objectivity, and timeliness, the management
audit becomes a powerful tool for corporate and organizational executives who seek to improve
effectiveness and efficiency.

An important aspect of the management audit is the composition of the study team. Both internal
and external analysts are frequently used on audit teams; the composition depends on several
factors, including the need for independent appraisal, the lack of human or financial resources to
conduct the audit, and the need to provide an external audit to contrast against internal findings.
In some instances, associations such as the American Institute of Management (AIM) provide
audit teams. The AIM has developed ten categories of the management audit, and many audits
apply these same categories. They include:
1. Economic function
2. Corporate structure
3. Health of earnings

4. Service to stockholders
5. Research and development
6. Directorate analysis

7. Fiscal policies
8. Production efficiency
9. Sales vigor
10. Executive evaluation
Management audits are not limited to business corporations. Non-profit organizations—including
educational institutions, hospitals, and churches—often use the management audit to attempt to
improve operations. When conducted effectively, and when recommendations are applied
properly, the management audit has proved its usefulness as a management technique

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