GROUP 3:

OPERATIONAL AUDIT
Reyes
Piluden
Mi-ing
Delfin
Dangkiw
 History
o Onset of Corporate Espionage and
Corruption During the Second World
War
o Increase in number of firms in the US
o Changes in the management and
internal auditing profession due to the
development of business structures
 Definition
 Operational Auditing is a systematic and
individual review of effectiveness,
efficiency and economy of operation.
 It is an appraisal activity within an
organization for the review of the entire
department operations at the request of the
management; thus focuses more on
operational areas (e.g. marketing,
production, finance, etc).
 Scope
 Effectiveness and Efficiency of Operations
 Effectiveness means reaching a goal
 Efficiency means the efficient utilization of
resources to reach this goal.
o Being Economical is used for being thrifty or
avoiding unnecessary expenditures.
 Importance; lack of efficiency and effectiveness
typically translates to fewer sales or increased
operational costs, which sometimes mean the
inability of the business to compete and stay in
business.
 Scope
 Samples of Leading Types of Inefficiencies
– Purchase of products and service at a very
high cost
– Unavailability of required raw material
– Unnecessary repetitions by employers
– Commiting pointless acts
– Hidden unemployment;
overemployment.
 Distinction
Distinction from Financial Audit
 Process is a much more in-depth review of
the business.
 It does not focus on a single department or
project, because each department plays a
role in the overall operational process and
is interconnected.
 Inclusion of Nonfinancial Reports
 Primary Objective
 Assess the quality of operations and
whether it is in line with the company’s
prescribed polices/plans which can help
assist all levels of management in the
effective discharge of their responsibilities.
 Specific Objectives
1. To appraise the effectiveness and efficiency of a
division, activity, or operation of an entity in meeting
organizational goals.
2. To understand the responsibilities and risks faced by
an organization.
3. To identify, with management participation,
opportunities for improving control.
4. To provide senior management of the organization
with a detailed understanding of the result.
 Advantages
i. To ensure the efficiency of performance of
the functional areas.
Example:
• Quicker production or sales turnaround
• Better allocation of costs
• Improved control systems
• The location of areas of delay and an overall
streamlined workflow.
 Advantages
ii. To provide incentives.
iii.To makes executives aware of problems that
might not have been found otherwise and
lets them evaluate risks for the future.
 In a nutshell; it helps to facilitate the granting of
loan from lenders, facilitate insurance claims,
facilitate the decision to invest, determination of
purchase consideration of a business, discovery of
errors and frauds, etc.
 Audit Process
I. Pre-audit process
II. Risk assessment meeting with auditee
III.Control matrix
IV.Test design
V. Report drafting
VI. Final audit report
 Audit Process
i. Appraisal of company’s objectives
ii. Evaluation of company’s policies
iii. Evaluation of company’s plans
iv. Evaluation of the structure of organisation
v. Evaluation of controls
vi. Appraisal of performance, (e.g. examination and
determination of work flow, performance of work load,
measurement of productivity and profitability,
performance of job, and appraisal of costs)
vii. Evaluation of company’s social responsibilities, (e. g.
extent of benefits passed on to consumers, creation of
employment opportunities, etc.)
 Operational Audit Checklist
 The subject matter of Operational Auditing is
materially different and must be evaluated
using pre-determined criteria called a
checklist.
 Checklists tend to be extensive and highly
detailed which relate to specific companies,
industries, markets, and internal
departments.
 Operational Audit Checklist
 Lists the key questions to be considered
when performing the activity.
 Aims to help the auditor to review and
examine the business management system of
a company.
 Can be used as an additional guide when
planning for the auditing procedure.
 Manufacturing Company
 Checklist items include:
o Are employees making the best use of their
time?
o Are goods coming out of the process at the
fastest possible rate?
o Are raw materials being wasted through bad
design or misuse?
After the audit; the company may make some
changes to improve its production numbers,
allowing it to compete with its most efficient
competitors.
 Service Company
 Conducted to monitor employees’ interaction
with customers
 Checklist items include:
o Measuring the amount of time it takes to carry out a
transaction
o Making a sales presentation to a potential client
o Employing straw buyers, unknown to the
employees, to measure and improve customer
service
o Examining security, time schedules, the use of
outside vendors and the business' physical setup and
appearance
 Production Department
 Checklist items include:
o Relationships with suppliers and staff
o Inventory management and control
o Alternate sources of raw materials, and all items
involved in product creation
o On-going maintenance procedures
o Production-employee training programs
o Processing procedure documentation
o Use of best available technology
o Environmental protection policies.
 Sales Department
 Checklist items include:
o Analysing the company’s competition and
customers, product pricing, sales channels, sales
philosophies, and sales personnel.
o Back-office or call center operations if the
company conducts electronic (or telephone) sales
along with or in lieu of the brick-and-mortar
variety.
 Marketing Department
 Checklist items include:
o Examination of the quality and effectiveness of
websites, ease of navigation, and timeliness of
content.
o Other viable checklist items on promotional
activities include community involvement,
charitable efforts, and other for-profit or non-
profit partnerships that promote the
organization.
 Advertising Department
 Checklist items include:
o Effectiveness in reaching current and potential
customers, sending clear messages, organization
of the advertising “calendar”, and the quality of
customer feedback.
 Customer Service
 Checklist items include:
o Quantity and quality of customer service
personnel responses
o Feedback to determine customer satisfaction
levels
o Timely customer question/problem follow-up,
and level of company understanding of its
customer base
o Identifying areas needing improvement that
could increase customer satisfaction.