apt financial consultants cpa review handouts p18 by sako mayrick m covered : management audit...

APT Financial Consultants CPA REVIEW HANDOUTS

P18By Sako Mayrick M

Covered :Management auditSocial auditHR auditEnvironmental audit

Sako Mayrick - APT 1

MANAGEMENT AUDITOther names

Operational auditOrganizational auditTechnical auditEfficiency audit

MeaningExamination of managements operation

Supervision of activities of the client Dynamism and flexibility of changing environment Opportunities grasping

2Sako Mayrick - APT

MA - MeaningIt is the examination, review and appraise of

various policies and functions of management on the basis of certain standards

It evaluate the performance of various management processes of an organization

It is a comprehensive examination of an enterprise to appraise its organization structure, policies, procedures in order to determine whether sound management exists at all levels, ensuring effective relationship with the outside world


MA - MeaningIIA defines MA as future oriented, independent and systematic evaluation of activities of all levels of management for the purpose of improving organizational profitability and increasing the attainment of the other organizational objectives Sako Mayrick - APT 4

Advantages of MAIt helps the management in preparing plans,

objectives and policies and suggests the ways and means to implement those plans and policies.

The inefficiencies and ineffectiveness on the part of the management can be brought to light.

The techniques of management audit are not only applicable to all factors of production, but also to all elements of cost.

Proper management audit techniques can help the business to stop capital erosion.

It increases the overall profitability of a concern through constant review of solvency, profitability and efficiency position of the organisation.


Disadvantage of MAThe introduction of management audit technique

involves heavy expenditure.Managers will hesitate to take initiative, as the

management auditor will always pinpoint some shortcomings in the action.

Managers will always try to keep the records up to date rather than improving efficiency and reducing the costs.

Due to ineffectiveness and inefficiency of the management auditor, in all cases, management audit cannot provide result-oriented service.

Management auditors are sometimes engaged in some activities detrimental to social objects of auditing, for example, evasion of tax.


MANAGEMENT AUDITIt considers

Policies and procedures in operationFuture plansPrevious trendsDischarge of fiduciary responsibilityResponsiveness to stakeholders interestsUse of resourcesOpportunitiesFurtherance of organizational objectivesEfficiency, economy and effectiveness of

operations7Sako Mayrick - APT

General Objectives of Management Audit To assist management in establishing

good relations with the employees and to elaborate duties, rights and liabilities of the entire staff.

To recommend changes in the policies and procedures for a better future.

To ensure most effective relationship with the outsiders and the most efficient internal organisation.


General Objectives of Management Audit To assist management in achieving co-

ordination among various departments.To assist management in establishing good

relations with the employees and to elaborate duties, rights and liabilities of the entire staff.

To recommend changes in the policies and procedures for a better future.

To ensure most effective relationship with the outsiders and the most efficient internal organisation.


Steps in MA1. Examination of management performance2. Reporting defects and irregularities3. Presenting suggestions for improvementThese basic steps can further be broken down

into the following stages: (1) study of the activities, (ii) detailed diagnosis, (iii) determination of purpose and relationship, (iv) looking for deficiencies, (v) analytical balance, (vi) testing of effectiveness, (vii) searching for problems, (viii) ascertainment of solutions, (ix) determination of alternatives, (x) seeking out methods of improvement.


Management auditObjectives

Appraisal of Plans and clients objectives

Appraisal of client’s organizational structure

Evaluation and assessment of client’s performance

Appraisal of client’s control of operations

11Sako Mayrick - APT

Management auditor qualitiesAnalytical skillsAbility to see the organisation from

different anglesSufficient knowledge of the industry

which the client operatesAuditing skillsInterview and inquisitive skillsObjective


Management auditor qualitiesSufficient knowledge about the functions of

managementAbility to understand different management

activities of the organisation i.e. internal control, production planning and control, personnel management techniques

Generally should have ability to understand problems of the organisation

He should have the ability to determine the progress of the organisation


Scope – Terms of Reference of MAWhether the basic aims and objectives of

the enterprise are being fulfilled in practice.Whether the enterprise is being successful

in adapting itself to technological change.Whether the management structure is

suitable.Whether management is efficient at all

levels and to extent to which economies are possible.


Scope – Terms of Reference of MAWhether the policies with regard to staff

recruitment and training are adequate, and whether staff morale is satisfactory.

Whether there is a proper communication system both upwards and downwards throughout the enterprise including a proper management information system.

Whether the enterprise's share of the market is increasing or declining and how it compares with its main competitors.


Management Auditappraisal of objectives and plansEvaluating of objectives

SMARTSufficient and reasonable

Reflects company responsibilities Compatible Communicated Easily understood Rigid


Management Auditappraisal of objectives and plansEvaluating plans

Compatible with objectivesAnticipates trouble spotsFlexible for efficiencyPermits delegation of responsibilitySupports uniformityCommunicatedmeasurable


Management Auditappraisal of clients Organisational StructureIt is a means for management control of

operationsIncludes assignment of duties and responsibilities

together with delegationOrganisation structure in harmony with objectivesStructure comensurate with responsibilitySpans of managementUnity of commandProper balance of functionsSimple and economical


Objectives of MAEvaluation and Assessment of client’s performancePossibility of getting an expert supportIssue is to measure efficiency, economy and effectivenessIssues

Personnel - staffing, turnover, qualification of employees, working conditions, overtime

Workload - volume of work, customers, payroll check, productivity levels, backlog, critical maintenance

Productivity - units expended/units produced, past performance, mechanization , man-hour per customer,

Quality – expectation/performance, improvement, work methods

Cost - labor costs, material costs, administrative costs, equipment costs, trends, necessity of activities. Forecast, variance, cost conscious,


Objectives of MAAppraisal of ControlAdministrative controls of operations to

accomplish management objectives or plans of operation

Information and assurance to management on adequacy and effectiveness of controls, not only at the time of audit but also for the future

The purpose is not cost control but procedural compliance

For example, procurement system


MACorporate AnalysisStudy of client’s business in view of both

competition and changing business environment.

Clients exploration of strategic core – assets for competitive edge e.g. brand name, technology, research and development, financial and capital structure, product costing and pricing policies, managerial skills, production systems and communication

Synergy of the aboveCompetitive edge over rivals


MACorporate Analysis Value chain analysis – how the policies giver

value to the customers e.g. marketing , logistics; cost and marketing strategies

Examine high input cost of marketing strategies to determine grey areas

Examine pricing policy for value adding to customers, margins for covering operational costs

Analysis of overall clients business strategy, SWOC analysis and environmentalf analysis


MACorporate Analysis – Industry AnalysisCompetition in the industry,

bargaining power of client’s suppliers, buyers,

Threat of new entrants, Threat of substitutesPurpose is to determine level of

competitiveness of rivalry and competitors


MACorporate Analysis – Environmental AnalysisPEST analysis

Trade barriers, Business trends – recession, boom and per

capital incomes, market demand and supply conditions

Price sensitivityProduct taste, branding, relationship with

local societyTechnological analysis – modern

technology and impact on current business.


MACorporate Analysis – SWOT AnalysisSW – Internal operating capabilities

Competitive edgeMinimizing weaknesses

OT- External Entrepreneurship skillsThreats are killer missions therefore clients must

have strategies e.g. interpersonal skills to manage uncertainties

SWOC and PEST Analysis results into new strategy development through financial modeling (NPV, IRR and cash flow)

The new strategy must be able to change with changes of environment.


MA - ApproachesOrganizational approach

Administrative structuresFramework of the organization – staffing, reporting ,

personnel evaluation, budgetsMicrocosm picture of company structure and study it

from many anglesConcentration of administrative activities rather

than productFunctional approach

Following up major activities from inception to conclusion,

Less concerned with adminstrationIt is more complex with long and devious trail


MA - StepsFamiliarization

Discussions with knowledgeable people about the organization – activities, performance evaluation, reporting

Walkthrough the departments or follow function Objectives and their implementation Examine organizational structure Review of policies and procedures Review of records generated Performance appraisals

Familiarization leads to development of workable audit program


MA - StepsVerification

Controls functioning through sample transaction Internal checks Documented vs Actual controls Standards of performance

Evaluation and Recommendations Audit tests of initial survery Recommendations based on facts not feeling Consider all factors affecting operation

Effectiveness of operation Deviations form procedures Structure of accounts, records and repors


MA - StepsEvaluation and Recommendations

Risks and loss Technical issues to be recommended to

managementReporting

No reservations Minor matters should be cleared through discussion Lower matters to be discussed with the lowest

cadre in mgt The auditor should note that the responsibility of

correcting defects ultimately rests with operating management.


Past Examination – May 2010Management audits involve the investigation of the

entire management to ascertain the decision making process of the top management and such it is kind of overhaul of the company’s top management to ascertain attitudes towards the internal control system and also personal relations with employees and their ability to manage an efficient and viable company.

(a) Explain the conditions under which these audits are ideal (4 marks)

(b) Explain the advantages of Management audits (8 marks)

(c) Describe the disadvantages of Management audits (8 mark)

(Total =20 marks)30Sako Mayrick - APT

Social AuditIt is based on concepts of Social ResponsibilityCorporates must consider social well being

rather than profitThey have high responsibility to the society

such asExtending staff benefits such as provident fund,

gratuity, bonus, insurance, leave salary, medical benefits, housing facility, recreation and entertainment

Keeping the environment of the factory and its surrounding clean and non harzadous


Social Audit and Social AccountingThe term ‘social accounting’ and ‘social

audit’ are used sometimes in the literature interchangeably. But social accounting is concerned with the development of measurement system to monitor social performance, and social audit is the use of an independent auditing system to verify a firm's records of social performance.


Social Audit and Social AccountingJohn Crowhurst in his book Auditing Guides

to Principles and Practice has clearly explained these two terms. According to him, ‘[s]ocial accounting is the process of determination of social performance of an organization”, while ‘social audit’ is the enquiry into the corporate social accounting records by an outside agency that can opine with a view to attestation and authentication of such results and reports.


Objectives of Social AuditTo make an assessment of social performance by an

organisation.To inform the management of an organisation of the

accuracy and fairness of its social accounts.To evaluate the socio-economic contributions made

by an industry.To bring to light for public knowledge how far an

organisation has discharged its responsibility to the society.

To advise the management in the preparation of social accounts.


HR AuditTouche Ross and Co., a Canadian CPA firm has

introduced for the first time the concept of human resource accounting as a part of its management information system in the belief that a good human resource accounting system can provide information of vital importance for short term as well as long-term decision-making and performance measurement.

According to Eric Fl amholtz, “Accounting for people as an organizational resource involves measuring the costs incurred by business firms and other organizations to recruit, select, hire, train and develop human assets”,


HR AuditThe decision of the investor to invest in the

company is greatly influenced by the working of the managerial staff of the company. So, disclosure of information regarding human capital in the annual report of the company may help prospective investors in forming an opinion whether to invest in the organisation or not. This may remove the standing criticism of the financial reporting that ‘one of the outstanding omissions is information concerning the human capital employed.'


HR AuditBut before including human capital employed as a

part of annual account, it has to be ensured that the human capital as included is reliable and computed on the basis of generally accepted principles for the valuation of human capital. In order to get reliable value of human resources, the necessity of human resource audit is felt. The Human Resource Audit examination should not relate the rightness to the process of valuation of the asset, but it should see that the information upon which the calculations are based upon are reliable and authentic


Steps in HR AuditThe nature of the organisation should be

thoroughly examined to know whether it is a firm of professionals or of the general business. Interview with the top managerial personnel should be taken to acquire information regarding the valuation of human resources. It should be seen that provision for depreciation of human assets has been adequately provided. It should be confirmed that the correct value has been placed in the balance sheet.


Steps in HR AuditThe internal control system as

regards various information of human resources should be reviewed to evaluate its effectiveness. It should also be ensured that all contingencies that have the effect on the valuation of human resources are duly considered in the value measurement of human resources


Green or Environmental AuditAn environment audit is a management tool An environment audit is a management tool

comprising a systematic, documented, comprising a systematic, documented, periodic and objective evaluation and periodic and objective evaluation and objective evaluation of how well objective evaluation of how well organizations, management and equipment organizations, management and equipment are performing with the aim of contributing are performing with the aim of contributing to safeguarding the environment by to safeguarding the environment by facilitation management control of facilitation management control of environmental practices, and assessing environmental practices, and assessing compliance with company policies, which compliance with company policies, which would include meeting regulatory would include meeting regulatory requirements and standards applicable. requirements and standards applicable.


apt financial consultants cpa review handouts p18 by sako mayrick m covered : management audit...

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