MANAJEMEN AUDIT

Dosen : Syamsu Alam, SE., Ak. M.Si.

MODUL 5

DETERMINING EFFICIENT, ECONOMICAL, AND EFFECTIVE OPERATIONS

R E F E R E N S I

1. Herbert Leo, Ph.D. Auditing the Performance of Management,1979.

2. Setiawan Johni, Pemeriksaan Kinerja, BPFE, Yogyakarta. 1988

3. Widiyanto Nugroho, Pemeriksaan Operasional Perusahaan, LP. FE-UI, Jakarta, 1980.

MODUL 5

DETERMINING EFFICIENT, ECONOMICAL, AND EFFECTIVE OPERATIONS

After you have read this chapter; studied the review questions, and worked through the cases, you will understand: The various considerations the auditor will make in determining the directions he will take in his examination. That most management audits point to deficiencies in managerial operations. How to state a tentative objective for an M-audit. How to state alternative tentative audit objectives for an M-audit. How management control transactions are tested in order to firm up the tentative audit objective. How to state a firm audit objective that will be used in the detailed examination for an M-audit. That the auditor must gather sufficient relevant, material, and competent evidence on the audit objective in order

to come to a conclusion on that objective so that he can report his conclusion to a third party. What a program is. What a P-audit is. That the same four phases apply to a P-audit as to an M-audit. Yet the auditor must identify the goals of the

program and the interorganizational structures for accomplishing the goals in the preliminary phases of a P-audit.

How to state a tentative objective for a P-audit. How to follow the flow of the management control in a P-audit in order to test it and state a firm audit objective

for the audit. How to state a firm audit objective for the detailed examination of a P-audit. The flow of information and evidence concerning the audit objective for both an M-audit and P-audit.

M-audits

The Preliminary Survey

Since an M-audit is the examination of a particular activity or organization to determine

the efficiency or economy of operations, repetitive audits seldom occur. In this respect, an M-

audit is quite different from a financial-statement examination, which may take place over and

over, from year to year. Each phase of a management audit, therefore, is much more distinct

and necessary than that of a financial-statement examination. The need is especially distinct for

auditors to identify from the background and general working information, evidence that will

show the direction they will take in the examination.

Some considerations an auditor will make in determining the directions to take in an

examination are:

1. The amount of money received and spent: the larger the amount the better the chance that there is need for improvement in the way the money is spent.

2. Executive interest: the executive, in an overall position, often has a better view of the operations than the auditor.

3. Legislative interest: the legislative or audit committee might be considering an area, for review that has a direct bearing on he area being considered for examination by the auditor.

4. Legal requirements: the law ordinarily is specific in the requirements to make an examination.5. Auditor's personal knowledge: working around an agency or activity for a sufficient time, the auditor

may have acquired a great deal of knowledge concerning an area needing examination, and this knowledge often leads to areas of known deficiencies.

6. Other consideration: public concern, current interest by the board of directors.7. Request for proposals: often CPAs and management consultants get into an area because of a

request for a proposal to make an examination. The auditor, undoubtedly, should have some reason for entering an area before starting to make a preliminary survey of that area.

Once the broad area has been determined, the auditor can obtain the information for the

entity, as discussed in the last chapter. The auditor will interview responsible officials and

employees at all levels of the activity or organization. The auditor will obtain all types of records,

such as budget and operating information submitted to the legislature, boards of directors, or

executive officials, reports prepared on the agency by outside groups; policy manuals,

procedure manuals, internal audit or inspection reports, and internal management reports.

Finally, the auditor will observe activities of all types, such as inspecting the physical property,

seeing how an activity is actually carried on, and making a walk-through of the organization,

often a revealing way to spot deficiencies in operations.

Most M-audits are those that point to a deficiency in operations. Suppose the area in a

state being considered for examination was the State Administrative Agency and the auditor,

Lynn Price. This agency would have responsibility for all administrative activities in the state.

These would include budgeting, accounting, automobile control, purchasing, warehousing, and

other activities normally considered administrative.

Quite often the evidence spotted from the background and general information points to

deficient effects. Once the auditor learned from the background and general information that the

State Administrative Agency had responsibility for all state automobiles and that the state had

government gasoline outlets, all she would have to do in order to assert a tentative audit

objective would be to see the driver of a state vehicle buying gasoline from a nongovernment

outlet. Ms. Price might not know exactly how much could be saved, but she could assert that if

government Car operators used (causes) government gasoline outlets whenever feasible

instead of private outlets (criteria), the state could save quite a bit of money (effects).

Once a particular tentative audit objective has been defined, it is easy to consider

alternative objectives. For example, if the survey is concerned with automobiles, should the

auditor not consider what is happening to tires, batteries, and repairs, as well as to gasoline?

But she would not have a tentative audit objective unless she could obtain some evidence on

whether tires were bought from retail outlets, batteries were bought from retail outlets, or repairs

made in-house or by retail outlets.

At this time, the auditor would nave only a tentative objective. The State Administrative

Agency might in fact already have a requirement that drivers of state vehicles buy gasoline from

government outlets; nevertheless, as the auditor, Ms. Price asserts that they should have that

requirement.

We can easily see now that in further planning for this case, the auditor can determine

what types of evidence she would need if she expected to continue the examination: She would

have to have information on whether the agency had the authority to require agencies and

drivers to buy gasoline from government outlets, whether the agency had any regulation or

requirement presently on the books, and whether the amount of savings would be worth the

time of the auditor and the agency to continue the examination. If Ms. Price decided to go on,

she would have a tentative plan for testing management control.

The auditor might also find, however, that the activity is doing everything so well that there

is no reason to believe that she could find enough evidence to support a significant deficiency.

In that case she should stop before wasting any more time.

As has been pointed out in the above illustration, the agency might already have a

regulation concerning the use of government gasoline outlets. Audits concerned with

compliance with laws, regulations, or other requirements are often called compliance audits. As

long as compliance with the law, regulation, or other requirement results in more efficient or

economical operations, noncompliance with the requirement would result in a management

audit report. The law, regulation, or other requirement would automatically be the criteria for the

audit. Noncompliance with this appropriate standard would result in a deficiency, which, if

significant, should be developed and reported.

Sometimes, in the course of a P-audit, the auditor may determine that the program is

operating effectively but that certain activities of the program apparently are not being carried

out efficiently or economically. These apparent or tentative audit objectives coming from a P-

audit can be used as the basis for starting n M-audit.

The Review and Testing of Management Control for an M-audit

The primary purpose of the review and testing of management controls is to firm up the

audit objective. To do this, the auditor obtains relevant, material; and competent evidence-not

necessarily sufficient-by testing transactions in the management control system. He can thus

determine whether the weaknesses identified as the tentative objective might be significant

(effects), whether some particular individual or groups of individuals might cause the weakness

(causes), and whether the standard used might be reasonable and firm (criteria). A secondary

reason would be to evaluate the effectiveness of the management control system in order to

determine the competency of any evidence that came from the overall system.

Any good management control system follows these steps: setting standards, objectives,

goals, or procedures determining whether the standards, objectives, goals, or procedures have

been appropriately carried out; appraising the results of such carrying out; and then, when

necessary, taking corrective action. The principle underlying these steps is that no one person

should be in complete control of any important part of the operations of the system.

The basic approach to the review of management control for an M-audit is to review the

specific flow of procedures and practices applied to a specific transaction or item. As an

example, let us continue with the illustration concerning the buying of gasoline for state cars. In

testing a transaction concerning the buying of gasoline from a government outlet, Ms. Price, the

auditor, would first start that testing by determining whether the State Administrative Agency

had the authority to require operators to buy gasoline from government outlets. This authority

would be in the form of a law, regulation, or operating practice. By obtaining the law, regulation,

or operating practice, Ms. Price would have some evidence on the criteria. If there were none,

she would have evidence on the lack of a standard and would have to develop one.

She would then have to follow the transaction back to the leasing of the vehicle to the

agency and ask questions. Are there instructions to the driver in the vehicles concerning the

buying of gasoline? Can the operator buy wherever he wants or is he required to buy from

government outlets? Then the auditor would have to trace a particular driver's actual purchases

of gasoline by analyzing the credit car purchases on travel vouchers. Has the driver bought

gasoline from government outlets or from retail outlets? What has the agency done to assure

the purchase from a proper outlet? Who has the responsibility for this particular activity? Do

purchases from retail outlets happen often? With answers to such questions, Ms. Price would

have some evidence on causes.

Then, If the analyzed the transaction in terms of the amount purchased from

nongovernment sources compared to that purchased from government sources, and took the

difference in cost from private sources to government sources, the auditor would have some

analytical evidence of the effects-not enough evidence to warrant reporting on this audit, but

enough to determine the possible significance of the effects.

Thus, by tracing one particular transaction from beginning to end as described, an auditor

would have evidence on all three elements of -the tentative objective and would be able to

determine whether the finding would be significant enough to warrant continuation of the audit

to the detailed examination.

In this way, too, she would be able to determine the competency of evidence from the

management control system. Does one person have overall control? Are the duties properly

segregated? Are the operations actually being carried out? Are there duplicate steps? Does the

system provide adequate control on costs, expenditures, receipts, or other revenue?

The Detailed Examination for an M-audit

Much of the balance of the book will be concerned with the concepts, standards, and

procedures for making a detailed examination, and a great deal of this concern will be for M-

audits. To further illustrate here, let us continue with the illustration pertaining to government

gasoline purchases for state-owned cars.

The audit objective Ms. Price developed for this case might read somewhat as follows:

Have drivers who use state-owned cars bought (causes) gasoline from state-owned outlets when feasible instead of private outlets (criteria) thus saving the state approximately $25,000 per year (effects)?

If the State Administrative Agency does not have a good standard for requiring the usage

of government gasoline outlets, the auditor may want to go to other states or the federal

government in order to have an excellent standard for measuring the present actions of buyers

of gasoline for state cars; that is, she would gather additional evidence on her criteria in order to

have the best standard possible. Thus, she would be able to assure that the criteria was

acceptable and that it could not be rebutted.

The actions involved in this case might include the failure of the state agency to prepare an

acceptable standard. Also, the agency might not have done anything to control the actions of

the drivers of state cars. Ms. Price would have to gather evidence on these causes in order to

present a recommendation that would correct the situation..

In addition, she would either have to gather evidence on all the transactions concerning

gasoline purchases for the year, or at least make a sample that would enable her to estimate

the total cost of buying nongovernment gasoline compared with buying gasoline from

government outlets. This evidence would also be evidence on the causes of the loss during the

year.

Once the auditor had all the information on gasoline purchasing from the many state

agencies using state cars, she could make an analysis of-the total savings that could be made

by using government outlets rather than private ones.

The auditor would then be ready to report her findings to the appropriate state officials,

such a report representing the end result of the audit of management's performance concerning

efficiency and economy. Because this subject is of such importance, it will be treated at length

in chapters 16 and 17, but a useful example of the graphic flow of an M-audit is shown in Table

3.1.

P-audits

The Preliminary Survey

In an industrial concern, programs are related to products produced and sold. Programs

are the activities of (1) internally producing the product, and (2) externally selling the product.

Industrial and commercial organizations may also have socially oriented programs, such as

equal employment opportunity programs, environmental programs, public identity programs,

and power usage programs.

In governmental organizations or industrial and commercial organizations with socially

oriented activities, programs are related to the services in which the organization is engaged. As

identified in (1) and (2) above, such programs are the activities of internally producing a service

and externally providing the benefits of the service to others. For example, General Motors

produces and sells Chevrolets, Oldsmobiles, Pontiacs, Buicks, and Cadillacs. Each of these

could be considered a program. Likewise, the U.S. Department of Health, Education, and

Welfare (HEW) produces and renders the services of health, welfare, and education. Each of

these could be considered a program.

Not only are there programs at the highest level of activity, but there can also be programs

much further down the line. A division of General Motors, for instance, might produce only

engines, and that could be a program. Similarly, HEW might have a special program for mental

health, and a city might have a program under police protection called prevention of child

molestation.

Each of the programs as something in common: It is producing a product or service and

selling the product or rendering that service to an outside group. You can see that from a

financial standpoint, the costs of the program can be related to revenues or benefits, and there

is a similar relationship of the revenues to the objectives.

In a P-audit, the auditor determines whether the organizations responsible for the program

are accomplishing the intended objectives. Therefore, in most P-audits, if the costs are related

to revenue or benefits and they in turn are related to the objective, the auditor can then

determine whether the costs are reasonably commensurate with revenue or benefits. The

benefits, of course, would have to be converted to a dollar value.

Table 3.1 Phases of the Audit Function for an M-audit, Described by Process

A. The Preliminary Survey

1. Obtain in a relatively short period of time background and general information on organization and management activity being considered for examination.

2. Analyze background and general information to obtain relevant evidence -- not necessarily sufficient, material or competent -- on one or more elements -- criteria, causes, or effects -- of a possible M-audit objective.

3. Assert the other element or elements in order to have a tentative M-audit objective.4. Assert alternative criteria and other elements on related management activities to establish possible

alternative M-audit objective.5. If possible alternative objective is to be considered, obtain relevant evidence, if no evidence has

previously been obtained, on one or more elements of the possible audit objective in order to have alternative tentative M-audit objective.

6. Summarize evidence and assertions on tentative M-audit objectives.7. Conclude from relevant evidence and assertions:

a) that original or alternative tentative M-audit objective can be used as the objective for the review phase, if relevant, material, and competent evidence can be obtained on all three elements of the tentative objective, and (1) what types of relevant material and competent evidence .will be needed to determine the audit objective. and (2) what types and how much evidence will be needed to determine competency of evidence. Proceed to review. Or

b) that tentative objective cannot be used because evidence would not be available or that conditions do not warrant continuation. Withdraw from engagement.

B. The Review and Testing of Management Control

1. Obtain any needed additional background information.2. Obtain relevant; material, and competent evidence-not necessarily sufficient-on tentative M-audit

objective by testing management control to determine:a) that there could be a reasonable criteria.b) that some particular person or group of persons at one or more levels of responsibility could cause

an inefficient operation. andc) that the effects of the inefficient operation are significant.

3. Obtain evidence from management control system on the competency of evidence that must come from system if additional work is to be done.

4. Determine that evidence could not be obtained on all three elements of the tentative M-audit objective.

5. Summarize evidence and conclude:a) whether the developed tentative M-audit objective can be a firm objective to be used in the

detailed examination phase.b) whether evidence that must be obtained would be competent. Andc) what additional evidence must be obtained and from what source to have sufficient competent,

material, and relevant evidence to come to a conclusion on the audit objective. Proceed to detailed examination, or

d) that auditor should withdraw from examination.

C. The Detailed Examinations

1. Obtain any additional background data needed.2. Obtain sufficient competent, material, and relevant evidence to determine:

a) the acceptability of the criteria of the M-audit objective and that any argument against the criteria can be rebutted,

b) the specific action or lack of action at levels involved in the management activity that caused the effects, and

c) the significance of the effects.

3. Summarize evidence in terms of criteria, causes, and effects.4. Conclude from the summarized evidence that the effects in the management activity were

significantly inefficient when the actions of employees and management are evaluated against the criteria. Proceed to report development.

5. Conclude that sufficient evidence could not be obtained to determine an appropriate criteria on the management activity, determinable causes, or significant effects, or that other conditions warrant that the auditor should withdraw from engagement.

D. The Report Development

1. Set the Scene through background or general information or through scope of audit.2. Communicate conclusion, stating the significance of the effects caused by not following a proper

standard. Sufficient evidence on criteria, causes, and effects should be given with the audit objective for the reader to come to same conclusion as the auditor.

3. State recommendation, usually that the criteria should be followed in the future to obtain best results.

Some P-audits, however, are concerned with how effective the organization is in carrying

out its objective in terms other than dollar values. In such cases, effectiveness must be

measured from same other agreed-upon standard, based upon the objective.

The approach to a P-audit follows the same four phases identified for M-audits. The

program, however, may be carried out by organizations not directly related to the one

responsible for the objective. Because of these inter-organizational relationships, the auditor

must often go outside of the primary organization in order to determine the benefits or other

measures of effectiveness in relation to the costs.

Often, too, the organization being audited and the one responsible for the program have

been so involved in budgeted line-item costs such as salaries, travel, and printing expenses,

that they have -not considered how these costs relate to specific programs. Or even more

important, they have never considered what the objectives of the program are. Therefore, if any

studies concerning the development of the objective for the program have ever been made,

either internally or externally, the auditor should obtain that information.

Furthermore, since the entity often has not developed specific objectives for the program,

or even given the matter much thought, the auditor must use reports of consultants, as well as

analytical techniques more sophisticated than those he would employ for financial-statement

audits or management audits. In addition, since a program may be carried out by many

organizations, gathering information and evidence from these interrelated organizations may

demand the use of such techniques as questionnaires and pilot programs, which are seldom

used in other types of audits.

Evaluating the building of Chevrolets, for example, may take the auditor to many

organizations-for tires, engines, fenders, batteries, and so on. Selling Chevrolets, likewise,

would take the auditor into many dealer organizations. If an auditor is trying to find out whether

the Chevrolet program is effective, he will need criteria, based on a stated objective and usually

a profit objective; causes, based on all levels of production and selling activities; and effects,

based on whether the costs do or do not exceed the revenues, stated as profits in the objective:

We must remember, of course, that profits are not the only objective of an organization;

there could be social objectives, for instance, not directly related to profit. Is the program

polluting the atmosphere or the streams? Is the program providing jobs to the economically or

socially depressed? When these activities are related to the objectives of the program, they can

turn out to be important considerations, themselves often related to cost benefits. It is clear,

then, that costs, as related to cost benefits, are much broader than accounting costs. For

example, in a situation where the atmosphere is being polluted, the possibility of an organization

going out of existence would be a cost in terms of cost-benefit considerations. For this

organization, the discounted costs of long-term interest would be a cost in terms of continuing

operations or buying a new building elsewhere.

These same principles apply to governmental programs. For example, the objective of a

federal program might be the improvement of water quality in the rivers through grants to cities

for sewage-treatment plants. But consider this: if industrial and agricultural pollution of the

streams is so great that sewage treatment may have no effect on the streams, then the grants

will have no effect on the improvement of water quality.

Thus, in evaluating background and general information on a program in order to come up

with a tentative audit objective, the auditor has a much broader field of information than he does

for an M-audit. The principle, however is the same: obtain evidence from background and

general information on one or more elements of the tentative audit objective and assert the

other element(s). Let us turn to the specific case, identified above, in the area of grants to

improve the quality of the environment: the auditor, Howard Green, may observe pollution of

streams by industry and assert that the program for improving water quality of the streams is

ineffective (effects) because those who grant money to cities for constructing sewage plants and

those in the cities who build the sewage plants (causes) have not considered that grants should

not be given to cities where agricultural pollution and industrial pollution is so great that sewage-

treatment plants would have no effect on the improvement of water quality (criteria).

At this point, Mr. Green would have only a tentative audit objective, and he would need to

do much more work before he could consider reporting on the effectiveness of the program.

The Review and Testing of Management Control for a P-audit

The accomplishment of the purposes of reviewing and testing management control for a

P-audit becomes much more complex than it is for an M-audit. For example, since one purpose

is to firm up the tentative audit objective, the auditor must determine the objective of the

program in order to firm up a measurable criteria. Also, since the program is usually not carried

out by any one organizational unit, the auditor must consider causes from multiple units. And,

unless the multiple causes can be evaluated against a firm criteria it would be impossible to

determine whether the program was or was not effective.

Furthermore, since the program's system is usually composed of many units, the

determination of the quality of the management control system and the information from anyone

of those units may cause the auditor some problems in determining the competency of the

evidence from the system. Because of good management control in one unit, the evidence may

be reliable; because of poor management control in another unit, the evidence may not be

reliable.

Let us continue with Mr. Green, our auditor on the case concerning grants for improvement

of water quality. He already has a tentative objective and wants to firm up that objective by

following one transaction completely through the management control cycle.

By selecting one grant and following the transactions concerning that grant, the auditor

would have a basis for determining whether he could firm up his audit objective. Is the objective

of the program well stated? Does it provide for improving the water quality of the streams? Does

it have a system for measuring the water quality? Are grants given on the basis of each grant

improving the water quality of the stream on which the sewage-treatment plant dumps its

waste? Does the grantor agency have some method for determining whether other wastes

would counteract the treatment provided by the sewage-treatment plant? If all the answers to

these questions are yes, the auditor would have a basis for measuring the actual operations of

the sewage-treatment plant along the river.

However let's be realistic. Seldom does a program have a well-stated objective with

specific standards for measuring that objective. The auditor would then have to develop the

objective and the standards. for measuring the activities of the program. And since this standard

will project into the future, Mr. Green will have to determine what techniques of analysis, such

as mathematical models, will have to be used, rather than limiting himself to mere gathering of

evidence. To do this, an auditor usually obtains help from experts or consultants, and these

advanced methods are discussed in Chapter 15. . '

In our case, Mr. Green might have to have a mathematical model of the riyer basin made

in order to have a standard by which to evaluate the results of the various types of pollution on a

given stream. Without this model as a standard, the auditor would have no way of measuring

the results of the program; with it, or with evidence from the granting agency, he would have

some evidence on the criteria.

The auditor's next step would be to follow the grant to the city. Mr. Green would observe

the sewage-treatment plant and its operation. The plant may be operating in an excellent

manner; but, by testing the quality of the water in the stream, he may find nevertheless that the

stream is just as polluted as ever because of agricultural and industrial wastes. He would have

some evidence on causes. And through analytical reasoning, he could determine that the effec-

tiveness of the program was not being accomplished, at least for this one grant.

From this illustration you can see that the meaning of management control has been

extended beyond the confines of just one organization; within the context of P-audits, it

encompasses all activities of the program, whether within or without the responsible

organization.

The Detailed Examination for a P-audit

Let us continue with our example in order to illustrate the next step in a P-audit. The

preliminary survey and the review and testing of management control will have resulted in a firm

audit objective, which our auditor, Mr. Green, might state somewhat as follows:

Have the federal agency providing the grants and .the various cities receiving the grants

by building sewage-treatment plants (causes) been effective in the grant program (effects) by

improving the water of quality of the river to acceptable Environmental Protection Agency

standards (criteria)?

The evidence in this program would have to come from many sources. If the auditor tested

the water in the stream below each treatment plant that received grants, he might find that the

water quality was far below federal or even many state standards. He would have to determine

what caused this, discovering in most instances that industrial and agricultural wastes were the

culprits.

At this point, Mr. Green might turn to his mathematical model of the entire river basin

showing what needs to be done to control all wastes--agricultural, industrial, and human-in order

to bring up the quality of the river to national standards. Having learned that treatment of one of

the wastes alone was not accomplishing the purpose of improving Water quality in the river the

auditor might want to consider also how the grants would have to be divided among the three

different types of wastes in order to achieve the objective. He might have to recommend that

additional funds would be necessary to achieve the purpose designated.

The final step, reporting the results of a P-audit, is of such importance that it will be treated

at length in chapters 16 and 18; but a useful example of the graphic flow of a P-audit follows as

Table 3.2.

REVIEW QUESTIONS

1. The objective of a preliminary survey for any type of audit is to obtain a working knowledge of the organization, activity, system, or program being considered for examination. Discuss how the objective of a preliminary survey for an M-audit is more distinct than that for a financial-statement examination.

2 Once the audit area has been determined for an M-audit, what types of information should the auditor obtain in the preliminary survey phase?

3. An M-audit is the examination of a particular activity or organization to determine the efficiency or economy of operations. How does the auditor often determine a tentative audit objective in the -preliminary--survey phase?

4. What is the purpose of the phase for the review and testing of management control in a management audit?

5. Explain how the auditor reviews the specific flow of procedures for management control for an M-audit.

6. Explain how the auditor determines his objective for the detailed examination for an M-audit.7. Review the audit objective for the detailed examination stated on p. 36. Can you state an objective

similar to this for any of the cases given in chapters 1 or 2?8. If during the course of a P-audit, the auditor finds that the program has no stated goal, what must the

auditor do before making the audit?9. See if you can state an audit objective for the P-audits in chapters 1 and 2.10. Review tables 3.1 and 3.2 in this chapter. Can you follow the information on each phase as given in

the chapter? These two tables can become a handy reference guide.

Table 3,2 Phases of the Audit Function for a P-audit, Described by Process

A. The: Preliminary Survey

1. Obtain in a relatively short period of time background and general information on program and management system being considered for examination, including purpose of program.

2. Analyze background and general information on program and management system to obtain relevant evidence-not necessarily sufficient, material, or competent-on one or more elements-criteria, causes, or effects-of a possible P-audit objective.

3. Assert the other clement or elements in order to have a tentative P-audit objective on effectiveness of program.

4. Summarize evidence and assertions,5. Conclude from relevant evidence and assertions:

a) that tentative P-audit objective on effectiveness of program can be used as the objective of the review phase if relevant material and competent evidence can be obtained on all three elements of the tentative objective and (1) what types of relevant, material, and competent evidence will be needed to determine the audit objectives, and (2) what types and how much evidence will be needed to determine competency of evidence. Proceed to review, or

b) that relevant evidence and assertions would lead to a more significant objective on an M-audit, Proceed to the review and testing of management control phase for an M-audit (column B, Table 3.1, p, 38, or

c) that tentative objective cannot be used because evidence would not be available or that the conditions do not warrant continuation. Withdraw from engagement.

B. The: Review and Testing of Management Control

1. Obtain any needed additional background information.2. Obtain relevant, material, and competent evidence on tentative objective (evidence may haw to be

obtained from auditor's use of advanced analytical techniques or from experts’ to determine:a) that there could be a reasonable and firm criteria based on entity's objective.b) that action or lack of action within or out of the organization responsible for accomplishing the

objective could cause.c) a significantly good or bad effect.

3. Obtain evidence on the competency of the evidence that must be obtained if additional work is contemplated.

4. Determine that evidence could not be obtain d on the three elements of the tentative objective.5. Summarize evidence and conclude:

a) whether the tentative P-audit objective can be firm enough to be the detailed examination audit objective, Proceed to detailed examination, or

b) whether the evidence shows that deficiencies in the management of the program could be a firm audit objective for an M-audit. Proceed to the detailed examination phase for an M-audit (column C, Table 3.1, p. 38), and/or

c) whether evidence for either the P-audit or Ai-audit would be competent.d) what additional evidence must be obtained to have sufficient material, relevant, and competent

evidence to come to a conclusion for either the P-audit or the M-audit, ande) whether to withdraw from the examination.

C. The Detailed Examination

1. Obtain any additional background data needed.2. Obtain sufficient competent. relevant, and material evidence on the audit objective to determine:

a) the acceptability of the criteria and that any argument against it can be rebutted,b) the specific action or Jack of action within or outside of the responsible organization which

caused it, andc) the significance of the effect.

3. Determine that sufficient evidence could not be obtained on criteria but evidence could be obtained on causes and effects. Consider e detailed examination phase of M-audit.

4. Summarize P-audit evidence in terms of criteria, causes, and effects.5. Conclude that effects are significant when the actions are evaluated against the P-audit criteria.

Proceed to report development, or6. Withdraw from engagement.

D. The Report Development

1. Set the scene through background data or scope of examination.2. Communicate the conclusion developed during the detailed examination phase. Include sufficient

relevant, material, and competent evidence on criteria, causes, and effects to convince reader.3. Provide recommendation for future appropriate action by one or more levels of the management

system.

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