Notes on Management Audit Criteria

This article provides notes on Management Audit Criteria.

The management functions are fundamentally of two types—qualitative and quantitative. Even if quantitative criteria or standards are identifiable or determinable and auditable, the qualitative aspects are difficult to audit.

With respect to Management Audit, the objective is to identify for management the typical problems the company faces in the management of its operations as well as to point out situations and opportunities for improvement.

Standards, upon which an evaluation of the organisation’s practices and methods of operation can be based, may be classified into five groups:

1. Government laws and regulations, including presidential decrees, letters of instruc­tion and policy pronouncements.

2. Company standards:

(a) Approved strategies, plans and programmes.

(b) Prescribed policies, procedures and methods.

(c) Approved organisation structure, functions and staffing pattern.

(d) Budgets.

(e) Input-output relationships.

(f) Objectives defined and established through the MBO system.

3. Industry standards and practices.

4. Fundamental principles of organisation and management.

5. Sound management practices, processes and techniques used by the progressive business houses.

Self-rating may also be a useful technique in evaluating performance. In this technique, subordinates are given chances to express themselves in performance evaluation. The rating scheme may also be done by persons within the organisation who are not related to that work.

Procedures for Problem-Identification:

For the purpose of identifying the problem areas (or situations), the management may adopt any or more of the following procedures:

(i) Examination and Scrutiny:

The organisation’s plans and policies should be subjected to scrutiny in order to ascertain how they are adhered to. The predeter­mined standard should be thoroughly examined and evaluated in order to appraise the actual performance with precision.

(ii) Survey and Study:

This process, through which the pertinent information and details can be obtained, should be adopted when studying the vulnerable or key areas.

(iii) Inquiry and Questionnaire:

These processes should be adopted when pertinent information are difficult to collect through normal procedure.

Example: Questionnaire to Appraise the Organisational Objectives:

1. Do the general objectives provide for survival, growth, economic contribution social obligations and profits?

2. Are the specified objectives sufficiently clear and realistic?

3. Can the goals be accomplished?

4. Do the objectives provide a basis for guiding, directing and leading the enterprise?

5. Are the objectives reasonable, logical, timely and related to each other so as to aid in motivating people?

6. Do they actually guide the control of human effort by a provision of reasonable standards?

7. Do some specific quantitative criteria, viz. return on investment, input-output, quantum of services, etc. reflect the overall objectives of the organisation?

(iv) Analytical Review:

This involves going through critically—the internal manage­ment report and the internal audit report and/or the cost audit report—with an aim at identifying problem areas and following up with the top management for corrective action.

(v) On-the-spot Inspection:

Organisational and administrative inefficiencies on differ­ent aspects like—idle investment, uneconomic operations, misuse of scrap, em­ployee idle time, etc. can be brought to light through physical inspection.

(vi) Test Check:

A tool for conducting cost/financial audit may be advantageously applied to examine operational areas of management in order to find out ineffective and inefficient performance.

(vii) Interviews and Discussions:

These are usually undertaken with the higher echelons of management. Personal discussions with them may bring into surface problems and difficulties in actual practice, e.g. employee attitudes, etc.

(viii) Performance Comparison:

This process involves evaluation of performance standard as to relevancy and reliability, and then comparing with the actual performance suitably correlated.

Problem Situations:

Problem situations or areas that may arise through the Management Audit can be briefly indicated as follows:

(i) Deficiencies in planning standards, policies and procedures in both functional and operational areas of corporate activity.

(ii) Defects in the organisation structure and in the manning pattern, such as: Ill-defined job-duties, Overlapping of work, Overstaffing or understaffing, Improper distribu­tion of work etc.

(iii) Weaknesses in materials and facilities.

(iv) Ineffective management control system—e.g. poor supervision, inadequate MIS, etc.

(v) Poor housekeeping indicated by inadequate records etc..

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