OPERATIONAL AUDIT
Operational Audit is a methodology for assessing the conformity of implementing the
procedures and methodologies set forth in the department’s instructions, regulations or
documents.
Operational audit is performed by specialized auditors. Upon completion of the auditing
process, a report of findings with recommendations is submitted. Operational audit contributes to
improving implementation, complying with the government organizations’ procedures and
providing the management with points of nonconformity so that corrective and preventive
actions can be taken, thereby improving the efficiency and effectiveness of operations and
increasing customers’ satisfaction.
The systematic process of evaluating an organization’s effectiveness, efficiency &
economy of operations under management’s control & reporting to appropriate persons the
results of the evaluation along with recommendations for improvements.
Notes:
Operational audit = management auditing = performance auditing
Systematic process logical, structured, organized series of steps/procedures. Proper
planning, obtaining & objectively evaluating evidence.
Evaluating operations based on some established or agreed upon criteria, e.g.
performance standards
Effectiveness, efficiency, economy focus on future
Effectiveness versus Efficiency
Effectiveness refers to the accomplishment of objectives.
Efficiency refers to the resources used to accomplish those objectives
Phases in Operational Auditing
~ Planning
- Having a preliminary preparation/risk assessment – gather background information
about the entity’s operation.
~ Evidence accumulation and evaluation/risk response
- You will gather evidences to support the financial statement and other documents
that are useful in performing the audit.
~ Reporting and follow-up/Audit Report
- Completion, and giving auditor’s opinion
Impact of operational audit on increasing customers’ satisfaction
~ Operational Audit
~ Identify points of nonconformity in procedure implementation
~ Corrective actions by the management
~ Increased efficiency and effectiveness
~ Increase customer satisfaction
Why Operational Audit?
- Identify poor work practices in order to improve them.
- Verify that employees implement operations in conformity with instructions and
regulations, which guarantees achieving the desired effectiveness and efficiency.
- Assist in the evaluation of quality control procedures adopted in the organization.
- Evaluate implementation processes in the organization.
Types of Operational Audits
Functional audit
- concentrates on activities of the business, e.g. billing function, production, accounting, IT
- Allows specialization, but fails to take into account interrelated functions
Organizational
- Organizational unit, e.g. branch, subsidiary, dept., unit, center
- Concentrates on organizational structure, coordination of activities
Special assignments
- Determining the cause of ineffective IT system, fraud investigation
INTERNAL AUDITING
It is an independent, objective assurance and consulting activity designed to add value
and improve an organization’s operations.
It helps an organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control, and governance
processes.
- Helping the organization accomplish its objectives
- Evaluating and improving the effectiveness of risk management, control, and governance
processes.
- Assurance and consulting activity designed to add value and improve operations.
- Independence and objectivity
- A systematic and disciplined approach (specifically, the engagement process)
Notes:
Broader objectives than external auditing more flexible to meet company’s needs.
Internal within the organization. Sometimes can be outsourced.
Independent & objective free of bias
Systematic, disciplined follow professional standards
Helps an organization accomplish its objectives aids/benefits an organization, guided
by organization’s goals/objectives
Institute of Internal Auditors’ Code of Ethics & Rules of Conduct
Integrity The integrity of internal auditors establishes trust and thus provides the
basis for reliance on their judgment.
Objectivity Internal auditors exhibit the highest level of professional objectivity in
gathering, evaluating, and communicating information about the activity or process
being examined. Internal auditors make a balanced assessment of all the relevant
circumstances and are not unduly influenced by their own interests or by others in
forming judgments
Confidentiality Internal auditors respect the value and ownership of information they
receive and do not disclose information without appropriate authority unless there is a
legal or professional obligation to do so.
Competency Internal auditors apply the knowledge, skills, and experience needed in
the performance of internal auditing services.
Relationship of Internal and External Auditors
The external auditor is responsible to financial statement users.
The internal auditor is responsible to management.
Notes:
Audit risk model & materiality
- External auditors rely on internal auditors through the use of the audit risk model
- Internal auditors reduce the CR reduce substantive testing if effective
Relationship between Operational Auditing & Internal Controls
Internal control evaluation – to evaluate efficiency & effectiveness, make
recommendations to management.
Scope – concerns any control affecting efficiency & effectiveness, e.g. policies,
procedures
