OPERATIONAL

AUDITING
ELLYSA GAIL S. CAMUTIN
MIKE FRANCIS PEÑALOSA
NATURE
•OPERATIONAL AUDIT also known as management audit and performance audit, are
conducted to evaluate the effectiveness and/or efficiency of operations.

•These are examinations of all or part of an entity to determine the degree of its
operational efficiency, effectiveness, and economy.

•It also refers to the auditor’s study of business operations for the purpose of making
recommendations about economic and efficient use of resource, effective achievement
of business objectives and compliance with company policies.

•OPERATIONAL implies a focus on operations, as opposed to financial position.

•MANAGEMENT implies that the information obtained in the audit process is useful to
management in decision making.

•PERFORMANCE implies an evaluation of the performance of persons or units in

executing the entity’s objectives.

•NOTE: WE USE THE TERM OPERATIONAL AUDITING BECAUSE IT IS MOST

WIDELY USED TODAY.
 EFFECTIVENESS VS. EFFFICIENCY;
ECONOMY
• EFFECTIVENESS refers to an entity’s or a unit of an entity’s success in
actually achieving its goals and objectives.

• EFFICIENCY refers to how well an entity uses its resources to achieve its
goals. It is also described as reducing cost without reducing
effectiveness.

• TYPES OF INEFFICIENCY:
• Work is done that serves no purpose.
• Raw materials are not available for production when needed.
• Acquisition of goods and services is excessively costly.
• There are too many employees.
• There is duplication of effort by employees.

• ECONOMY refers to an entity’s success in maximizing the use of its

limited resources to achieve its goals and objectives.
OBJECTIVE OF OPERATIONAL AUDIT
Operational Audit is often performed by INTERNAL AUDITORS for their
organization.

Major users of operational audit reports: MANAGERS AND BOARD OF

DIRECTORS

Top management needs assurances that every component of an

organization is working to attain the organization’s goals.
For example, management needs the following:
1. Assessment of the unit’s performance in relation to management’s objectives or
other appropriate criteria
2. Assurance that its plans are comprehensive, consistent, and understood at the
operating levels.
3. Objective information on how well its plans and policies are being carried out in
all areas of operations and on opportunities for improvement in effectiveness,
efficiency and economy.
4. Information on weaknesses in operating controls, particularly as to possible
sources of waste.
5. Reassurance that all operating reports can be relied on as a basis for action.
• GOVERNMENTAL AUDITORS, such as those employed
by the Commission on Audit (COA), perform operational
audits of governmental programs that are administered by
both governmental and nongovernmental organizations.
SCOPE OF OPERATIONAL AUDIT
The broad statement of purpose of an operational audit usually includes the intention to
appraise the performance of a particular organization, function, or group of activities.

The operational auditor appraises management’s operating controls and systems over
such varied activities as purchasing, data processing, receiving, shipping, office services’,
advertising, engineering etc.

1. ECONOMY AND EFFICIENCY AUDITS which include determining (a) whether the
entity is acquiring, protecting, and using its resources (such as personnel, property,
and space) economically and efficiently, (b) the causes of inefficiencies or
uneconomical practices, and (C) whether the entity has complied with laws and
regulations concerning matters of economy and efficiency.

2. PROGRAM AUDITS include determining (A) the extent to which the desired results
or benefits established by the legislature or other authorizing body are being
achieved, (B) the effectiveness of organizations, programs, activities, or functions
and (C) whether the agency has complied with laws and regulations applicable to
the program.

3. COMPLIANCE AUDIT includes testing and reporting on whether an organization

has complied with the requirements of various laws, regulations and agreements.
DISTINCTION BETWEEN OPERATIONAL
AUDITING (OA) AND FINANCIAL AUDITING (FA)
OPERATIONAL Auditing (OA)
A. Purpose of the Audit
• Emphasizes effectiveness, efficiency, and
economy.
• Concerned with operating performance for
the future.
B. Nature and Distribution of the Report
• Reports are intended primarily for
management.
• OA reports vary considerably from audit to
audit of the diverse nature of audits for
efficiency and effectiveness.
C. Inclusion of Non-financial Areas
• OA’s covers any aspect of efficiency and
effectiveness in an organization and can
therefore involve a wide variety of activities
Financial Auditing (FA)
A. Purpose of the Audit
• Emphasizes whether historical
information was correctly recorded.
• Past-oriented.
B. Nature and Distribution of the
Report
• Report typically goes to many users of
financial statement (stockholders and
bankers)
• Wording in FA reports is well-defined
because of the widespread distribution of
the report.
C. Inclusion of Non-financial Areas
• FA’s are limited to matters that directly
affect the fairness of financial statement
presentation
TYPES OF OPERATIONAL AUDITS
There are three broad categories of operational audits:
1. FUNCTIONAL
2. ORGANIZATIONAL
3. SPECIAL ASSIGNMENTS

In each case, part of the audit is likely to concern

evaluating internal controls for efficiency and effectiveness.
FUNCTIONAL
A functional audit deals with one or more functions in an
organization.

Functions are a means of categorizing the activities of a

business, such as the billing function or production
function. There are many different ways to categorize and
subdivide functions.

A functional audit has the advantage of permitting

specialization by auditors.

A disadvantage of functional auditing is the failure to

evaluate interrelated functions.
ORGANIZATIONAL
An Operational Audit of an organization deals with an entire
organizational unit, such as department, branch, or
subsidiary.

The emphasis in an organizational audit is on how

efficiently and effectively function interact.

The plan of organization and the methods to coordinate

activities are especially important in this type of audit.
SPECIAL ASSIGNMENTS
Special operational auditing assignments arise at the
request of management. There are a wide variety of such
audits.

Examples:
1. Determining the cause of an ineffective EDP system.
2. Investigating the possibility of fraud in a division
3. Making recommendations for reducing the cost of a
manufactured product.
WHO PERFORMS OPERATIONAL
AUDIT?
INTERNAL AUDITORS are in such a unique position to perform
operational audits that some people use internal auditing and
operational auditing interchangeably.

An advantage that internal auditors have in doing operational

audits is that they spend all their time working for the company
they are auditing. They develop considerable knowledge about
the company and its business, which is essential to effective
operational auditing.

To maximize their effectiveness, the internal audit department

should report to the board of directors or p resident. Internal
auditors should also have access to and on-going
communications with the audit committee of the board of
directors. This organizational structure helps internal auditors
remain independent.
GOVERNMENT AUDITOR
Most of the government auditors are concerned with both financial and
operational audits, also referred to as performance audits.

Performance audit include the following:

1. ECONOMY AND EFFICIENCY AUDITS. These have as their purpose
determining (1) whether an entity is acquiring, protecting, and using its
resources economically and efficiently, (2) the causes of inefficiencies or
uneconomical practices, and (3) whether the entity has complied with laws
and regulations concerning matters of economy and efficiency.

2. PROGRAM AUDITS. These have as their purpose determining (1) the

extent to which the desired results or benefits established by the
legislature or other authorizing body are being achieved, (2) the
effectiveness of organizations, programs, activities, or functions and (3)
whether the entity has complied with laws and regulations applicable to the
program.

The first two objectives of each of these types of performance audits are clearly
operational in nature. The final objective in each is compliance in nature.
CPA FIRMS
The background knowledge about a client’s business that
an external auditor must obtain in doing an audit often
provides useful information for giving operational
recommendations.

It is also common for a client to engage a CPA firm to do

operational auditing for one or more specific parts of its
business.
IMPORTANT QUALIFICATIONS OF
OPERATIONAL AUDITORS
1. To whom the auditor reports to. It is important to ensure
that investigation and recommendations are made
without bias.
2. Independence. It is not a problem for CPA firm auditors
because they are not employed by the company being
audited. Internal auditors can enhance their
independence by having the internal audit department
report to the BOD or president. But the responsibilities
of operational auditors can affect their independence.
3. Competence. It is necessary to determine the cause of
operational problems and to make appropriate
recommendations. Competence is a major problem
when operational auditing deals with wide-ranging
operating problems.
CRITERIA FOR EVALUATING
EFFECTIVENESS AND EFFICIENCY
A major difficulty found in operational auditing is in deciding on specific
criteria for evaluating whether efficiency and effectiveness have
occurred.

PFRS are the broad criteria for evaluating fair presentation in auditing
historical financial statements. Audit objectives are used to set more
specific criteria in deciding whether PFRS have been followed. In
operational auditing, no such well-defined criteria exist.

Different approaches can be used to evaluate efficiency and/or

effecitveness.
1. Look at an entity’s overall level of profitability.
2. For profit entities, you can check the improvement in the defect
rate.

Identifying criteria for evaluating effectiveness and efficiency may be

very difficult in the absence of specific standards.
There are several sources that the operational auditor can
utilize in developing specific evaluation criteria. These
include the following:

1. Historical Performance
2. Comparable Performance
3. Engineered Standards
4. Discussion and agreement