Objectives of Management Auditing - Essay Example

Management Auditing Management auditing, as the suggests, is all about detailed assessment encircling the entire operations, policies and procedures undertaken by an organization. It is necessary to keep an eye on the operational framework of company’s actions and policies, so that a dedicated control can be manifested in assessing whether the company’s operations are in-line with that of the policies stated and they are being conducted in an efficient and effective way. Management auditing is significant to entrenching the worldwide established standards and assessing the company’s objectives against those standards for their accuracy and reliability. This leads to the development of targeted objectives and standards, and the actual standards and objectives are compared to identify the potential gaps and flaws in the system (pickett, 2005). Management Auditing is applied at the core and structure of an organization with its basic emphasis on comprehensively examining the structure, functionalities and governing bodies, departments, division heads and all the major operations of an organization. Moreover, management auditing acts as a powerful tool that has the potential to ascend deep down into the core operations of management of any organization from a highest point to the lowest one. It further ensures that a sound and foolproof management is being conducted internally and strengthens on the enhanced relationship with the outside world only if the internal operations of an organization are run smoothly (Leonard). Management auditing is much frequently interchanged with Internal Auditing or even Operational Auditing. According to IIA Institute of Internal Audit’s CEO, the regulatory environments and complex business systems have evolved as a result of dynamic environment and for this internal audit function has been established to cope up with the solution to these problems. This system has been developed by the internal auditors and the corporate management, therefore this system is significant to the improvement of business performance and suggesting constructive ways of improvements to the line managers. (Wilson and wood, 1985). Objectives of Management Auditing: Management auditing ensures the efficient and managed workability of all business operations. It furnishes improvements and outlines suitable recommendations. It frequently strengthens and enhances the managerial efficiency. Moreover it delineates efficient methods and effective processes whilst designing responsibilities and duties of the work force and lastly it actively seeks the progress of an organization whether it is accomplishing its objectives or not. Scope of Management Auditing: First of all management auditing actively reviews the existing organizational structure in relation to the current and forecasted demands undertaken by business keeping in view the objectives and aims of that enterprise. It examines the rate of return over the invested capital and monitors the performance whether the return rate is sufficient, average or poor as per the calculations and targets. Management auditing is also concerned with the studying of relationship that exists among the business, its direct shareholders and other investors from public. It also engages in comparative analysis of the position and performance of an organization against the other firms within the same industry. This actively defines the exact position gained by an organization when the comparative ratios of different firms with that of an organization are evaluated. The duties and responsibilities undertaken by the auditor are also put under concern. Management auditing also involves the financial planning and control systems. The department of manufacturing, production and sales also comes under the body of management auditing (Vallabhaneni, 2013). Institute of Internal Auditors: Institute of internal auditors has become a chief body considered well as a standardized regulatory body for carrying out management or internal auditing over a few years. Internal Auditing is concerned with bringing value to the organization by improving its operations independently and objectively. It further stresses on the facts that objectives of an organization are accomplished in a systematic way and the overall risk of the system is reduced and mitigated and there lies maximum control over the system and adequate governance. Development of Internal Auditing Function: Four distinct stages are highlighted when there of question of how the internal auditing functions has been developed. 1. Traditional Approach To Internal Auditing: As the word suggests, traditional internal/management auditing was nothing but the auditing and reviewing of financial budgets and systems. It mainly encompassed on the compliance department only with the prime focus on managing, monitoring and reviewing large volumes of financial transactions only (Sawyer, 1996). In the past such horrifying process was commonly termed as inspection frequently carried out in banks and insurance companies. As it was a really strenuous and time consuming approach of olden times now things have become much easier and accountable. Now internal auditing has been regarded as a management function. 1. System Based Internal Auditing: The development of system based internal auditing approach was a stage two development of internal auditing development cycle. Previously a vertical approach was utilized whilst conducting the audit from each of the divisions, sub units and branches. But with the development of system based approach a new concept of auditing function was enabled that undertook the horizontal approach by auditing the organization as a whole and applying internal auditing functions across the organization taking it as a single unit. The systems based approach was much focussed on competency of controls instead of looking at the bulky volumes of transactions on daily basis. It was regarded as a collaborative and much constructive approach with less time consuming as compared to that of the traditional one (Coderre, 2009). 3.Development Internal Auditing: This is a much contemporary approach of management or internal auditing as it involves the auditing of merely any function rather than the financial and transaction functions only. Unlike other approaches discussed above, it is regarded as a risk based approach. It basically focuses on the critical issues faced by the organization that caused threat to an organization’s accomplishment of objectives and hinders in achieving them. Moreover here much focus is given to all those functions that are vital to the functionality of an organization and concentrating on such objectives gives a clear direction to the workforce. This explains a more strengthened approach on reviewing the action oriented departments of an organization that constitute overall business framework instead of the individual systems. Here most critical areas are identified that needs enough accountability which was otherwise vague and blurred. 2. Forward Looking Internal Auditing: Forward looking internal auditing is considered as the final stage of internal auditing which includes the following processes: Process 1: It functions as a bridge for consulting type assignments indulging in looking for and getting requests. Process 2: It is regarded much as a function resolving problems rather than simply pointing out the defaulted functions specifically. Process 3: It actively seeks recognition as a mentor, advisor and a business partner contribute to the most positive and distinct role of internal auditing (Vallabhaneni, 2005). Internal Auditing Expectation Gap- An Important Aspect to Measurement: This expectation gap was a creative and different move to using internal auditing as a tool to measuring by Cindy Cosmas (1996). She states that, “A marketing program, or plan, is essential for every internal auditing department. A well-devised plan will direct internal auditors in their quest to provide valuable services to their organization.” She also writes about the promotion of internal auditing as “As a marketing tool, audit participation on project teams has been beneficial overall in winning management’s praise and support. Internal auditing brings a unique perspective to project teams through their background and training.” This was all what she concluded as a result of her study at North American organizations where she was initially providing these services in auditing. Now coming towards the expectation gap part of her study, she focussed on the intrinsic value of Improvement and Meeting customers’ needs. She stresses that internal auditing is a powerful tool to measure the overall improvements that can be brought into as the customers are always seeking continuous improvement benefits in any product/ service offering put forth by an organization. Moreover internal or management auditing will highlight the customers’ needs and the potential expectation gaps between their specific needs will be highlighted and taken under strong consideration. Cosmas ideology of taking internal auditing as a core part of organization in coalition to its customers has gained enough recognition over the years as the organizations are become more of Customer-oriented rather than merely as Product-oriented as seen in the past. Cosmas says that in order to improve any process, an organization must seek its customers’ interest and outcome that its customers are searching for and their intention of using that process outcomes. According to a study it is revealed that a marketing plan is only functional when there is adequate knowledge poured in from the internal auditing customer. Moreover the study also explains the significance of any internal auditing functioning inside a business when the customer understands what is regarded of internal audit services. ( Cosmas, 1996) She stressed on the fact that every customer whether directly or indirectly related to an organization must understand the critical role of Internal Auditing that is being operated inside the company. Its performance, perceived benefits and intrinsic value must be communicated to organization’s customers through training programs that speak of its responsibility, roles, authority and purpose. As for instance an example dictating the expectation gap falling under the role of internal auditing is to detect, to prevent and to investigate fraud. Today’s Modern Image of Internal Auditing: According to a modern image of internal auditing a gap lies between the internal auditors and the domain in which fraud and irregularities exist. The outside parties always expect that internal auditors are there to inspect fraud areas and fill in for those loopholes. They expect internal auditors to be effective and the success of an internal auditor to identify and prevent fraud lies with the chief audit executive (Chambers, 2005). Chambers speaks of the value the extensions brought into the internal auditor’s role as a business partner, analyst, consultant, mentor, governance body, risk reducer and scam detector etc through the 1990’s. Chambers’ viewpoint was later supported by a research done in United Kingdom in 2002 that showed that internal auditing brought about six major improvements and adding value to the corporate governance as ensuring the internal auditing control framework is functioning well, ensuring that risk factors faced by a business are being handled adequately and fraud detection and irregularities prevention is upholstered. These three are regarded as part of traditional approach to internal auditing. The next three elements are considered as inherent parts of team based approaches which include best practices of a firm are being implemented and shared across the workforce to enhance business performance, novel business risks are identified and risk mitigation strategies are developed accordingly and mix of knowledge and experience is utilized while governing intricate issues of interest (Chambers, 2009) By now, many organizations are adding value to their processes and are trained and competent enough to extract the essence of these valuable elements. The new services as explained above have incredibly changed the internal auditing functions in many businesses and well accepted by the top levels of management and board directors, since 2005. Types of Organizations Using Internal Auditing Systems: Many organizations of today are constantly focussing on the improvement sides in their businesses. They are implementing internal auditing management systems to strengthen the transparency and accuracy of the auditing systems not because of tracking frauds and irregularities only, but also many other governance and authoritative benefits. Most of the medium sized and large corporate organizations have now built in distinct Internal Auditing Management Departments. Following is a brief list of organizations undertaking internal auditing functions in their common business practices: 1. Organizations enlisted in the stock exchange. 2. Banking institutions supported on financial frameworks. 3. Insurance companies dealing with financial functions 4. Other organizations dealing with fiduciary responsibilities. Moreover, other companies are also conducting this internal auditing approach as there is much evidence of assurance of auditor’s committee as a critical element of management function now. It furthermore strengthens the overall structure and composition of an organization making it free of black pools or loop holes and enhancing the credibility of an organization with the external creditors and investors of the company (Champlain, 2003). Internal financial records are established and maintained by the management frequently and this record often with written certification is acquired by the regulators for checking the accuracy and competence of control systems authentication. As the environment is becoming uncertain every day and many organizations are moving towards globalizations, the original legalities and regulatory requirements are being reviewed and amended on a frequent bass to cope with such dynamic environment. Therefore it is considered as a binding for the organization to keep up with the new advancements in legislations and understand the significance of new rules. The above discussion encompassed the medium sized to large organizations, but in this section smaller organizations with their own viewpoints are discussed. In smaller organizations there is less distance among the different levels of hierarchy and there is less span of control down the authority of command. Mostly the managers, supervisors and subordinates work closely together that the mangers can actively seek control over the subordinates in an easy way. They can thereby effectively monitor the activities performed by the middle management and the low level management and can easily direct them towards their targets. In cases where there is enough complexity of systems and there are too many bulky transactions more workforces is required to cope up with the increase internal and external demand shifts. With this increased workforce, only managers and supervisors cannot perform the monitoring and controlling functions alone. Adding more workforces is significant to disperse the increased responsibility of management in carrying out internal controlling role. Organization dealing with cash inflows and outflows systems, financial institutions and management of liquid assets require a certain degree of inspection, management and internal auditing control. Organizations that lack proper and distinct internal auditing systems must establish some equivalent potential systems that work as internal auditing functions. These organizations must constitute such management auditing systems that corresponds well to their size and type of business to protect it from the harms of scams and secure the source of capital and reduce risk factors associated with it. The existing systems must be assessed and monitored against their estimated costs and the potential benefits contributed in by the internal auditing function (Anderson and Dahle, 2009). Internal Auditing Supreme Roles to Governance: Implementing internal auditing is critical to the proper functioning of any organization. Consider of an organization with adequate capital and workforce working under very less control. Is it possible for an organization to work under such minimal levels of controls in today’s era? This is something to impossible at least if considering today’s environment. The internal auditing framework supports the running of the functions including consistent and upright financial working and operational information processes, smoother running of operations in an efficient and effective manner, upholding of all types of assets and capital that a firm requires and strict compliance to the registered laws, and regulations, adherence to the written contracts and certification (Diamond, 2002). Internal Audit Function – A Step Forward: Internal auditing is a difficult process to be implemented at first but when practiced by the organization as whole and exercised by the top management it is the most transparent, accurate and reliable auditing function developed so far. Moreover external auditors are well aware of their distinct role and what they actually require of their work, but when compared to the team of internal auditors their role is not defined by the established laws and rules (Bragg, 2011). Every organization has distinct work capabilities and frameworks in which they operate. Therefore organizations must identify its needs to shape internal auditing functions as per their very own requirements. This way the role of internal auditing function is defined by them. The Institute of Internal Auditors (IIA) has been constantly developing and enriching the definition of internal auditing by adding crucial points of value to reinforce the role of internal auditing. these frequent adjustments into the definition of Internal Auditing is generalized and of distinct value to organizations as every organization has its own set of roles and responsibilities that needs to be established and then encountered (Wilson and wood, 1985). In addition to this, up till now, several authors have written books on internal auditing that provide value and guidance to organizations in implementing internal auditing functions in their organizations. Internal/ Management auditing is considered as a truly valuable resource for top levels of managements and the board because of its immense objectivity, in depth analysis of the targeted and actual objectives and overall skills and knowledge required of the organization. Management auditing functions are integral to the management and they are often set up by the corporate management. This system is acquired by the management to assess the internal control system that management takes the responsibility of establishing. Internal Auditing is not liable to perform the controlling functions as this is purely regarded as a line management’s responsibility. The emphasis has always been on compliance to the company policy systems and inspection of fraud and irregularities (Jhonson, 1999). References ANDERSON, U., DAHLE, A. J., & ANDERSON, U. (2009). Implementing the international professional practices framework. Altamonte Springs, Fla, IIA Research Foundation. BRAGG, S. M. (2011). The new CFO financial leadership manual. Hoboken, N.J., Wiley. CHAMPLAIN, J. J. (2003). Auditing information systems. Hoboken, NJ, John Wiley CODERRE, D. G. (2009). Internal audit: efficiency through automation. Hoboken, N.J., John Wiley & Sons. COSMAS, CINDY E. 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(2005). Wiley CIA exam review. Hoboken, N.J., Wiley. WILSON, J. A., & WOOD, D. J. (1985). Managing the behavioral dynamics of internal auditing. Institute of Internal Auditors Research Foundation. Read More