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Operations Auditing LM 2

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Edwin Bong Ababa Jr.
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15 views

Operations Auditing LM 2

Uploaded by

Edwin Bong Ababa Jr.
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Overview of Operational

Auditing Part 2
Outline
• Audit Approaches to Operational Auditing
• Principles and Standards Related to Operational Auditing
Audit Approach to Operational Auditing

• Auditors of operations should keep firmly in their mind the


objectives of management for the operations being audited. At an
early stage in planning the audit engagement, the audit team need
to establish what are management’s objectives.

• “Audit objectives” are not synonymous with “management


objectives”
Auditing for the Three and Six Es
Operational auditors are auditing for the “three Es”:

• Effectiveness
• Efficiency
• Economy
Actual Inputs (Efficiency) Actual Outputs

(Economy) (Effectiveness)

Planned Inputs Planned Outputs


(i.e., Objectives)
• •

•Economy – means “doing them cheap” – with, for instance, unit costs for labour, materials,
etc. being under control. Economy is the ratio between planned inputs and actual inputs in
terms of unit costs of given quality.

• Efficiency – means “doing things well” – smoothly, for instance with good systems which
avoid waste and rework. Efficiency is the ratio of actual inputs to actual outputs. Every
organization, whether a service organisation or a manufacturing business, has such a
conversion process.

• Effectiveness – means “doing the right things” – i.e. achieving objectives. Effectiveness is
the ratio of actual outputs to planned outputs (i.e. planned objectives).
Internal auditors have now added a further “three Es” to their
portfolio of matters of audit interest, particularly as a consequence of their
role in the audit of governance processes as set out in Standards 2110 to
2110.C1 of The Institute of Internal Auditors:9
Equity—avoidance of discrimination and unfairness; acceptance and
promotion of diversity.

Environment —acting in an environmentally responsible way.

Ethics—legal and moral conduct by management and staff.


Resourcing the Internal Audit of Technical
Activities
Standard 1210 of The Institute of Internal Auditors on “Proficiency” reads:
“Internal auditors must possess the knowledge, skills, and other competencies needed to perform
their individual responsibilities. The internal audit activity collectively must possess or obtain the
knowledge, skills, and other competencies needed to perform its responsibilities.”
and Standards 1210.A1 and 1210.C1 10 respectively read:

“1210.A1—The chief audit executive must obtain competent advice and assistance if the
internal auditors lack the knowledge, skills, or other competencies needed to perform all or part
of the engagement.

“1210.C1—The chief audit executive must decline the consulting engagement or obtain competent
advice and assistance if the internal auditors lack the knowledge, skills, or other competencies
needed to perform all or part of the engagement.”
The chief audit executive is responsible for all internal audit engagements, whether performed
by or for the internal audit activity, and all significant professional judgements made throughout the
engagement. The CAE also adopts suitable means to ensure this responsibility
is met. Suitable means include policies and procedures designed to:
• minimize the risk that internal auditors or others performing work for the internal audit activity
make professional judgements or take other actions that are inconsistent with the CAE’s
professional judgement such that the engagement is impacted adversely.
• Resolve differences in professional judgement between the CAE and internal audit staff over
significant issues relating to the engagement. Such means may include discussion of pertinent
facts, further inquiry or research, and documentation and dis- position of the differing viewpoints
in engagement working papers. In instances of a difference in professional judgement over an
ethical issue, suitable means may include referral of the issue to those individuals in the
organization having responsibility over ethical matters.
Productivity and Performance Measurement
Systems
Example Performance Measures:
1. Workload/Demand Performance Measures
2. Economy Performance Measures
3. Efficiency Performance Measures
4. Effectiveness Performance Measures
5. Equity Performance Measures
Value For Money (VFM) Auditing
Value is provided by improving opportunities to achieve
organizational objectives, identifying operational improvement,
and/or reducing risk exposure through both assurance and consulting
services.

The internal audit activity adds value when the organization and
its stakeholders benefit from the results of internal audit work.
Benefit arises when the internal audit activity pro- vides objective and
relevant assurance, and contributes to the effectiveness and efficiency
of governance, risk management and control processes.
Value For Money (VFM) Auditing

• Value for money auditing is sometimes used in a different context to refer


to a style of operational auditing which makes extensive use of key
performance indicators to explore the cost of achieving standards of efficiency
and effectiveness and whether these costs represent good value.
• Value for money auditing takes account of the three Es.
• Value for money auditing will involve the assessment of an appropriate range of
performance measurement criteria.
Value For Money (VFM) Auditing

In both the management and audit assessment of matters of value for


money, the usual approach is to make comparisons with a range of
options or possible solutions to the principal problem.
In order to avoid any potential problems at the conclusion of their
assessment, auditors should consider discussing their proposed
assessment and measurement criteria with management at the
outset, and furthermore to obtain the agreement of management on
the applied methodology. In certain sectors and industries, recognised
criteria may already exist and so it may not be necessary for
auditors to develop their own process.
Benchmarking
Benchmarking can be defined simply as a comparison of one’s own
performance in a specific area with that applied by others in
compatible circumstances.
For a benchmarking exercise to be meaningful, it is necessary to
understand fully the existing processes, systems and activities as a
firm basis for subsequent comparison with external points of
reference (such as industry or professional standards). This process of
realization often incorporates the establishment of critical success
factors for an operation (or part thereof).
Benchmarking
The principal objectives of benchmarking are likely to include:

• maintaining a competitive advantage in the appropriate market;


• establishing current methods, best practice and related trends;
• ensuring the future survival of the organization;
• maintaining an awareness of customer expectations (and
being able to address them);
• ensuring that the organization has the appropriate approach to
quality issues.
Benchmarking
Internal audit departments can often benefit from participating in
benchmark comparisons with other audit functions; such involvement can
contribute to their understanding of:

• the internal auditing trends and practices as applied by the


companies surveyed;
• the implications and potential of the findings for the participant’s own
organization;
• the validity of the participant’s own stance on internal auditing in relation to
that apparent from the survey data.
Benchmarking is not an end in itself, but rather one platform used
to identify and subsequently launch the required or necessary processes of
change within a department, function, activity, process or organization.
Internal Audit Standards
Attribute Standards Performance Standards
a. Purpose, Authority and Responsibility a. Managing Internal Audit Activity
b. Independence and Objectivity b. Nature of Work
c. Proficiency and Due Professional Care c. Engagement Planning
d. Quality Assurance and Improvement Program d. Performing the Engagement
e. Communicating Results
f. Monitoring Progress
g. Communicating the Acceptance of Risk

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