CHAPTER 1: Definition, Characteristics, and Guidance

1.1 Introduction

●​ Operational auditing evaluates an organization's efficiency (resource use), effectiveness (goal

achievement), and economy (cost management).
●​ Unlike financial or compliance audits, it aims to improve operations.
●​ Key outcome: recommendations for performance improvement, not just reporting past issues.
●​ Helps organizations align operations with strategic objectives and manage business risk.

1.2 Definition and Characteristics of Operational Auditing

●​ Defined as a systematic process of objectively obtaining and evaluating evidence regarding the
efficiency, effectiveness, and economy of operations.
●​ Emphasis on performance improvement and value addition.
●​ Not bound to financial data only; evaluates any operational activity.
●​ Combines traditional audit techniques with business analysis and consultancy.

Core Characteristics:

1.​ Scope is flexible – can include any activity, function, or process.

2.​ Independent and objective – auditors are neutral parties.
3.​ Results-oriented – focuses on outcomes and enhancements.
4.​ Continuous improvement focus – beyond compliance and error detection.
5.​ Multidisciplinary – requires knowledge of business, management, risk, and IT.

1.2.1 The Other Parts of the Definition

●​ Operational audits involve:

○​ Assessing goals vs. actual performance.
○​ Identifying root causes of inefficiencies.
○​ Suggesting strategic improvements, not just technical fixes.
●​ Emphasis on practical, actionable, and sustainable solutions.
●​ Auditors often act as internal consultants to drive change.
1.3 The Risk-Based Audit

●​ A risk-based approach assesses where the greatest potential harm or failure may occur.
●​ High-risk areas (e.g., data breaches, supply chain failure) receive more audit focus.
●​ Steps:
1.​ Risk Identification – known and emerging risks.
2.​ Risk Prioritization – based on likelihood and impact.
3.​ Audit Planning – designed around risk severity.
●​ Ensures efficiency and effectiveness in audit execution.

1.4 Auditing Beyond Accounting, Financial, and Regulatory Requirements

●​ Operational audits evaluate:

○​ Operational processes (e.g., procurement, logistics).
○​ Strategic alignment of departments and teams.
○​ Project effectiveness, IT systems, HR, marketing, etc.
●​ Focus shifts from "Are we following rules?" to "Are we doing things well?"

1.4.1 The Value Auditors Provide

●​ Insight – into processes, risks, and gaps.

●​ Foresight – anticipation of emerging issues.
●​ Oversight – independent monitoring of operations.
●​ Auditors can highlight:
○​ Misaligned KPIs
○​ Resource wastage
○​ Repetitive or manual tasks
○​ Poor communication channels
1.5 Identifying Operational Threats and Vulnerabilities

●​ Auditors identify:
○​ Process inefficiencies
○​ Fraud risk indicators
○​ Weak internal controls
○​ Poor decision-making structures
●​ Includes internal and external sources:
○​ Internal: poor documentation, unclear roles, tech lags.
○​ External: economic shifts, supply disruptions, cyber threats.

1.6 The Skills Required for Effective Operational Audits

●​ Technical and soft skills blend:

1.​ Analytical thinking – data analysis, problem-solving.
2.​ Business acumen – understand company strategy and operations.
3.​ Communication skills – reporting, interviewing.
4.​ IT proficiency – using data analytics, ERP systems.
5.​ Relationship management – influencing without authority.
●​ Continuous professional development is essential.

1.7 Integrated Auditing

●​ Combines operational, financial, and compliance perspectives.

●​ Benefits:
○​ Reduces duplication of effort.
○​ Provides a holistic view of risks and controls.
○​ More comprehensive findings and actionable recommendations.
●​ Often used in enterprise-wide audits or large-scale risk assessments.
●​ IA-CM Framework - used to assess the internal audit department's current condition and also as a
visioning tool.
○​ Level 5: Optimizing - internal auditing recognized as a change agent
○​ Level 4: Managed - overall assurance on governance, risk management, and control
○​ Level 3: Integrated - advisory services
○​ Level 2: Infrastructure - compliance auditing
 ○​ Level 1: Initial - ad-hoc/isolated audits

1.8 The Standards

●​ Governed by the IIA’s IPPF (International Professional Practices Framework):

1.​ Attribute Standards – relate to the qualities of auditors (independence, objectivity,
proficiency).
2.​ Performance Standards – relate to how audits should be conducted.
3.​ Implementation Standards – guidance for specific types of audits.
●​ Code of Ethics: integrity, objectivity, confidentiality, competence.
 CHAPTER 2: Objectives and Phases of Operational Audits

2.1 Introduction

●​ Operational audits are structured and iterative.

●​ Ultimate aim: recommend actionable improvements for management.

2.2 Key Objectives of Operational Audits

●​ Determine:
○​ How well resources are used (efficiency).
○​ If objectives are achieved (effectiveness).
○​ If cost control exists (economy).
●​ Secondary objectives:
○​ Ensure policies and procedures are followed.
○​ Evaluate risk management and internal control systems.
○​ Enhance strategic alignment and accountability.

2.3 Phases of the Operational Audit

1.​ Planning – risk-based, defines scope and depth.

2.​ Fieldwork – evidence gathering and analysis.
3.​ Reporting – findings and recommendations.
4.​ Follow-Up – implementation and impact measurement.

2.4 Planning

●​ Includes:
○​ Defining audit universe and selecting target area.
○​ Understanding process flows and key players.
○​ Establishing audit criteria and methods.
●​ Use interviews, walkthroughs, and documentation review.

2.4.1 What Must Go Right for Them to Succeed?

●​ Identify Critical Success Factors (CSFs) – activities essential for goal achievement.
 ●​ Audit focuses on whether these CSFs are:
○​ Present
○​ Working as intended
○​ Supported by controls

2.4.2 Risk Factors

●​ Identify:
○​ Process-level risks (e.g., manual approvals).
○​ Strategic risks (e.g., market shifts).
○​ External risks (e.g., regulations).
●​ Evaluate likelihood and impact.

2.5 Fieldwork

●​ Deep dive into operations:

○​ Walkthroughs
○​ Testing
○​ Observation
○​ Data analysis
●​ Validate if controls are effective and goals are met.
2.6 Types of Audit Evidence

2.6.1 Testimonial Evidence

●​ Interviews, surveys.
●​ Assess understanding and intent of personnel.

2.6.2 Observational Evidence

●​ Direct viewing of processes.

●​ Identifies practice vs. policy gaps.

2.6.3 Document Inspection

●​ Policies, SOPs, logs, performance data.

●​ Verifies compliance and accuracy.

2.6.4 Recalculation/Reperformance

●​ Rechecking computations or executing tasks again.

●​ Confirms accuracy and reliability of processes.
2.6.5 Professional Skepticism

●​ Always question and validate.

●​ Avoid confirmation bias.
2.6.6 Workpapers

●​ Formal documentation of evidence, analysis, and conclusions.

●​ Must be:
○​ Clear
○​ Logical
○​ Compliant with standards

2.6.7 Flowcharts

●​ Visual representation of processes.

●​ Helps identify control gaps and redundancies.

2.6.8 Internal Control Questionnaires (ICQs)

●​ Structured forms to identify existing controls.

●​ Often used in the planning or fieldwork phase.

2.6.9 Condition of Workpapers

●​ Must be:
○​ Neat
○​ Indexed
○​ Referable to findings
○​ Reviewed and signed off

2.6.10 Electronic Workpapers

●​ Use of tools (e.g., AuditBoard, TeamMate).

 ●​ Benefits:
○​ Easier updates
○​ Integration with risk matrices
○​ Efficient collaboration

2.7 Reporting

●​ Communicates:
○​ What was found
○​ Why it matters
○​ What should be done
●​ Includes:
○​ Executive summary
○​ Detailed findings
○​ Management responses
○​ Action plan

2.8 Follow-Up

●​ Confirm:
○​ Recommendations were implemented.
○​ Changes have had desired impact.
●​ Follow-up may include mini-audits or interviews.

2.8.1 Metrics

●​ Track:
○​ Implementation rates
○​ Performance changes post-audit
○​ Control maturity
○​ Audit turnaround time

2.9 People, Processes, and Technology

●​ Must be assessed in tandem:

○​ People – roles, skills, training, culture.
○​ Processes – steps, controls, efficiency.
○​ Technology – systems, automation, cyber risk.
 CHAPTER 3: Risk Assessments

3.1 Introduction

●​ Risk assessments drive:

○​ Audit focus
○​ Resource allocation
○​ Strategic alignment
●​ Crucial for identifying priority areas.

3.2 Risk Assessments

●​ Risk = Likelihood × Impact

●​ Includes:
○​ Strategic
○​ Operational
○​ Compliance
○​ Reputational
○​ Cyber

3.2.1 Identification of Risks

●​ Sources:
○​ Industry trends
○​ Past incidents
○​ Stakeholder concerns
○​ Control breakdowns
3.3 Measurement of Risks

3.3.1 The Risk Matrix

 ●​ Plots likelihood on one axis, impact on the other.
●​ Helps in prioritization:
○​ High risk – audit priority
○​ Low risk – monitor or defer

3.4 Assessing Risk and Control Types

●​ Inherent risk – without controls.

●​ Control risk – failure of existing controls.
●​ Residual risk – what remains post-controls.
●​ Controls can be:
○​ Preventive
○​ Detective
○​ Corrective

3.5 The Importance of Control Self-Assessments (CSAs)

●​ Employees assess their own risks and controls.

●​ Benefits:
○​ Builds ownership
○​ Promotes risk culture
○​ Early risk detection

3.6 Business Activities and Their Risk Implications

●​ Examples:
○​ Sales – overpromising, revenue recognition.
○​ Procurement – vendor fraud, contract risks.
○​ IT – data breaches, downtime.
○​ HR – turnover, succession planning.
●​ Each requires customized risk identification.

3.7 Future Challenges and Risk Implications

●​ Emerging risks include:
○​ Cybersecurity and data privacy
○​ Remote work and hybrid operations
○​ AI and automation
○​ Climate risk
○​ Geopolitical instability
●​ Auditors must remain agile and future-focused.