OPERATIONAL

AUDITING
 Operationalaudits also known as management
audits and performance audits.

 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. For
example, Congress may request auditors of the
Commission on Audit to evaluate one of its
programs, such as a program on low-cost
housing.
 Operational auditing 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.
 Operationalimplies 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. We use the term operational
EFFECTIVENESS OF VS EFFICIENCY:
ECONOMY
 Effectiveness refers to an entity's or a unit of an entity's
success in actually achieving its goals and objectives.
Before an operational audit for effectiveness can be
performed, there must be specific criteria for what is
meant by effectiveness. An example of an operational
audit for effectiveness would be to assess whether a
governmental agency has met its assigned objective of
achieving elevator safety in a city Before the operational
auditor can reach a conclusion about the agency's
effectiveness, criteria for elevator safety must be set. For
example, is the objective to see that all elevators in the
city are inspected at least once a year? Is the objective to
ensure that no fatalities occurred as a result of elevator
breakdowns or that no breakdowns occurred?
EFFECTIVENES VS EFFICIENCY:
ECONOMY
 Efficiencyrefers to how well an entity uses
its resources to achieve its goals. It is also
described as reducing cost without
reducing effectiveness. For example, if two
different production processes manufacture
a product of identical quality, the process
with the lower cost is considered more
efficient.
The following are several types of inefficiencies that
commonly occur and often
are uncovered through operational auditing.
Types of Inefficiency
• Work is done that serves no purpose. • Copies of vendors' invoices and receiving
reports are sent to the production
department where they are filed without
ever being used.
• Raw materials are not available for • An entire assembly line must be shut down
production when needed. because necessary materials were not
ordered.
• Acquisition of goods and services is • Bids for purchases of materials are not
excessively costly. required.
• There are too many employees. • The office work could be done effectively
with one less administrative assistant.
• There is duplication of effort by • Identical production records are kept by
employees. both the accounting and production
departments because they are unaware of
each other's activities
Economy refers to an entity's
success in maximizing the use of
its limited resources to achieve its
goals and objectives.
Objectives of Operational Audits

 Operational audits are often performed by

internal auditors for their organizations. The
major users of operational audit reports are
managers at various levels, including the
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. Assessments of the unit's performance in relation to management's

objectives or other appropriate criteria.
2. Assurance that its plans (as set forth in statement of objectives, programs,
budgets, and directives) 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. Operational
auditing is especially applicable to governmental
programs where the effectiveness of the programs
cannot be evaluated in terms of profits; they must
be evaluated by measuring such elements as the
number of families relocated, the number of
individuals rehabilitated, or the extent of the
improvement in environmental conditions. In
addition to internal and governmental auditors, CPA
firms perform operational audits for clients through
their consulting services departments.
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. However, this broad
statement must be expanded to specify precisely
the scope of the audit and the nature of the report.
The auditors must determine specifically which
policies and procedures are to be appraised and
how they relate to the specific objectives of the
organization.
Three types of operational
audits
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)
A. Purpose of the Audit

 FA emphasizes whether historical information was correctly

recorded whereas OA emphasizes effectiveness, efficiency,
and economy.

 FA is past-oriented whereas OA is concerned with operating

performance for the future. OA for example may evaluate
whether a type of new material is being purchased at the
lowest cost to save money or future raw material purchases.
Distinction Between Operational
Auditing (OA) and Financial Auditing
(FA)
B. Nature and Distribution of the Report
 For FA, report typically goes to many users of financial
statement, such as stockholders and bankers, whereas OA
reports are intended primarily for management
 Wording in FA reports is well-defined because of the
widespread distribution of the report
 OA reports vary considerably from audit to audit of the
diverse nature of audits for efficiency and effectiveness
Distinction Between Operational
Auditing (OA) and Financial Auditing
(FA)
C. Inclusion of Non-financial Areas

 OA's covers any aspect of efficiency and effectiveness in

organization and can therefore involve a wide variety of
activities.

 FAs are limited to matters that directly affect the fairness of

financial statement presentation.