Guest
MANAGEMENT AUDIT
(A) Definition
Management audit is the audit to examine, review and appraise the different policies of the management on
the basis of certain prescribed standards. It is not like a traditional audit but is a comprehensive and critical
review of all aspects of management performance.
“The Management Audit may be more specifically defined as being an investigation of a business from the
highest level downwards in order to ascertain whether sound management prevails throughout, thus facilitating
the most effective relationship with the outside world and the most efficient organization and smooth running
internally”- Taylor and Perry.
“The Management Audit is an informed and constructive analysis, evaluation and series of recommendations
regarding the broad spectrum of plans, process people and problems of an economic entity”- Camp Field.
“The Management Audit may be defined as a comprehensive and constructive examination of an organization
structure of a company, institution or branch of Government or any component thereof, such as a division, or
department, and its plan and objectives, its means of operation and its use of human and physical facilities.”-
William P. Leenard.
In short the Management Audit is a forward looking audit. It emphasizes on problem identification rather than
problem solving, it pinpoints the areas requiring attention of management, it evaluates the existence of well
defined objectives and examines whether policies are consistent with objectives and understood properly at all
functional levels, it goes far behind the areas of financial accounting and cost accounting, it seeks to review,
appraise and evaluate the corporate plans and policies based on certain standards of objectivity. Though this
type of audit is made mandatory in Sweden and USA, it is yet to take appropriate momentum in India.
(B) Need of Management Audit
The following are the circumstances wherein the management audit is useful-
(i) To overcome the human limitations of Top Management.
INFORMATION SYSTEM AUDIT AND MANAGEMENT AUDIT
(ii) To improve the management’s production.
(iii) Circumstances of corporate planning deficiencies, organization’s structured defects, ineffective
management control system etc. warrants the necessity of management audit.
(iv) In the circumstances of acquisition of another business entity, the acquiring organization needs to evaluate
financial aspects, technical aspects and management aspects and analysis of these aspects takes the
form of management audit.
(v) Society at large likes to be assured that the top and middle level management discharge their functions
efficiently and to the best advantage to the society, the management audit satisfy the different interest of
groups like customers, employees, citizens, government etc. of the society and also guide the management
in the application of scientific methods of business management for social well being.
(vi) The statutory financial audit is generally annual and concerned with the past without having any forward
approach. Statutory financial audit and internal audit along with statutory cost audit are essentially
legalistic in terms of time given for its completion and nature of certification fails to provide the insight to
the management in regard to unsuitability of structure to meet the entity’s needs, poor leadership,
inability to make decisions, poor vision and the enlightened managers realizes this fact and feels the need
of management audit to identify the problems and guidance to overcome them.
(vii) Foreign collaborators, while investing in other organizations feel the necessity of management audit to
ensure that the funds invested are to be used properly for growth and expansion.
(viii) Financial institutions conduct the management audit, while participating in equities of a company to avoid
possible losses arising from inefficient management.
(ix) Company itself feels the need of management audit to assess its managers’ performances and link an
incentive system to the results of such assessment.
(x) While advancing loans, banks like to get the management audit conducted.
(C) Scope of Management Audit
The scope of management audit can be as broad as the management process itself. It is concerned with the
whole field of activities of a business concern from top to bottom of a management hierarchy. Management
audit concerns with the appraisal of management policies, methods and performance, it includes review and
appraisal of an organization to determine 1) Better means of control. 2) Greater improved methods. 3) More
efficient operations. 4) Greater use of human and physical facilities and 5) Waste and deficiencies.
(D) Management Audit Process
Fundamentally the activities to be undertaken by management auditor in its review of material management,
production management, industrial engineering management, sales management, financial management,
general administration etc. include-
(i) Collection and analysis of relevant statistics and reports used by the management.
(ii) Establishment of priorities for various functional activities to be reviewed.
(iii) Interviews and meetings with the senior, middle and supervisory management levels in order to ascertain
1) How plans are developed. 2) How resources are controlled and 3) How performances are evaluated.
Who can conduct the management audit?
The management audit can be conducted by –
(A) Company Talent- Which may include-
(1) An administrative staff.
(2) An audit committee.
(3) An officer on special duty. These personnel have sufficient knowledge of operations and talent necessary
for the study, have no vested interest and are acceptable to other persons responsible for the area.
(B) Outside Management Consultants- Who may be Chartered Accountants, Cost Accountants or
Management Consultants having no vested interest in the company management, having no loyalty to
any individual in the organization, having an impartial and objective approach, having wide range of
specialties, have already developed the skill to carry on management audit.
AUDITING 435
(C) Company Talent as well as Management Consultants- Considering the prevailing circumstances in a
company a combination of company talent and outside management consultants would be a best team to
conduct the management audit. The advantages of each compliment the other.
Whoever maybe appointed as management auditor, should possess the following qualities-
(i) Ability to understand the problems of the business.
(ii) General understanding as to nature and objects of the organization.
(iii) Expert knowledge of the principles of delegation of authority, management by objectives, management
by exception, management control, budgetary control, internal control, flow charts, use of computers etc.
(iv) Sufficient knowledge and experience in preparing different reports for presentation to the different levels
of management including top management.
(v) Background of engineering, costing, statistics, management accounting, financial accounting, industrial
psychology, managerial economics etc.
(vi) General understanding of different laws and regulations like company laws, tax laws, etc.
(vii) Tactfulness, perseverance, pleasing & dynamic personality.
(E) Advantages of Management Audit-
(i) The company’s personnel know the organizational policies, plans, personnel operations, personalities
and working relationships, the political climate, the functional importance, and some of the problems
themselves.
(ii) The audit team need not spend an unduly long time for familiarizing themselves with the background
information for study.
(iii) It may be easier to get the support of the higher management, because such audit in the form of selfappraisal
apparently involves no extra cost.
(iv) The acceptance of the findings may be comparatively easier because the concerned personnel may
readily accept the recommendations from the internal management audit team (consisting of co-workers)
than from the external management auditors (or consultants).
(v) The implementation of the new method of operation or organizational arrangement may be easier because
the personnel who designed and advised it are on the premises. The constant co-operation necessary in
the implementation phase are greatly facilitated.
(vi) The experience and expertise gained by the company personnel in the conduct of management by selfappraisal
could be gainfully utilized for subsequent audits.
(F) Limitation of Management Audit
(i) The company personnel possess experience limited only to their organization. The company might have
faced difficulties and constraints due to limited experience of the company personnel.
(ii) They are more likely to take facts for granted and may not probe into the details to unearth problems.
(iii) There may be a tendency to suppress unfavorable facts relating to some of the fellow personnel.
(iv) The company may not have the talent necessary to conduct such management audit involving complicated
studies.
(v) It may not be possible for the company to spare personnel for the studies as these may take long time.
(vi) It may be possible, due to conflicting interests that the audit work may be prolonged and as a result, the
action on findings and recommendations may be delayed.
(vii) The vested interests of the operational executives may prevent the management audit team from being
objective.
(viii) In a management audit scheme, the areas of investigation should fruitfully cover the entire management
system, and so the situation demands the audit team to complete the studies under a time constraintwhich
may result in not covering some of the important appraisal areas.
Guest
Sanjay Ji,
Pls clarify my certain doubts which proped up in my mind :
1. In Article point B says
(B) Meeting of Audit Committee
The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months.
While tablulated presentation in article says -
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Meeting of Audit Committee
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The Audit Committee Shall meet at least four times in a year and not more than four months shall elapse between two meetings.
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No such requirement under section 292A.
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2. In article it is mentioned that -
II Audit Committee.
A. Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up and shall comply with the following:
(i) The audit committee shall have minimum three members. All the members of audit committee shall be non-executive directors, with the majority of them being independent.
(i.e. 51% constitutes majority)
Tabular presentation says :
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Composition
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Clause 49 requires that the Audit Committee shall have minimum three directors as members and two-thirds of the member of Audit Committee shall be independent directors. All members shall be financially literate and at least one member shall have accounting or related financial management expertise.
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Section 292A requires that the Audit Committee shall consist of not less than three directors and such number of other directors as the board may determine. Two-thirds of the total no of the Audit Committee shall be directors other than the managing and whole-time directors.
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Sanjay Jee, with due respect, pls let me know and clarify which provision should be followed because of inconcistancy ?
Thanks
Neha Jain
CAclubindia
