Operational Auditing

By: NILO N. IGLESIAS, CPA, MBA, REA

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MODULE 1
Introduction
to Operational
Audit

This Photo by Unknown Author is licensed under CC BY-NC

 Introduction
• Internal audit are very common occurrence in
business
• Operational audits, however, are rarer
• These operational audits can deliver wider-
ranging benefits compared to internal audits
• But it take more effort to carry out
• That is the major reason why businesses do
not do operational audits more often
 What are Operational Audits?

• Operational audit are audits that focus on

the effectiveness, productivity and cost
efficiency of the operations of the
business
• Operational audits are a forward-looking
process and are part of many
organizations’ on-going business
improvement process toolkit.
• The findings of operational audits are
intended to diagnose which areas need
attention and to safeguard assets by
averting potential future risks.
 What are Operational Audits?

Hence, Operational Audit is defined as:

“A systematic process of evaluating an

organization’s effectiveness, efficiency
and economy of operations under
management’s control and reporting to
appropriate persons the results of the
evaluation along with recommendations
for improvement”
 What are Operational Audits?

• While audit is usually associated with

financial matters, operational audits
are more comprehensive and go
beyond financial data.
• The primary information sources are
policies and achievements related to
the objectives of the organization.
• Operational audits are a “deep dive”
into every facet of management.
 What are Operational Audits?

• As a result, start to finish time frames

can vary from weeks to many months,
depending on scope, complexity and
size of the organization and whether
the audit is for the entire entity or a
particular business unit
• Unlike financial audits, which is
conducted by external entities,
operational audits are carried often by
an internal auditor
 What are Objectives of Operational Audits?

• The objectives can vary depending on

the type of the organizations and its
Key Performance Indicators (KPIs) or
whether the audit is being conducted
to answer a specific concern from
challenges arising in areas like human
resource, customer relations or
manufacturing slowdowns or
government compliance issues to
consider such as consumer safety.
 What are Objectives of Operational Audits?

• Overall, the objectives of the operational

audit process are the following:
- To improve the way the business
performs
- To help business lower costs
- To help business decrease the
turnaround time for many process
- To directly improve the service
delivery and customer satisfaction
 Benefits of Operational Audits
Organization can expect to achieve five primary
goals or main advantages by performing any
operational audits:

Influence Positive Change

Understand how future processes,
policies, procedures, and other types of
management are producing maximum
effectiveness and efficiency

Review Internal Controls

Establish the potential impact of
successes and failures in the specialized
functional areas of operation.
 Benefits of Operational Audits
Understand Risks
The type of risk associated with business
and operational risk range from business
interruption, employee omissions or
errors, IT system failure, product failure,
safety and health issues, loss of key
employees, fraud, loss of suppliers, and
litigation.

Inform Senior Management

The results of the audit should appear in a
clear report that provides analysis,
appraisals, recommendations, and
pertinent comments concerning the
activities reviewed.
 Benefits of Operational Audits
Identify Improvement Opportunities
As a result of understanding risks,
auditors can determine where to
make improvements and how to
mitigate risks and improve
opportunities.
The broad categories of risk- and
where improvements should occur
are:
- Operational Risk
- Financial Risk
- Environmental Risk
- Operational Risk
 Operational Audits Challenges
• To meet the challenges of a rapidly changing
marketplace and regulatory environment,
companies must continually reinvent the
way they do business.

• The most widely used tools are the “Plan-

Do-Check-Act or Deming Cycle, which the
auditor uses in their own auditing activities.

• Organizations should conduct audits

regularly to support continuous
improvement and to check the progress of
quality measures recommended in previous
audits.
Operational Audits Challenges
 Operational Audits Challenges
Deming Cycle:

D Detailed understanding for existing process to suggest

improvement

E Eliminate waste and duplication of work

M Merge operation/processes to reduce turnaround time

I Improve/Increase quality, volume and revenue

N New method, techniques, and devices for better result

G Govern man, machine, methods and money

 Operational Audits Challenges
Biggest Challenges to conducting operational
audits:

• Top management support for auditing program

can sometimes be difficult to obtain, since, by
its nature, the process highlights management
issues

• There needs to be effective management

processes in place to handle conflict
management which may arise due to the audit

• There should be systems approach to linking

organizational goals and objectives.
 Operational Audits Challenges

Other Challenges to conducting operational

audits:
Change Management
- Change management needs to be well-
handled.
- The results of the audit will likely lead to
multiple changes and team members
and managers may have difficulty
adjusting to different expectations,
processes, personnel or budgets
- Change can also affect teamwork
 Operational Audit Challenges
Change Management
by Russell Keenan

• RACI charts are a type of Responsibility Assignment Matrix

(RAM), which can be used to clarify and more effectively
define, resource, and implement processes and procedures.

• RACI charts are especially well-suited for metrology

applications where accuracy, precision, and meeting
meticulous standards is a routine requirement.
 Operational Audits Challenges
Change Management
by Russell Keenan

• RACI charts are developed through cross-functional

collaboration between management and personnel to define
functional areas, roles, and responsibilities; identify process
ambiguities and/or inefficiencies; highlight best practices and
support continuous improvement; and facilitate frequent,
effective, and meaningful communication between teams and
departments.

• RACI charting techniques take a systems approach to

operational processes and procedures; recognizing and
enabling the inter-relationships between stakeholders that
are necessarily involved with successfully executing every
process and procedure.
Operational Audits Challenges
 Operational Audits Challenges
Other Challenges to conducting operational
audits:
Operational Auditing Expenses
- There are cost involved during and after
an audit.
- If the auditor is a consultant, there will be
fees for their engagement
-There is also the cost of having projects
or production slow temporarily when
managers and employees are working
with the auditor
- If the auditor holds another position
within the company, there may be
slowdown in his/her regular job
responsibilities
 Operational Audits Challenges
Other Challenges to conducting
operational audits:
Auditor Evaluation
- Considering the major responsibility
of auditing position, the competence
of the auditor should be determined
based on explicit evaluation criteria
- This evaluation checklist to help
assist in the selection of best
candidate
 Operational Audits Challenges
Other Challenges to conducting operational audits:
Auditor Evaluation Checklist
Evaluation Method Objectives Examples
Analysis of education, training, employment,
Review of Records Verify background credentials, and experience

Surveys, questionnaires, personal references,

Provide information about the perceptions of testimonials, complaints, performance
Feedback auditor performance evaluation, and peer review

Evaluate personal behavior, communication

Interview skills, verify information, and test knowledge Personal interview

Observation Evaluate personal behavior and the ability to Personal interactions, oral and written
apply knowledge and skills evaluation

Testing Evaluate skills Oral and written exams, and psychometric

testing

Give information about performance during

Post-Audit Review audit, and identify strengths and weakness Review audit report, interviews, and feedback
forms
 Different Types of Operational Audits

Financial Audits or Review

- Financial audits focus on financial

controls as they relate to reporting
to internal and external governing
bodies.
- Financial statement auditing is the
bailiwick of external auditors
- Internal audits complement the work
of operational audits, which includes
some form of budget or financial
review
 Different Types of Operational Audits

Operational Audits
As noted, operational audits focus on
the review and assessment of single or
multiple business process

Department Reviews
Different departments may run a
periodic analysis to assess the adequacy of
control, how well assets are safeguarded,
how resources are used, and if there is
compliance with applicable laws.
 Different Types of Operational Audits

Information System (IT) Audits

Investigate overall infrastructure and
networks, technical operations, data center
operations, project management, and review
security status and procedures

Investigative Audits
When company suspects a risk of
security breach, or when one has occurred on
the part of an individual or department, there
often an investigative audit to understand
causes and additional background
information and research
 Different Types of Operational Audits

Compliance Audits
Review the level of compliance with
external regulatory requirements or
internal policies

Follow-Up Audits
After an operational audit report has
been issued, it is standard practice to
follow-up to evaluate corrective actions,
usually within a six month period
 Different Types of Operational Audits

Marketing Audits
- A marketing audit is a broad,
precise, and autonomous probe into
the marketing of a company or a
business
- It holds both an external situation
analysis and a through review of
internal marketing goals, strategies,
capabilities, processes, and systems.
- The result is actionable
recommendations to improve progress
toward stated goals
 Activity 1- Week 1
• Define and discuss the effect of the
following risks in the business
organization:
1) Operational Risks
2) Financial Risks
3) Environment Risks
4) Reputational Risk
• Submit as scheduled for Week 1
 Activity 2- Week 2
• Recommend at least three (3)
strategies on each risk listed to
mitigate and improve business
opportunities of the business
organization:
1) Operational Risks
2) Financial Risks
3) Environment Risks
4) Reputational Risk
• Submit as scheduled for Week 2
 Accompanying Notes
• These activities (1 & 2) in independent to
the required discussion forum
requirements divided in the following
manner:
1) For Week 1 – Introduction, operational
audits and its benefits
2) For Week 2 – Operational audit
challenges and Different types of
Operational Audits
 END of
Module 1