Strategic Audit

By : Group Three
 Table of Contents
THE CONCEPT OF THE STRATEGIC
1 AUDIT
5 SCOPE OF STRATEGIC AUDITING

IMPORTANCE OF THE STRATEGIC

2 AUDIT
6 FINANCIAL & STRATEGIC AUDIT

THE RELATIONSHIP BETWEEN THE

REQUIREMENTS OF THE STRATEGIC
3 AUDIT
7 STRATEGIC AUDIT & PERFORMANCE
IMPROVEMENT

ELEMENTS OF THE STRATEGIC

4 AUDIT
8 STRATEGIC AUDIT ISSUES
 Introduction
Strategic management is an important tool for the success or
failure of any company. The inability of other types of auditing to
provide a comprehensive assessment of the strategic management
process and the performance provided arises the need to find a
new type of audit that helps decision makers in decision-making by
identifying a company's strengths, weaknesses, opportunities, and
threats while ensuring timely access to essential information.
 The Concept of the Strategic Audit
STRATEGIC AUDIT

involves an objective assessment of the growth and exit options

available to shareholders and management when making critical and
complex decisions to maximize shareholder value.
the result is to ensure that there is a well-defined and agreed path of
development including a series of practical steps which when
implemented will substantially enhance a company’s value.
 Bain and Band (2016) Goosen and Van (2017) Bushuyev et al. (2019)

Strategic audit is a system to Strategic audit is the final step Strategic audit is a
ensure that the company in strategic management, and methodological and
achieves its goals through while conducting audit comprehensive approach for
drawing levels for the target processes, interest should be the strategic processes of the
actual performance and then focused on following up both company to determine the
assessing the actual the internal and the external strengths and weaknesses that
performance and comparing it factors, assessing actual affect the company. In
with the existing standards to performance, and making the particular, the causes of the
identify the achievement of correctional procedures. The company’s failure and the
the strategic goals of strategic audit is one of the inability to obtain profitability
performance. vital processes as future as expected and seeks new
success depends on the fields and dimensions that
accuracy in following up may be the reason for adding a
today’s actions and real value.
continuously evaluating them.
Importance of the Strategic Audit
Ensuring that companies continue to add value
1 through the overall testing for the company's
strategic status.

Evaluating the extent of the success of activities

2
implemented within the company.

Assisting managers to identify and recognize the

3 problems and deficits that cannot be identified
and resolved at the appropriate time.
 The strategic audit contributes to overcoming unnecessary
4 practices that in turn lead to achieving abundant costs and
increased supply, as well as increasing the company's competency.

The strategic audit assists in ensuring that the company's goals,

plans, and policies do not conflict with its strategic decisions,
5
through the testing and evaluation processes for the internal and
external environment of the company

The strategic audit contributes to treating the weaknesses of the

6 company and addressing the challenges faced by the company and
reducing them to the lowest limit.
 The strategic audit contributes to initially offering the
7 necessary instructions and recommendations to treat the
deficits and negative aspects at the appropriate time.

The strategic audit assists companies to efficiently supervise

8 and to instruct strategic performance, as well as understanding
the relationships among the operational and strategic aspects.

The strategic audit assists companies to report their

9 strategic performance and achievements following real
evidence.
In conclusion, strategic audit plays an extremely important role in modern
business conduct.

The prospects of business development are estimated with the help

of strategic audit, and the company's development strategies are
also forecasted and justified.
It allows you to compare several business projects and identify the
most profitable strategy for the company.
It allows you to minimize risks and anticipate the profit or loss the
current economic activity of the enterprise will bring in the future.
 Requirements of the Strategic Audit
Offering an efficient managerial Offering specific standards for
information system: performance
Focus
The availability of the qualified staff to
Appropriateness
conduct the strategic audit process
Balance
Flexibility Management's conviction of the
Integrity
importance of the strategic audit
Cost/Profitability
Elements of the Strategic Audit
ESTABLISHING THE CRITERIA

DATABASE DESIGN & MAINTENANCE

THE STRATEGIC AUDIT COMMITTEE

RELATIONSHIPS WITH THE CEO

ALERTNESS TO DUTY
 ESTABLISHING THE
CRITERIA
Objectivity is the most important requirement for the data used in the strategic
review process.
In addition, the criteria should be FAMILIAR, WELL-UNDERSTOOD, and ACCEPTED
MEASURES OF FINANCIAL PERFORMANCE.

There are two reasons why:

1. Board's responsibility in assessing strategic impact on shareholder value.
2. Managers' advantage in evaluating evolving strategy.
 Consistently presented objective data, backed by past
performance, enhances the board’s credibility.
Standard financial indicators ensure clear communication.
While financial criteria are key to board oversight, other forms
of progress should also be considered.

The board should consider both objective and subjective evidence of long-
term strategic success while intervening if there is a sustained decline in the
investment base essential for corporate operations.
The criteria best suited to the strategic oversight process share two
important characteristics:
Focus on sustainable rate of return on shareholder investment
produced by the corporate income stream.
Permit objective comparisons among the company’s separable
income streams and with alternative investments in other
companies inside or outside the industry.

In the final analysis, these criteria should reflect a fundamental economic reality:
The long-term loyalty of the equity holders depends solely on sustaining a
competitive return on investment. Without that, no product-market strategy is
safe.
COMMONLY USED CRITERIA FOR THE EVALUATION OF STRATEGIC ALTERNATIVES:

Return on Book Investment (ROI)

It has the advantage of being based on data familiar to shareholders

and management.
It shows profit per unit of sales (profit margin), sales per unit of capital
employed (asset turnover), and capital employed per unit of equity
invested (leverage).
When multiplied together, these ratios transform profit margin into
return on equity.
However, this set of measurements has two weaknesses:
-It may be subject to random changes in accounting practice.
-It doesn’t provide an external standard of comparison.
Cash Flow Return on Investment (CFROI)

This measure highlights net cash flows from operations rather

than reported income and produces a rate of return that can be
compared with alternative company or market rates of return
(the cost of capital).
It has the special merit of approximating actual flows of
investable funds and is therefore well suited to rate-of-return
comparisons with alternative investment opportunities.
Net Economic Value Added from Year to Year (EVA)

This is an estimate of the absolute dollar value that is added to

shareholder wealth whenever a company gains a return on
investment in excess of its cost of capital.
It highlights those periods in which, in comparison with
alternative investment opportunities, the company’s
performance has led to the creation-or destruction- of economic
value.
Total of Shareholders’ Return on Investment (TSR)

Total Shareholder Return (TSR) measures yearly taxable income

from dividends and capital gains as a percentage of the starting
market value.
It reflects realized value rather than future prospects and aligns
more with shareholder expectations than corporate performance.
However, TSR is influenced by short-term market fluctuations
beyond management's control, making it best used as a
supplementary metric.
One simple consideration should drive the choice of the measure—or
set of measures—for a given company:
Directors and the CEO must fully understand the chosen
measurement to avoid disputes that could weaken objective evidence.
If board members prefer different indices, providing comparable data
in their preferred index can help ensure alignment in the audit
process.
 DATABASE DESIGN &
MAINTENANCE

An effective strategic-oversight process requires that the board also take

control of the database in which the criteria are maintained.

Outside board members struggle to assess strategic performance as information

is filtered through management’s perspective, often lacking historical context or
consistency. While insiders may find the data meaningful, outsiders risk
confusion and misinformation.

The credibility of the board’s review process depends on the integrity and
consistency of the statistics by which progress is measured. It will be the
cumulative evidence that tracks emerging trends in the indices of
performance over several quarters or years.
Effective oversight depends on how these data are assembled and maintained in the short
and long term and who does the job on behalf of the board.

Traditionally, boards of directors have neither the independent staff support nor the
personal time and expertise to devote to data collection and analysis. One solution is to
ask the company’s chief financial officer for the help of someone on staff. However, this
solution has some obvious practical problems.
Conflict of interest could arise for an employee working with potentially sensitive
data.

A better solution is for an outside consultant to design the database and gather the data
the board chooses to monitor. The database maintenance function could become an
ongoing contractual arrangement.

The management challenge here would be to provide a consultant from the outside
with enough information and context about the company that he or she could ask
intelligent questions about the database design and data collection effort.
The preferred solution, one consistent with the model of the
financial audit, is to involve the company’s public auditors.

The public auditors would bring much more to the ongoing effort
because of their access to and familiarity with the company’s
financial information and systems. Their role would ensure, over
the long term, consistency in maintenance, documentation, and
reporting. Management would not have to be involved in
establishing the relationship or in acting as a go-between.
 THE STRATEGIC AUDIT
COMMITTEE
The committee should:
Most governance processes Select the criteria for review of strategic
performance
lack formal strategic oversight.
Oversee the design of the database
To ensure sustainability and Establish a review process
effectiveness, specific board It should ensure the integrity and continuity of
the ongoing data collection and reporting
members should be assigned efforts
responsibility, similar to other Identify issues for discussion with the CEO
Keep the full board abreast of the evidence
committee roles.
Schedule both regular and special meetings.
A strategic audit committee should consist of
three outside directors, with the chair playing a
crucial role.
If a lead or liaison director exists, they should
chair the committee to maintain unity in strategic
decisions.
Membership should rotate on a staggered basis
to retain institutional memory, ensuring all
outside directors serve before their term ends.
The strategic audit committee's meeting frequency should
align with industry dynamics and environmental changes.
It should convene at least once every three years, barring
special circumstances like a CEO transition.
Meetings should avoid excessive frequency to prevent
conflating strategic and operational reviews or
misinterpreting minor fluctuations as major trends.
Additionally, oversight should not undermine the CEO’s
authority or suggest unstable leadership.
 RELATIONSHIPS WITH
THE CEO

A central objective of a well-designed and implemented strategic-oversight

process is to reduce both the appearance and the reality of confrontation over
disputed turf.

Board members, often possessing strong egos, are sensitive to perceived

challenges to their authority. While overlap between responsibility and oversight
is common, it becomes especially delicate at the board level. Unplanned
discussions on strategic direction risk being seen as implicit criticism of existing
strategies and leadership.

It takes sensitivity and diplomacy to raise such issues constructively, but

sensitivity and diplomacy are attributes not all board members possess.
A formal, regular review of strategic performance with the
CEO helps prevent an adversarial atmosphere.
Private meetings between outside board members and the
CEO encourage open, thoughtful discussions allowing
differences to be resolved amicably or carefully managed before
becoming public.

The strategic audit committee is not meant to share in the leadership of

the ongoing business strategy or be a backseat driver. Under normal
circumstances, it should be a low-key, behind-the-scenes operation
designed to lend additional credibility to management’s leadership and
authority.
 ALERTNESS TO DUTY

Alertness to duty and to opportunity is the capstone of a serious strategic-review

process.

Even with the imposed discipline of a well-designed, formal oversight process, a

board can fall asleep at the controls. A period of sustained success can lull the
board into the belief that success is forever and that the company can do very
nicely on automatic pilot.

It is essential that the board be alert both to signs of weakness in the established
strategic mission and to events or initiatives that present a natural opportunity to
confirm or modify the existing strategic direction.
Board approval of investment proposals signals support
for the existing business strategy.
Since such proposals are frequent, reservations should be
addressed in periodic review meetings between outside
board members and the CEO, initiated by the strategic
audit committee.
However, certain events may warrant a special committee
meeting.
 Scope of Strategic Auditing

A strategic audit is a comprehensive assessment of a company’s

strategic processes and operations.

It goes beyond financial audits to examine business functions,

decision-making, and market positioning. Unlike financial audit,
strategic audit is a continuous evaluation of all the strategic
functions of any success-seeking firm.
 COMPONENTS
1. Marketing Audit 11. Cost of Quality Audit
2. Funding Audit 12. Environmental Audit
3. Research and Development Audit 13. Leadership Audit
4. Operations and Physical Distribution Audit 14. Culture Audit
5. Human Resources Management Audit 15. Corporate Identity Audit
6. Stakeholder Audit 16. Corporate Longevity Audit
7. Productivity Audit 17. Corporate Flexibility Audit
8. Logistics Audit 18. Information Security Audit
9. Service Management Audit 19. Strategic Alliance Audit
10. Customer Satisfaction Audit 20.Technology Audit
Marketing Audit

This is a comprehensive examination of the company's marketing

environment, goals, strategies, and activities to identify issues,
opportunities, and areas for improvement. It assesses the
alignment of marketing efforts with the company's overall
objectives and evaluates performance, market position, and
competitive advantage locally and internationally.
 Funding Audit

One of the key elements that helps the company to ensure its
financial independence and maintain its balance of work. It
evaluates the company's financial goals, strategies, and policies
for clarity and alignment with internal and external conditions.
The audit also assesses financial analysis trends, past and present
performance, and their impact on future decisions, ensuring a
strong financial position and competitive advantage.
Research and Development Audit

This evaluates the company's efforts in knowledge creation,

product innovation, and improvement. It assesses the impact of
R&D on competitive advantage, company growth, budget
allocation, and technological integration. The audit also examines
the balance between basic and applied research, ensuring
alignment with the company's mission and strategies while
measuring the return on investment in R&D.
Operations and Physical Distribution Audit

This assesses the efficiency of production machinery, alignment of

company policies with manufacturing programs, and cost-
effectiveness of raw material procurement. It evaluates process
managers' use of methods like cost systems, quality control,
inventory management, and advanced information systems to
enhance performance. Additionally, it examines the role of
operations and distribution in strategic management.
Human Resources Management Audit

This evaluates the effectiveness of HR in meeting organizational

needs and supporting strategic goals. It examines HR managers'
use of accepted methods for performance evaluation, job analysis,
and employee development. Additionally, it assesses job
descriptions, training programs, and the HR manager's role in
strategic management.
 Stakeholder Audit

This audit evaluates the organization from the perspective of its

stakeholders, including shareholders, customers, employees, and
suppliers. Each group has a vested interest in the organization's
success, as it directly impacts their own prosperity. Understanding
these interests helps strengthen corporate governance by ensuring
stability and growth for both the organization and its stakeholders.
 Productivity Audit

This audit explains the complexity of the productivity concept and

discusses the evaluation of productivity in a strategic context. This
increases the chances of increasing productivity in real terms,
rather than improving efficiency at the expense of strategic goals.

Logistics Audit

This audit includes the best practices of companies with world-class

logistics systems and suggests tools for measuring a company's
performance in comparison to logistics leaders.
 Service Management Audit

This audit provides information about using service resources

effectively, measuring the quality of the service management, and
assessing a company's ability to recover in the face of service failure.

Customer Satisfaction Audit

This audit outlines the critical aspects of system-wide customer

satisfaction and provides tools for measuring performance along
those lines.
 Cost of Quality Audit

The term 'cost of quality" refers to the cost of not ensuring high
quality. This audit provides a way of understanding the amount of
income that is lost because of poor quality, along with suggestions for
reducing that cost and improving quality.

Environmental Audit

This audit describes how managers can determine which environmental

standards should be targeted for a given organization and provides a
model for auditing performance in terms of those standards.
 Leadership Audit

This is a method of determining which competencies are required

for leadership success in each organization, and present tools for
measuring the performance of the company's employees in terms
of those competencies. It stresses the need to develop leadership
at all organizational levels and suggests an outline for developing
personal improvement plans.
 Culture Audit

This audit provides a tool for uncover a company's culture and

provides tips on using that understanding to implement change
more effectively.

Corporate Identity Audit

This audit provides insight into determining the effectiveness of a

current identity and outlines a way of assessing whether an identity
should be changed, and what is the direction of those changes.
 Corporate Longevity Audit

This audit is undertaken to ensure that an organization not only

maximizes the value of the existing products and services but also
simultaneously develops their replacements that will earn future
income. Many companies rest on their current successes, today's
breadwinners, without realizing it is only a matter of time until
their current products and services are obsolete.
 Corporate Flexibility Audit

This audit considers the processes in place to hire the right people
the first time and get them up-to-speed as fast as possible. The
checks on the systems created to bring people together (e.g., work
presentations to non-related staff, office layout) and encourage
good working relationships.

Information Security Audit

This audit provides a framework for systematically evaluating an

information system's security.
 Strategic Alliance Audit

This audit suggests ways of determining whether a particular

alliance option is suitable for a given company and provides ideas for
rejuvenating alliances that may be functioning at sub-optimal levels
for both manufacturing and service firms.

Technology Audit

This audit provides insight into determining which technologies should

be priorities for a company given its strategies. It also provides tools for
determining what aspects of the company can be called technologies
and a system for breaking technologies down into component parts.
 Financial & Strategic Audit
The main feature of strategic audit, in contrast to the audit of financial statements,
is that it refers to the upcoming information about the activities of the
organization and its business environment. A strategic audit shifts the focus from
traditional financial statement audits to assessing the future of a business. Since it is
closely tied to future periods and inherent uncertainties, all potential business risks
must be considered. In today's world, market risks often arise from incomplete or
missing information. However, a well-executed strategic audit helps minimize these
risks and equips management with insights into expected financial outcomes. Its
primary goal is to anticipate business development prospects.
 Performance Improvement & it’s
Relationship with Strategic Auditing

PERFORMANCE

a broad, comprehensive and important concept for any companies.

a company's ability to sustain itself while balancing shareholders and
employees.
PERFORMANCE IMPROVEMENT
involves efficiently using resources to achieve goals, execute
strategies, and stay competitive.
Basic principles:
increased awareness of the fulfillment of customer needs and
expectations
with a focus on systems
processes and the removal of barriers
encourages the participation of all employees.
Performance Components

EFFECTIVENESS EFFICIENCY

Measures goal achievement by The ability to achieve the best results

comparing actual and estimated using available resources, aiming for
outputs. A company is more effective maximum profitability. It involves the
when its outputs align with its goals. optimal use of productive resources,
It is also defined by the ability to focusing on cost and the relationship
achieve strategic objectives, such as between inputs and outputs.
growth, sales, and market share.
Factors Affecting Performance

INTERNAL EXTERNAL

organizational structure customers

company's culture competitors
technological development political and government factors
company's resources economic factors
corporate resources social and cultural factors
strategic financial factors
leadership
Dimensions of Performance

Performance is influenced by economic, organizational, social, and

environmental dimensions, which are shaped by changes within
modern companies.
These dimensions involve various stakeholders, including
customers, suppliers, creditors, lenders, and employees.
ECONOMIC DIMENSION
This dimension includes:

the company's financial performance which determines its

profitability and the extent of market share expansion
the competitive performance which measures the company's
ability to achieve a competitive advantage compared to its
competitors.
ORGANIZATIONAL DIMENSION
This dimension relates to the internal performance of the company, as it
reflects how the company uses its material and human resources and
invests them in a way that enables achieving its objectives.

SOCIAL DIMENSION
This dimension has attracted interest with the emergence of new
management concepts, such as corporate social responsibility, which
seeks to improve the social performance of workers and intellectual capital,
which is no less important than its financial and material resources.
ENVIRONMENTAL DIMENSION
This dimension is one of the new dimensions of performance and it
emerged with the social dimension and recently has been separated
from it.
It is part of the corporate social responsibility, growing with industrial
progress. It offers a competitive advantage and supports sustainable
development.
Defined as a measurable outcome of an environmental
management system, it reflects a company’s commitment to
environmental policies and objectives.
 The Relationship between the Strategic Audit &
Performance Improvement

The strategic audit enhances company performance by managing risks,

identifying errors, and providing managers with insights into economic,
competitive, commercial, political, legislative, social, and cultural
environment to assist them in making the appropriate decisions. It plays a
key role in investigating errors and solving them, as is outlined below:
 Analyzing the Internal environment

Auditing and analyzing the company's internal environment is the appropriate base
to identify risks, treat them by the workers and employees, and identify how to
manage these risks.

Setting goals

The process of setting and determining goals and is carried out by the senior
management of the company, where the strategic audit can identify potential
events that affect its strategy. It therefore includes the process of risk management,
and the strategic audit supports objectives that in return support the company's
mission and are consistent with the level of risk.
 Identifying and distinguishing action

Internal or external events affect the achievement of the company's objectives.

The strategic audit contributes to the distinction between risks and opportunities
and its primary task is to collect and use information in the prediction process to
seize opportunities and avoid threats.

Risk assessment

The strategic audit contributes to the assessment of current and potential hazards,
considering available possibilities and their impact as a basis for determining how
current risks are managed on clear bases and rules.
 Control

The strategic audit seeks to develop the control system and to make the
necessary adjustments to keep it up to date with developments in the company's
environment, to face the risks that are a repetitive and multi-directional process. It
includes company activities and risk response.

Response

The strategic audit helps senior management to choose appropriate responses to

risk (avoidance, acceptance, reduction), and helps prioritize risks.
 Strategic Audit Issues
Due to such a wide scope, strategic audit issues are pertinent to management
accounts, business analysts, audit directors, senior managers and
executive-level management, as well as those aspiring to become
someone who oversees audit, security, compliance and control functions.
Strategic audits extend beyond technical matters to offer management and
stakeholders insights into information systems and technology at a strategic
level.
This fosters good corporate governance by supporting informed planning
and resource decisions, ultimately enhancing organizational value.
Thank You!