Unit 4: Management audit
Corporate Accounting and Auditing notes · PTU syllabus (MCOP403-18)
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Unit summary
Management audit asks whether the organisation is well managed, not just whether the accounts are right. This unit covers the meaning, objectives and scope of management audit, the appointment and qualifications of the management auditor, audit of management functions — planning, organising and control — and audit of functional areas: production, personnel, marketing, finance and accounting.
After this unit you can
- Explain the meaning, objectives and scope of management audit
- Explain the appointment and qualifications of a management auditor
- Audit the management functions of planning, organising and control
- Audit functional areas — production, personnel, marketing, finance and accounting
PTU syllabus topics
- Meaning
- objectives and scope of management audit
- appointment and qualifications of the management auditor
- audit of management functions (planning, organising, control)
- audit of functional areas — production
- personnel
- marketing
- finance and accounting
Planning
Quality of goals and plans
Organising
Structure and delegation
Production
Efficiency, capacity use
Personnel
HR policies and morale
Marketing
Sales effectiveness
Finance
Fund use and controls
Topic 1
Meaning, objectives and scope of management audit
Management audit is a comprehensive and constructive examination of an organisation's structure, plans, policies, methods of control, operations and use of physical and human resources, to appraise the efficiency and effectiveness of management.
- Objectives: identify weaknesses and opportunities, assess achievement of objectives, evaluate policies and their implementation, improve decision-making, ensure optimal resource use, assist top management.
- Scope: the whole organisation — management functions and functional areas; forward-looking and constructive (not fault-finding).
Focus
Accuracy and fairness of financial statements
Efficiency and effectiveness of management
Compulsion
Statutory
Voluntary (generally)
Period
Past transactions
Present and future
Auditor
Chartered accountant
Multidisciplinary experts
Report to
Shareholders
Top management/board
Topic 2
Appointment and qualifications of the management auditor
- Appointed by the board or top management (sometimes by government for public enterprises); may be internal teams or external consultants.
- Qualifications: knowledge of management principles and functional areas, analytical ability, experience, independence, communication skills, integrity; often a team of specialists (accountant, engineer, HR, marketing).
- 1
Define objectives and scope
- 2
Plan the audit
Team, timetable, questionnaires
- 3
Collect information
Documents, interviews, observation, benchmarking
- 4
Analyse and evaluate
- 5
Discuss findings with management
- 6
Report with recommendations
- 7
Follow up implementation
Topic 3
Audit of management functions
| Function | Questions the auditor asks |
|---|---|
| Planning | Are objectives clear and measurable? Are plans realistic, consistent and communicated? Are forecasts based on sound premises? |
| Organising | Is the structure suitable? Are authority and responsibility clearly defined? Are spans of control appropriate? Is delegation effective? |
| Directing and staffing | Is leadership effective? Are communication and motivation adequate? |
| Control | Are standards set? Are deviations reported promptly? Are corrective actions taken? Are MIS reports useful? |
Topic 4
Audit of functional areas
Production
Capacity utilisation, productivity, quality, maintenance, inventory, safety, technology
Personnel (HR)
Manpower planning, recruitment, training, appraisal, compensation, IR, attrition
Marketing
Market research, product mix, pricing, distribution, promotion effectiveness, customer satisfaction
Finance
Capital structure, working capital, budgeting, investment decisions, cost of funds, liquidity
Accounting
Accuracy and timeliness of records, internal controls, MIS, cost systems
- Indicators used: productivity ratios, cost per unit, sales per employee, attrition rate, market share, ROI, working capital turnover.
Exam tip
End management audit answers by stressing its constructive nature — it suggests improvements rather than finding fault.
Key terms
- Management audit
- Examination of the efficiency and effectiveness of management
- Management auditor
- Expert appraising management functions
- Functional audit
- Audit of a specific area such as production or marketing
- Benchmarking
- Comparing performance with best practices
- Follow-up
- Ensuring recommendations are implemented
Quick revision
- Management audit: comprehensive, constructive, forward-looking.
- Financial vs management audit.
- Auditor: appointed by top management; multidisciplinary team.
- Audit of planning, organising, directing, control.
- Functional audits: production, HR, marketing, finance, accounting.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define management audit.
- Q2.State the objectives of management audit.
- Q3.Distinguish financial audit and management audit.
- Q4.What qualifications should a management auditor have?
- Q5.What does a production audit cover?
- Q6.What is the follow-up stage of management audit?
Long-answer questions
- Q1.Explain the meaning, objectives and scope of management audit.
- Q2.Explain the appointment, qualifications and process of management audit.
- Q3.Explain the audit of management functions.
- Q4.Explain the audit of functional areas — production, personnel, marketing and finance.
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