Operational Auditing Operational Audits -also known as operational audits, performance audit.

-are conducted to evaluate the efficiencies and/or efficiency of operations. -often performed by internal auditors for their organizations. Operational Auditing-also refers to the auditors study of business operations for the purpose of making recommendations about economic and efficient use of resource, effective achievement of business objectives & compliance with company policies.

a. the e-tent 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. c. whether the agency has complied with laws and regulations applicable to the program. . !ompliance Audit-includes testing and reporting on whether an organization has complied with the regulations of various laws, regulations and agreements.

"#PES O$ O%&A'()A"(O'A* A+,("S: Objectives of Operational Audits: op management need assurances that every component of an organization is working to attain the organizations goals. !anagement needs the following" #. $ssessments of units performance in relation to managements objectives or other appropriate criteria. %. $ssurance that its plans are comprehensive, consistent, and understood at the operating levels. &. 'bjective information on how well its plan and policies are being carried out in all areas of operations and on opportunities for improvement in effectiveness, efficiency and economy. (. )nformation or weaknesses in operations control. *. +eassurance that all operating reports can be relied on as basis for action. "-ree .road !ategories of Operational Audits: 1. $unctional -deals with one or more functions in an organization. -has the advantage of permitting specialization by auditors. 2. Organi/ational -the emphasis in an organizational audit is how efficiently and effectively functions interact. -the plan of organization and methods to coordinate activities are especially important in this type of audit. . Special Assignments -this arise at the re,uest of the management, -wide variety of such audits.

Scope of Operational Audit: he auditors must determine specifically which policies and procedures are o be appraised and how they relate to the specific objectives of the organization. 1. Economy and Efficiency Audits-include determining" a. whether the entity is ac,uiring, protecting and using its resources economically and efficiently. b. the causes of inefficiencies or uneconomical practices. c. whether the entity has complied with laws and regulations concerning matters of economy and efficiency. 2. Program Audits-include determining"

,istinction .et0een Operational Auditing 1OA2 and $inancial Auditing 1$A2 A. Purpose of t-e Audit -.$ emphasizes whether historical information was correctly recorded whereas '$ emphasizes effectiveness, efficiency and economy. -.$ is past oriented whereas '$ is concerned with operating performance for the future. .. 'ature 3 ,istribution of t-e %eport -.or .$, report typically goes to many users of financial statement, whereas '$ reports are intended primarily for management.

-/ording in .$ reports is well defined because of the widespread distribution of the reports. -'$ reports vary considerally from audit to audit of the diverse nature of the audits for efficiency and effectiveness. !. (nclusion of 'on-financial Areas -'$s cover any aspect of efficiency and effectiveness in an organization and can therefore involve a wide variety of activities. -.$s are limited to matters that directly affect the fairness of financial statement presentation.

-likely to determine the cause of the reduction to evaluate the possibility of obsolete inventory that would misstate the financial statements. &eneral Approac- to Operational Audit

Effectiveness vs. Efficiency4 Economy Effectiveness -refers to an entitys or a unit of an entitys success in actually achieving its goals and objectives. Efficiency -refers to how well an entity uses its resources to achieve its goals. -is also described as reducing cost without reducing effectiveness. Economy -refers to an entitys success in ma-imizing the use of its limited resources to achieve its goals and objectives. (llustrative %eports $igure 9.1 illustrates a 0ummary 'perational $udit +eport while $igure 9.2 presents the 1etailed 1iscussion of 'perational $udit .indings. $igure 9.1 5-o performs operational Audit6 (nternal Auditor -are in such a uni,ue position to perform operational audits that some people use internal auditing and operational auditing interchangeably. -an advantage that internal auditors have in doing operational audits is that they spend all their time working for the company they are auditing. &overnment Auditor -concerned with both financial and operational audits. !PA $irms7E8ternal Auditors -provides useful information for giving operational recommendations. Summary Operational Audit %eport ----------------------------------------------------------------------------------------------------------------------------------------1$ 2" '" .+'!" 0:;32< " $udit 3anuary 4, %556 3osefina 7lanes, 2-ecutive 8ice 9resident 1irector of )nternal $uditing +esearch and 9roduct 1evelopment <enter

Executive Summary /e have completed an audit of the +esearch and 9roduct 1evelopment <enter. 'ur audit objectives and findings are summarized below. /e have discussed our detailed report with, and issued it to, the management of the <enter. Purpose and Scope

'ur purpose was to evaluate the effectiveness and efficiency of the research and product developmebt activity. )n particular, we looked at procedures to =#> identify projects to be undertaken, =%> control costs on project undertaken, =&> evaluate whether a project deserves to be continued, and =(> evaluate individual researchers activity. Summary of Audit Results he procedures and practices used to identify projects undertaken, evaluate projects, and evaluate individual researchers appear to be efficient and effective. ?owever, procedures involved in controlling costs on active projects re,uire improvement. /e discussed these matters, along with some administrative weaknesses and our recommendations for corrective action, with the research director at our closing conference. he research director agreed with our findings and recommendations and plans to reply to our report by 3anuary &#, %556. $igure 9.2 ,etailed ,iscussion of Operational Audit $indings ----------------------------------------------------------------------------------------------------------------------------------------+esearch and 9roduct 1evelopment <enter 2fficiency and 2ffectiveness $udit 3anuary @, %556 Findings #. !onthly cost reports for individual projects are usually not available until thirty days after the end of each month. ;ecause of the time lapse, project directors ignore this report. %. ;udgets for research projects are not developed for monthly activities so that costs can be compared to monthly e-penditures. &. .or si- projects completed during the year, costs ranged from #*5 percent to (55 percent of budgeted cost. Recommendations #. 2ncourage the development of realistic budgets. /hen the inade,uacy of a budget becomes clear, modify it, following the procedures initially used to approve the budget. %. 1evelop budgets that project costs on a monthly basisso that project managers can meaningfully monitor project costs.

&. 'btain cost reports promptly and re,uire project directors to report monthly on whether they will be able to complete the project within budget. $igure 9. illustrates a 0ample )ntroductory 7anguage for an 'perational $udit +eport $igure 9. Sample Operational Audit %eport (ntroductory *anguage for an Operational Audit %eport ----------------------------------------------------------------------------------------------------------------------------------------!r. Aestor 1antes 8ice 9resident B 'perations 9anorama <orporation !akati <ity

1ear !r. 1antes, )n 0eptember %55*, we concluded an operational audit of the data processing operations. Objectives, Scope and Approach he general objectives of this engagement, which were specifically outlined in our letter dated 3une &5, %55*, were as follows" o document, analyze, and report on the status of current operations. o identify areas that re,uire attention o make recommendations for corrective action or improvements

'ur operational audit encompassed the cenrtralized data processing facilities and the on-site computer operations of the companys retailing division. 'ur evaluations included both the financial and operational conditions of the units. .inancial data consulted in the course of our analyses were not audited or reviewed by us, and, accordingly, we do not e-press an opinion or any other form of assurance on them. he operational audit involved interviews with management personnel and selected operations personnel in the units studied. /e also evaluated selected documents, files, reports, systems, procedures, and policies as we considered appropriate. $fter analyzing the data, we developed recommendations for improvements. /e then discussed our findings and

recommendations with appropriate unit management personnel, and with you, prior to submitting this written report.

Findings and Recommendations $ll significant findings are included in this report for your consideration. he recommendations in this report represent, in our judgment, those most likely to bring about improvements in the operations of the organization. he recommendations differ in such aspects as difficulty of implementation, urgency, visibility of benefits, and re,uired investment in facilities and e,uipment or additional personnel. he varying nature of the recommendations, their implementation costs, and their potential impact on operations should be considered in reaching your decision on courses of action. =0pecific .indings and +ecommendations> -----------------------------------------------------------------------------------------------------------------------------------------E8amples of Operational Audit $indings (nternal Operational Audit $indings #. 'utside 3anitorial saves 9 #65,555 $n internal auditor reviewed the efficiency and effectiveness of the janitorial services furnished by the local government employees for the buildings in the capitol comple-. he audit disclosed the costs of the janitorial services were e-cessive when compared with similar services performed by outside janitorial firms. )n addition, the auditors found many janitorial tasks were not complete as re,uired, resulting in unacceptable ,uantity. $ study of alternative janitorial services indicated e,ual or better service could be provided by an outside janitorial firm and at a savings of 9 #&C,555 a year. %. !ore timely credit memo processing $ fre,uent complaint heard by the internal auditor concerned the inordinate amount of time re,uired to process customers credit memos. he auditor found the complaint was justified because an average of #( working days elapsed between the receipt of the re,uest and the actual issuance of the memo. )n some cases, as many as %# working days elapsed before the memo was issued. :sing a time-phased flow chart, the auditor determined the re,uests were not moving in an efficient linear flow. $s a matter of fact, the time-phased flowchart looked like a zigzag with a bad case of hiccups. he re,uests moved from the originator for removal of the supporting documents. he re,uest then went back again to one of the approving departments for sorting, coding and batching. .inally, the re,uest was transmitted to the computer to issue the memo. 2ach step re,uired from # to * working days depending on the workload and comple-ity of the re,uest. &. :se the right tool he company leased %* heavy-duty trucks for use by service employees who installed and repaired about %5,555 vending machines in a large metropolitan area. $ll of the trucks were e,uipped with hydraulic lift-gates for loading and unloading vending machines. he internal auditor found that only a few of the trucks were actually delivering and picking up vending machines. !ost of the trucks were used for service calls, which consisted of on-the-scene repair of coin bo-es or other simple adjustments not re,uiring the hydraulic lift-gates. (. imely 1eposit 1uring a cash review, the internal auditor found that bank deposits were not made until several days after the cash and checks were received. he cause was a complicated reconciliation/distribution process re,uiring & to #* days to complete. !anagement agreed to implement a direcvt deposit or electronic funds transfer system and to perform the reconciliation distribution process after the funds were deposited. he systems estimated additional interest is about Operational Auditor:s %ecommendations he auditor recommended the local government seek competitive bids and contract with the janitorial firm submitting the lowest bid that meets the specifications. he resultant contract actually saved more than 9 #65,555, and the ,uality of the cleaning improved noticeably.

he auditor recommended each approving department perform all the re,uired functions the first time it handled the re,uest and substitute well-controlled procedures for afterthe-fact approvals in place of the preapprovals. he recommendation was adopted, and credit memos are now being issued within * working days after the re,uest is received. he auditor noted a higher degree of customers satisfaction, and complaints have ceased.

he auditor recommended most of the heavy duty trucks be phased out and replaced by conventional light vans. !anagement agreed and the savings in lease rates and operating e-penses were estimated at p %*,55 a year.

9 #%5,555 a year.