Definition:

“Management audit can be defined as an objective and independent appraisal of the

effectiveness of managers and the effectiveness of the corporate structure in the achievement
of company objectives and policies. Its aim is to identify existing and potential management
weaknesses within an organization and to recommend ways to rectify these weaknesses”. –
CIMA Official Terminology.
Management Audit is an important tool for the continuous appraisal and evaluation of the
methods and performance of an enterprise. The prime objective of Management Audit is to
locate defects of irregularities in the areas covered by the audit and to suggest possible
improvements. It assists the management in managing the operations of an undertaking in the
most efficient manner practicable.
Objectives of Management Audit.
(a) To ensure optimum utilization of human resources and available physical facilities.

(b) To point out deficiencies in objectives, policies, procedures and planning.

(c) To suggest improved methods of operations.

(d) To point out weak links in organizational structure and in internal control system and
suggesting improvements.

(e) To help management by providing early signals of sickness, ways and means to avoid the
same; and

(f) To anticipate problems and suggest remedies to solve them in time.

Process of Management Audit:

The Management auditors may not need the verification of accounts since his object is to
evaluate the performance of Managerial functions and not the study of accounting accuracy.
The following procedure may be followed for conducting Management Audit.

1. Collection of Information: Management auditors requires information for the

appraisal of various Managerial aspects. A questionnaire should be prepared for
collecting relevant information. The questions should cover information about
objectives, planning process, organisation, control systems: procedures, functional
areas etc. The questions should be so framed that they provide full information about
every aspect.

2. Examination Of Information: The Management auditors should carefully examine

the information may also be required to reach certain conclusions. The information
should be carefully studied to ascertain the real position of organisation.

3. Authentication of Information: The Management auditor may collect information

from various persons. The information collected should be authenticated by the
 persons supplying it. When they get information from any source then the persons
supplying it must put their signatures so to authenticate information.

4. Confirmation of Information: The management auditor may like to confirm the

information supplied by different sources. It may be counter-checked from other
sources etc. It can be confirmed by putting oral or written questions to certain persons.
This is very important for reaching reliable conclusions.

5. Observation: The management auditor may observe certain activities himself If he

sees the things being done himself then he can undertake his work in a better way. He
may prepare organisation charts, flow charts etc. himself after making observations.
This will give him more insight in to the activities undertaken.

6. Comparison of Information: The information collected by management auditor

should be compared with the objects and standards set earlier. Sometimes,
information is compared with that of previous years. This will give on idea of actual
performance of the enterprise. This will help in assessing the comparative
performance of the unit.

Scope of management audit:

(a) The suitability, practicability and present compliance or otherwise of the organization with
its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its
own particular industrial or commercial field.

(c) The rate of return on investors’ capital – whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

(f) The relationship between management and staff within the business.

(g) The aims and effectiveness of management at its various levels such as top level, middle
level and operational level.

(h) Financial policies and control relating to production, sales and distribution and in other
functions of the organization.

Areas of Management Audit:

Decision making:
Correct and prompt decision making, can help in improving profit and services of
cooperatives. Decision making comprises a series of acts at different levels in a hierarchy.
During management audit the assessment and of the quality of the decisions taken will have
to take into account several factors-some controllable and some uncontrollable.

Though it is the effort of every organisation to appoint right man at the right position to
ensure quality decision-making. It is not always possible. Management audit will have to take
into account the executive calibre of people at different levels, especially in sensitive areas
like personnel department, credit appraisal and public relation.

Management audit will examine situations critically and point out faults whether these are at
the top level or lower level. Finally this will help in deciding as to what extent power should
be delegated to middle and lower level for effective and quick decision making.

Financial Viability
The present day problem of a business organization is primarily that of profitability and
viability which calls for a definite orientation in management audit exercise. Management
audit can help to identity clearly factors which are contributing to the profitability and
viability to the business, as also those which are not making any contributions in this regard.
The management and administrative costs should be analysed thoroughly by the audit to
apprise the management of the impropriety in expenses. The total income of the business
should match its managerial, financial and administrative expenses and save a certain
quantum as met profit.

Management audit is a very suitable device for suggesting remedial measures to improve the
profitability and viability” of the business organization. A factual and analytical management
audit can be an effective test for stimulating action to correct the weakness underscored by
the auditor.

Risk assessment
Risk assessment is the identification and analysis of relevant risks to the achievement of an
organization's objectives, for the purpose of determining how those risks should be managed.
During the risk assessment process, management auditing identifies and assesses both the
likelihood and potential impact of various risks to the organization.    Internal controls are
then identified and evaluated to determine how adequate they are in reducing risk to ensure
that residual risk is at manageable levels.  Residual risk is the risk that something will occur
after controls or procedures are implemented to prevent it.  In addition to audits required by
state regulations, those activities or functions with higher levels of residual risk are typically
selected for audits.

Operating Effectiveness

Management audit involves the review of operating effectiveness like organizational

procedures, structure, control and system in order to check the efficiency or performance of
the management over the activities of the Company. Unlike financial audit management audit
mainly examine the non-financial data to audit the efficiency of the management.
Somehow audit tries to search the answer of how well the management has been operating
the business of the company? Is the managerial style well suited for business operation?
Management Audit focuses on results, evaluating the effectiveness and suitability of controls
by challenging underlying rules, procedures and methods.

Production efficiency
In appraising production efficiency, the management audit aims at the evaluation of materials
management, waste control and management, manpower management (especially
management of non-executive employees), and management of machinery, plant and
equipment. The appraisal of production policies and achievement in terms of quality and
quantity should also be duly considered.

Health of Earnings:
It involves determination of the income itself and also appraising the extent to which the
resources including the assets of the company have realised the profit and their potentiality in
real and tangible terms.

Service to shareholders:

The evaluation of a company's service to its shareholders can be assessed in three areas: (1)
the extent to which stockholders' principal is not exposed to unnecessary risks; (2) whether
the principal is enhanced as much as possible through undistributed profits; and (3) whether
stockholders receive a reasonable rate of return on their investment through the form of
dividends.

Directorate Analysis:
Directorate analysis in management audit covers the quality and effectiveness of the board of
directors. Three principal elements are considered in the evaluation of the board. First, the
quality of each director is assessed along with the quality and quantity of the contributions he
or she makes to the board. Second, how well the directorate works together as a team is
evaluated. Third, the directors are assessed to determine if they truly act as trustees for the
company and act in the shareholders' best interest. This can best be examined in areas where
a conflict of interest exists between a company's executives and its owners and public.