MODULE IN

OPERATIONS
AUDITING

Prepared by:
Leo C. Camacho, CPA

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 MODULE 1
Introduction to Operations Auditing

As of today, operational auditing is one of the emerging consulting services that can be offered by
any professionals. It can be an Internal Auditor within an organization, Certified Public
Accountants in Public Practice, Industrial Engineers, and any professional who has an expertise in
any field with regards to the operations depending on the nature of business or organizations.
Operations auditing is most likely conducted by the Internal Auditors of an organization and this
is also part of the performance audit which is conducted by the government auditors in their
respective assignment.

As of today, the Commission on Audit (COA) is now dealing with this kind of audit that is why,
there is a plan to employ interdisciplinary studies to be able to carry out the mandate, which is to
engage in the performance audit whether it is a process, projects, programs and activities.

Operational Auditing is a future-oriented, systematic, and independent evaluation of

organizational activities of which the operational policies and achievements related to
organizational objective is the primary source of evidence rather than the financial data. 1 It is also
a methodology for the assessment of procedures and methodologies in conformity with the
department’s instructions, regulations or documents and performed by the specialized auditors.

Operational auditing is also a type of audit service that focused on the review of key processes,
procedures, system, as well as internal control and the main objective is to improve productivity,
as well as efficiency and effectiveness of the operation. 2

Operational audits may also be concerned with the appropriateness of organizational structure
because the information on the organization which has a poor structure does not flow accurately
and have an impact in achieving the goals and objectives of the organizations.

1
Operational Auditing Principles and Technique for a Changing World, Hernan Murdock
2
https://www.wikiaccounting.com/operational-audit/

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 The purpose of operational auditing is to improve the profitability of the organization and the
attainment of organizational objectives. These surpasses the review of internal control issues
because objectives cannot be achieved by simply adhering only in the internal control system.
The organizational objectives of the organization can be achieved by defining the goals of the
management, setting appropriate strategies, and having enough and competent staff in the
organization. Operational auditing also involves management performance evaluation because
management has a responsibility to the owners of the organizations and to other relevant
stakeholders.

Since it is part of the Internal Audit, we need to define what is an Internal Auditing. Based on the
Institute of Internal Auditors (IIA), Internal auditing is defined as an independent, objective
assurance and consulting activity designed to add value and improve an organization's operations.
It helps an organization accomplish its objectives by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control, and governance processes. 3

Based on the above definition, there are key words or terms that need to be define as follows:

1. Independence – Independence is the freedom from conditions that threaten the ability of
the internal audit activity to carry out internal audit responsibilities in an unbiased manner.
To achieve the degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the chief audit executive has direct and
unrestricted access to senior management and the board. This can be achieved through a
dual-reporting relationship. Threats to independence must be managed at the individual
auditor, engagement, functional, and organizational levels. To be able to determine that
the Internal Auditors are effective by evaluating the organizational structure of the
organization. Internal Audit Department (IAD) should be directly reported to the Board
of Directors or in the Government setting, IAD should be directly reported o the Head of
the Agency.

2. Objectivity - Objectivity is an unbiased mental attitude that allows internal auditors to

perform engagements in such a manner that they believe in their work product and that no
quality compromises are made. Objectivity requires that internal auditors do not
subordinate their judgment on audit matters to others. The biggest threat to objectivity is a
conflict of interest that is why, Internal Auditors must maintain their professionalism in the
organization.

3
https://na.theiia.org/standards-guidance/mandatory-guidance/Pages/Definition-of-Internal-Auditing.aspx

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 3. Assurance – it refers to the ability of the internal auditor’s to give confidence and have an
impact regarding the condition of matters within the organization and it referred to
“compliance” which is the traditional focus of internal auditors. Compliance audits focus
on the verification and confirmation of the conformity and adherence of a particular area,
process, or system with policies, plans, procedures, laws, regulations, contracts, or other
requirements that govern the conduct and actions of that area, process, or system. 4

4. Consulting - means giving advice to management and conducting an activity that helps
organizations in resolving business issues to attain the business goals and objectives. This
is also an activity that aims at improving the organizational programs, processes, and
activities, and become more flexible, responsible and active in addressing the business
challenges.

5. Designed to add value – internal auditing is designed to add value to the organization by
recommending changes in various process that may hamper the operations as well as
achieving the goals and objectives of the organizations.

6. Improve an organization’s operations – Internal Auditing is focused more on improving

operations to enhance efficiency, effectiveness and economy.

Reviews of the transactions to verify whether it has been properly authorized, processed and
recorded in the book of accounts was the traditional approach to internal auditing. This was
patterned in public accounting firms with the objectives to help the external auditor in the conduct
of audit of the financial statements prepared by the organization. Internal auditors need to go
beyond the audit of the financial transactions of the organization because the focus of the internal
audit today is how to mitigate the threats and vulnerabilities that may hamper the organization’s
goals and objectives in the short, medium, and even longer term. By focusing on future events
and the future implications of present events rather than reporting primarily on past events would
add more value to their organizations. The future threats and vulnerabilities as follows:

a. Operational - such as maintaining operational capacity, cycle time, human resources

management, such as employee motivation and knowledge transfer as well as system
development, and implementation. With regards to the government the risks that
operations are inefficient and ineffective in executing the government’s operating model,
satisfying the public, and achieving the government’s quality, cost and time performance
objectives.

4
Operational Auditing Principles and Technique for a Changing World, Hernan Murdock

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 The operational risk arises if the processes are not clearly defined, poorly aligned with
strategies, goals and objectives of the organization and not performed effectively and
efficiently in satisfying the stakeholders and expose significant financial, physical and
intellectual resources to unacceptable losses, risk taking, misappropriation or misuse.

b. Technological- such as hacking, obsolescence, systems development and business

continuity due to personnel turnover.
c. Strategic – refers to mergers and acquisitions, customer loyalty, customer and vendor
relations and outsourcing of some services. In government, it arises when forces in the
environment could significantly ”change the fundamentals” that drive overall social and/or
operating objectives, strategies and, in the extreme, result in failure of the operations.
d. Environmental – compliance with environmental laws and regulations prescribed by the
authorities.

Benefits of the Organizational Auditing5

The Organization can achieve its aims by applying disciplined, systematic methods to assess and
advance the effectiveness of control, risk management, and governance processes.

 The Individual can continuously improve their ability to apply knowledge and skills to
deliver the intended results.

 The End User or Consumer receives a more cost efficient and high-quality products or
services.

 The World benefits from a better, more sustainable future.

Organizations can expect to achieve five primary goals or main advantages by performing any
operational audit:

 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.

 Understand Risks: The type of risks associated with business and operational risk range
from business interruption, employee omissions or errors, IT system failure, product

5
https://www.smartsheet.com/operational-audit-process#different-types-of-operational-audits-

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 failure, safety and health issues, loss of key employees, fraud, loss of suppliers, and
litigation.

 Identify Improvement Opportunities: As a result of understanding the 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, and reputational risk.

 Inform Senior Management: The results of the audit should appear in a clear report that
provides objective analysis, appraisals, recommendations, and pertinent comments
concerning the activities reviewed.

The Skills Required for Effective Operational Audits

Due to the paradigm shift in the work of internal audit, from being control based to risk based,
Internal auditor must acquire and apply different skills to address the emerging needs in mitigating
risks and vulnerabilities affecting the operations of the organization.
6
The general competencies that need to possess by the Internal Auditor are as follows:

a. Communication skills
b. Problem identification skills
c. Accounting framework, tools and techniques
d. Industry, regulatory and standards changes
e. IT/CT Framework, tools and techniques
f. Organizational Skills
g. Ability to promote value of internal audit
h. Conflict resolution/negotiation skills
i. Cultural fluency and foreign language skills
j. Staff training and development
k. Change management skills

The three common core competencies identified in the report are communication skills, problem
identification and solving skills, and keeping up to date with industry and regulatory changes and
professional standards. These results highlight the importance of individual and team
competencies and the role they play in team effectiveness.7

6
https://global.theiia.org/iiarf/Public%20Documents/2010-CBOK-Core-Competencies.pdf
7
https://global.theiia.org/iiarf/Public%20Documents/2010-CBOK-Core-Competencies.pdf

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 Sample Quiz

Multiple Choice: Choose the letter of the correct answer.

1. The purpose is to improve the profitability of the organization and the attainment of
organizational objectives.
a. Management Consultancy b. Compliance Audit
c. Operational Audit d. Financial Audit

2. It is a threats and vulnerabilities which pertains to the maintaining operational capacity,

cycle time, human resources management such as employee motivation and knowledge
transfer as well as system development, and implementation hat refers to
a. Operational b. Strategic
c. Technological d. Environmental

3. It is a future-oriented, systematic, and independent evaluation of organizational activities

of which the operational policies and achievements related to organizational objective is
the primary source of evidence rather than the financial data.
a. Operational Audit b. Compliance Audit
c. Financial Audit d. Management Consultancy

4. It is the freedom from conditions that threaten the ability of the internal audit activity to
carry out internal audit responsibilities in an unbiased manner.
a. Objectivity b. Independence
c. Environmental d. Management Consultancy

5. It refers to the ability of the internal auditor’s to give confidence and have an impact
regarding the condition of matters within the organization and it referred to “compliance”
which is the traditional focus of internal auditors.
a. Objectivity b. Independence
c. Environmental d. Assurance

6. It is define as an independent, objective assurance and consulting activity designed to add

value and improve an organization's operations It refers to the ability of the internal
auditor’s to give confidence and have an impact regarding the condition of matters within
the organization and it referred to “compliance” which is the traditional focus of internal
auditors.
a. Internal Auditing b. Financial Auditing
c. Value for Money d. Management Consultancy

7. It is part of threat and vulnerabilities that the internal auditors should focus on which
includes hacking, obsolescence, systems development and business continuity due to
personnel turnover.

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 a. Objectivity b. Technological
c. Environmental d. Strategic

8. It is part of threat and vulnerabilities that the internal auditors should focus on which refers
to mergers and acquisitions, customers loyalty, customer and vendor relations and
outsourcing of some services.
a. Objectivity b. Technological
c. Environmental d. Strategic

9. It refers to giving advice to management and conducting an activity that helps organization
in resolving business issues to attain the business goals and objectives.
a. Objectivity b. Technological
c. Internal Auditing d. Consulting

10. It is part of threat and vulnerabilities that the internal auditors should focus on which refers
to the compliance with environmental laws and regulations prescribed by the authorities.
a. Objectivity b. Technological
c. Environmental d. Strategic

ANSWER KEY

1 C 6 A
2 A 7 B
3 A 8 D
4 B 9 D
5 D 10 C

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