OPERATIONS AUDIT

Short-term 2022-2023, BSA 3B

Instructor: ATTY. MAY ANGELICA M. TENEZA, CPA, MBA
 OVERVIEW
This course is primarily intended to address the needs of students
taking up B.S. in Accountancy and students who are taking up other
business courses. Operational Audit allows the assessment and
evaluation of the operation activities and processes of the enterprise.
The students will determine the roles of auditors in influencing
management to achieve operational excellence. The students should
also have acquired a good knowledge of concepts and models
relevant to operations auditing. Furthermore, they should be able to
analyze an organization with a focus on risk exposure and internal
control – proposing how the internal auditing process should be
designed. They will also learn how to employ various methods, tools,
and skills to collect and analyze operational information and data,
identify causes of operational issues and risk exposures, and develop
solutions to enhance the operational performance of business
activities, processes and/or resources deployed across the
organization.
COURSE LEARNING PLAN
1. Nature and Objectives of Operations Auditing Engagement
2. Approaches to Operational Auditing
3. Risk-Based approach and Process-based Approach
4. Operational Audit Process
5. Performance Evaluation, Business Process improvement
methods and Operational audit tools
6. Benchmarking Methodology
7. Value Added assurance services which decision-makers
demand in the information age
What is auditing?
 Auditing originates from the Latin term “Audire”, which means
“to hear,” - just as in ancient times auditors used to listen to
officers and people of authority to confirm the validity of their
words. Over the years, the role of auditing evolved to verifying
written reports: specifically, the financial records of individuals
and businesses.

 Auditing is defined as the on-site verification activity, such as

inspection or examination, of a process or quality system, to
ensure compliance to requirements. An audit can apply to an
entire organization or might be specific to a function, process, or
production step.
 AUDITING
External Audit Compliance Audit Internal Audit

- FS Audit (not
primary)
- Compliance with
- Management
- FS Audit laws, rules and
Audit
regulations
- FS Assertions - Operational
Audit
 Topic No. 1:
Nature and Objectives of
Operations Auditing
Engagement
a. What is operational audit?
 The Institute of Internal Auditors defines operational
audits as systematic processes for evaluating an
organization’s efficiency, effectiveness, and economy of
operations under its management’s control and
reporting the evaluation results and recommendations
for improvement to appropriate employees.
 It is an in-depth, future-oriented, independent
evaluation, and systematic review of an organization’s
activities, or of a stipulated segment of them, in relation
to specified objectives, designed to add value and
improved an organization’s operations.
Operational audit engagement refers to the
auditor’s study of business operations for the
purpose of making recommendations about
economic and efficient use of resource, effective
achievement of business objectives and
compliance with company policies.
3 Es of Operational Audit
What are the purposes of an operational audit
engagement?

1. to assess performance;
2. to identify opportunities for improvement;
and
3. to develop recommendations for
improvement or further action.
1. Assess Performance

 Any operational audit involves an assessment

of the reviewed organization’s performance.
To assess performance is to compare the
manner in which an organization is
conducting activities (1) to objectives
established by management or the engaging
party, such as organizational policies,
standards, and goals, and (2) to other
appropriate measurement criteria.
2. Identify Opportunities for
Improvement
 Increased economy, efficiency, or effectiveness are the
broad categories under which most improvements are
classified. The practitioner may identify specific
opportunities for improvement by analyzing interviews
with individuals (whether within or outside of the
organization), observing operations, reviewing past and
current reports, studying transactions, making
comparisons with industry standards, exercising
professional judgment based on experience, or other
appropriate means.
3. Develop Recommendations for
Improvement or Further Action
 The nature and extent of recommendations developed
in the course of operational audits vary considerably. In
many cases, the practitioner may be able to make
specific recommendations. In other cases, further
study, not within the scope of the engagement, may be
required, and the practitioner may simply cite reasons
why further study of a specific area may be
appropriate.
c) What are the objectives of
operational audit engagement?
1. Assessment of the unit’s performance in relation to
management’s objectives or other appropriate criteria;
2. Assurance that its plans are comprehensive, consistent,
and understood at the operating levels;
3. Objective information on how well its plans and policies
are being carried out in all areas of operations and on
opportunities for improvement in effectiveness,
efficiency and economy.
4. Information on weaknesses in operating controls,
particularly as to possible sources of waste; and
5. Reassurance that all operating reports can be relied on
as a basis for action.
d) What are the different types of
operational audits?
There are three broad categories of operational audits:

1. Functional
• A functional audit deals with one or more functions in an
organization.

2. Organizational
• Deals with an entire organizational unit, such as department,
branch, or subsidiary.
• Emphasizes how efficiently and effectively functions interact

3. Special assignments
• Arise at the request of management for a wide variety of audits
In addition, the following are some of
the subcategories of operational audit:
1. Financial Audits or Review

Financial audits center around a business’s financial controls and

procedures concerning reporting externally to governing bodies
and internally to upper management. Internal auditors handle
budget and financial reviews, while external auditors handle
financial statement audits.
Continuation…
2. Department Reviews

Different divisions of a company or business periodically run

investigations to ensure employees are using designated resources
and protecting assets, existing controls are adequate, and laws are
being complied with.

3. Information System (IT) Audits

IT audits are a probe into the technical operations of a business. They

investigate the current network and infrastructure, review the
procedures and status of security, and analyze project management
and data center operations.
Continuation…
4. Investigative Audits

Investigative audits happen when there’s a suspected risk of a

security breach or if a breach actually occurs. A thorough
investigation uncovers direct causes, persons involved, and future
preventative measures.

5. Compliance Audits

Compliance audits analyze the degree of compliance with internal

controls and policies and external regulatory requirements.
Continuation…
6. Marketing Audits

Marketing audits are a broad but accurate investigation into a

business’s advertising. The audit examines external results while
thoroughly challenging internal strategies, processes, systems,
capabilities, and marketing goals.

7. Follow-Up Audits

An auditor schedules a follow-up when an audit uncovers something

that requires corrective action.
 e. Advantages of operational audit
There are four categories of people who benefit from
operational audits:
1. Organization itself
2. Organization’s employees
3. Organization’s consumers
4. Environment
 1. Organization itself
There are a few significant organizational benefits to performing an operational audit:

a. Recognize the risk.

 Various risks are associated with organizations, ranging from human error,
product failure, fraud, loss of key employees, business interruption, loss of
suppliers, IT system failures, litigation, and health and safety issues.

b. Risk improvement opportunities.

 Once you recognize the risks, auditors can determine how to mitigate them
by making improvements in their specific categories—reputational risk,
financial risk, operational risk, and environmental risk.

c. Affect positive change.

 The comprehension of how policies, procedures and processes can produce
efficiency and effectiveness

d. Internal controls review.

 Realize the impact of successes and failures within each specialized
operation area.
2. Organization’s employees
 Operational audits encourage employees to continuously
improve their performance by applying the knowledge
and skills learned from the results of the audits. This is
widely beneficial for boosting collaboration and company
morale.
3. Organization’s consumers

Operational audits help deliver higher-quality, more cost-

efficient products or services to the consumer, often leading
to repeat business.
4. Environment
The entire world benefits when organizations create
sustainable products and services wherever possible,
allowing a more sustainable future for the environment.
 f. Disadvantages of operational audit
Some challenges when performing operational audits are as
follows:
1. They can cause confusion and frustration among staff
2. They often require retraining
3. They cost money
4. The more complex the operations, the longer the audit
takes
g. Explain the different phases of
operational audit.
1. Planning
In this stage, the auditor plans the scope of the audit and identify
the objective of the audit. It also includes budgeting, determining
the population of interest and the procedures of testing to be
performed, and announcing the audit.
The starting point of planning should be the performance of a
risk assessment that allows the Chief Audit Executive (CAE) to
prepare an audit plan based on the results of an analysis of the
organizations audit universe.
2. Fieldwork or the evaluation phase
In this phase, testing of transactions, records and resources and
performing necessary procedures to achieve the objectives of the
audit takes place.
Fieldwork consists primarily of two things:
• Determining if the process or program under review is
designed effectively so that the related goals and objectives
are likely to be achieved
• Verify that the controls in place are performing as designed
by management
3. Reporting
Third phase of the audit is the communication of results,
often referred to as reporting. It includes processes like
reporting the findings, observations and best practices
noted during the review, and developing recommendations
for corrective action.

Findings should be discussed with the process owners and

other relevant stakeholders before being included in the
report.
Attributes of Effective Audit Findings:
4. Follow-up
After findings are reported, both management and
auditors should verify whether the recommendations for
corrective actions have been performed by the
organization.