Guide To Operational Auditing: Definition, Process, Advantages and Disadvantages

Operational audit is a systematic review of effectiveness, efficiency and economy of operation. Operational audit is a future-oriented, systematic, and independent evaluation of organizational activities.

In Operational audit financial data may be used, but the primary sources of evidence are the operational policies and achievements related to organizational objectives.[1] Operational audit is a more comprehensive form of an Internal audit.

The Institute of Internal Auditor (IIA) defines Operational Audit as a systematic process of evaluating an organizations effectiveness, efficiency and economy of operations under managements control and reporting to appropriate persons the results of the evaluation along with recommendations for improvement; see aside.

Introduction to Operations Audit (Morning Class)

What is the operational auditing process?

The typical operational audit process involves the following steps:

Determine the auditor

Typically, a company conducts an operational audit internally. They may have an internal auditor or audit team whose job is to manage internal or operational audits. However, some companies may not have an internal audit team or an internal auditor with the necessary knowledge or experience needed, so they may hire an external specialist to conduct the audit.

Plan the audit process

The auditor meets with relevant managers to discuss and plan their audit method. During this discussion, the auditor gains an understanding of the business and any potential concerns. They can then identify areas that may require process improvements, providing challenges for them to focus on during the audit. Through this conversation, the auditor also establishes the scope and timeline of the audit.

Next, they can begin establishing the audits goals and strategies. These objectives vary but should aim to support the organizations needs and overall objectives. They may focus on a specific area of the company and its related processes. For example, a company may perform an operational audit on its hiring practices. The auditor and managers must establish objectives for those processes to meet, such as increasing the number of employees hired over a set period. Then the auditor uses those objectives to assess the companys current procedures and find improvements.

Conduct the audit

Now the auditor examines the business areas within the scope of their audit program. The auditor needs to assess the existing processes and procedures to determine whether they meet the goals set earlier in the audit process. They have conversations with managers and employees to discuss whether the processes meet expectations. The auditor also may observe employees as they conduct those procedures and examine every step.

Once the auditor understands and reviews the processes or procedures, they can develop tests to evaluate them. Through those tests, the auditor may find specific factors that need improvement and generate and experiment with solutions that help fulfill their objectives. An ideal process works without issues and enables the company to conduct the task in a cost- and time-efficient manner.

Report audit findings

The auditor develops a report on their findings and includes any recommendations for improvements. Depending on those recommendations, the auditor may also draft an implementation plan to help the company make the necessary changes. They discuss these recommendations with relevant managers, ensuring that the management team understands the findings and solutions. The management may agree to follow all the suggestions or discuss why some changes may not be feasible.

Perform a follow-up

After completing an audit, the auditor sets up a follow-up meeting with the relevant management team and staff. Commonly, they hold the follow-up about six months after the audit. During the follow-up, they discuss the changes made to the processes and assess their results. They measure these results to the objectives set forth by the audit and determine whether they meet those goals or are making some progress towards them.

What is operational auditing?

An operational audit refers to a method of examining how an organization conducts business. It requires analyzing the processes, procedures and systems used within the company. This type of audit looks beyond the organizations financial circumstances and examines its management practices. An operational audit aims to find areas in need of improvement to make the organizations operations more efficient, productive and effective.

Advantages of an operational audit

Conducing an operational audit within an organization can bring numerous benefits, such as:

The audit identifies opportunities and risks

The operations of a business may run smoothly, but an audit can identify areas for improvement. These changes can make processes faster, less costly or improved in other ways that support profitability and business goals. Through an audit, managers may also discover risks or issues within their processes that they were not aware of previously. The auditor helps identify these risks and provides methods of resolving them. Now that staff understands the risks associated with their business, they can better identify and evaluate future risks.

The audit can improve business effectiveness

An operational audit requires taking an in-depth look a the processes and procedures involved with business operations. The purpose of the audit is to ensure the business completes processes effectively and efficiently. Therefore, any changes made serve that goal and result in improvements to company operations and profitability. Sometimes, an auditor may identify an area of the business that works efficiently and use it as an example to help boost another teams efficiency.

The audit can offer objective or new views

An auditor can help managers gain a fresh perspective on their business operations. If the auditor has no regular involvement with the identified processes or procedures, they can provide insights that someone who regularly performs them may not see. Because they base their assessment of the processes on business goals, it serves as an objective evaluation method. It is not about whether the auditor likes the process, but whether it meets the required goals.

The audit can provide motivation

During an audit, the auditor and management develop objectives they to achieve. These goals aim to help the business perform better by making improvements to specific processes and procedures. Management staff can use these goals to motivate their employees by giving them a standard to work toward. The goals also provide clear guidelines for employees, ensuring that they understand their employers expectations and know what constitutes good work.

Types of operational audits

An operational audit examines the business processes and procedures within a company. This type of audit may overlap with other types of audits, such as:

Disadvantages of an operational audit

An operational audit aims to improve the processes and procedures within a company, but it may come with some disadvantages. However, these disadvantages may not matter in the long run due to the advantages of the improvements made. Some of those disadvantages may include:

The audit may require making changes

Improving the processes and procedures within a company often requires changing elements of them. Employees may need time to adjust to these changes and become more comfortable with them. Some changes may even require training staff on how to conduct the new and improved processes. As a result, companies implementing changes due to an operational audit need to consider developing a change management plan to help employees ease into the transition.

The audit comes with monetary costs

Like any other audit, an operational audit brings costs to the organization. While typically handled by an internal auditor, a company may sometimes hire an external auditor who charges a fee for their services. The audit may also deem certain changes necessary to improve specific processes and procedures in the business. The implementation of those improvements or training employees on them could add costs to the company.

The audit can affect productivity

An operational audit could impact the productivity of the participating employees participating. If the internal auditor typically performs other duties at the company, conducting the audit takes them away from those responsibilities during its duration. Similarly, the employees whose department or business area is being audited need to spend time working with the auditor and going over their processes and procedures. This task could slow down progress on their projects or take time from day-to-day responsibilities. The processes highlighted for improvements may be put on hold as the company implements any necessary changes.

The audit can be time-consuming

It can take significant time for an auditor to review the business operations of a company. They must examine every step of the processes they audit, and the more complex the processes, the more time-consuming they can be. The task of implementing solutions or improvements can also take time to complete. The company may need to perform tests to ensure the solutions or improvements make the processes more effective. If employees require training to learn how to conduct changed processes, that can also take time away from their usual responsibilities.

How does an operational audit differ from an internal audit?

An operational audit acts similarly to an internal audit because an internal auditor conducts the process. Though they both look at internal processes, there are still some differences between the two. Typically, a business may conduct an internal audit when something goes wrong within its processes and procedures. The internal audit will examine the mistake and what allowed it to occur. Then the company can focus on improving its processes to ensure the error does not happen again. An internal audit assesses success by seeing whether the process gets completed with no mistakes.

An operational audit differs because it looks for the potential for improvement within the companys business operations. It also tends to focus on factors related to processes, such as their effectiveness and efficiency. Rather than performing an audit due to an issue occurring, the operational audit examines business areas that may benefit from process improvements. The operational audit will evaluate a process by assessing whether it completed a task without mistakes and met company standards for efficiency related to cost, time and resources used.

FAQ

What is an example of an operational audit?

Examples of Operational Audits

Operations consist of those work processes that directly create the products or services that are the company’s main business. For example, in a dry-cleaning business, operations would include all work that contributes directly to cleaning customers’ clothing.

Why is operational auditing important?

The objective of the operational audit process is to improve the way the business performs. An operational audit can help businesses lower costs. It also helps businesses decrease the turnaround time for many processes, directly improving service delivery and customer satisfaction.

What are the three phases of operational auditing?

Audit Phases

Audit engagements are performed in three general phases: planning, fieldwork & review, and reporting.

What are the characteristics of operational auditing?

Operational audit is a future-oriented, systematic, and independent evaluation of organizational activities. In Operational audit financial data may be used, but the primary sources of evidence are the operational policies and achievements related to organizational objectives.

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