Types of Operational Audits and AuditorsTypes of Operational Audits: 1. Functional Audits

Deals with one or more functions in an organization Has the advantage of permitting specialization by auditors

Certain auditors with an internal audit staff can develop considerable expertise in an area, such as production engineering

Auditors can be more efficient and effective by spending all their time auditing in that area

Has the disadvantage of being prone to failure in evaluating interrelated functions Example: Failure to take into account that production engineering function interacts with

manufacturing and other function in an organization Example of a functional audit:

Functional audit dealing with the efficiency and effectiveness of the payroll function for a division or for the company as a whole

2. Organizational Audits 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

Examples: Determining the cause of an ineffective IT system, investigating the possibility of fraud in a division, and making recommendations for reducing the cost of a manufactured product

Types of Operational Auditors: (Who performs operational audits)1. Internal Auditors

Because they spend all their time working for the company they are auditing, they can develop considerable knowledge about the company and its business, which is essential to effective operational auditing

2. Government Auditors They perform operational auditing, often as part of doing financial audits Most widely recognized government auditor group is the Commission on Audit (COA)

They usually audit the local and national government units to determine whether taxes have been collected and remitted in accordance with existing laws and regulations

They usually audit the economy and efficiency in the use of government funds and resources

They usually conduct Program Results Auditing Audits conducted to determine whether a government project or program has met

its stated objectives3. CPA Firm auditors

Part of their audit of historical financial statements often consists of identifying operational problems and making recommendations that may benefit the audit client

The recommendations can be made orally but they are typically included in a management letter

Background knowledge about a client’s business, which an external auditor from a CPA firm must obtain while doing an audit, provides useful information for giving operational recommendations

An auditor who has broad business background and experience with similar businesses is more likely to be effective at providing clients with relevant operational recommendations than a person who lacks those qualities

Clients commonly engage a CPA firm to do operational auditing for one or more specific parts of its business

Only when the company does not have an internal audit staff or if the internal audit staff lacks expertise in a certain area

Note that CPA firms cannot provide the operational auditing services to their public company audit clients

Independence and competence of operational auditorsThe two most important qualities for an operational auditor are:

1. Independence Operational auditor should report to the appropriate level of management to ensure that

investigation and recommendations are made without bias Independence of (1) Internal auditors

Enhanced by having the internal audit department report to the audit committee of the board directors of the company

Independence of (2) Government auditors Enhanced by having the government auditors report to a level above the operating

departments For example, the COA reports directly to the President

Independence of (3) CPA Firm auditors Seldom a problem because they are not employed by the company being audited

Responsibilities of operational auditors can also affect their independence Auditor should not be responsible for operating functions in a company or for correcting

deficiencies when ineffective or inefficient operations are found.

2. Competence Necessary to determine the cause of operational problems and to make appropriate

recommendations When operational auditing deals with wide-ranging operating problems, competence can be a

major obstacle For example, imagine the difficulties of finding qualified internal auditors who can evaluate

both the effectiveness of an advertising program and the efficiency of a production assembly process

Functional areas covered by operational auditsSome areas which operational audits focus include: 1. Organizational structure2. Asset management and security 3. Staffing4. Productivity