Understanding Operational Audit
Operational audit is related to the activities in the functional areas; The policies and actual operations are compared and evaluated under operational.audit. The end result is compared with the standards and the variations are analyzed. After evaluation and analysis, suitable recommendations and suggestion are made to improve the operational efficiency.
Operational audit is a part of performance audit. Performance audit evaluates the effective functioning of an organization. It includes operational audit, financial audit, etc.
In the words of Sri. Kamal Gupta
“Operational audit is confined to various activities and operations in the functions areas.”
Operational audit reviews the operational performances of various areas and compares it with the predetermined standards. It is output — result oriented and operational audit does not ensure the adherence of systems and procedure.
Steps for Conducting Operational Audit
The following steps are taken while conducting operational audit
1. The objectives of the management are studied and undefined objectives are defined and identified in terms of target or goals.
2. Specific functional centres are identified such as production, sales, etc.
3. Performance or operation of each area is evaluated in quantitative terms and the same is compared with the per-determined standards and targets.
4. Remedial measures are suggested to the management to improve the operational e6iciency.
Purpose of Conducting Operational Audit
Operational audits are conducted for the following purposes:
1. To provide Incentives: The performance of the functional units are appraised and incentives are awarded on the basis of the operational efficiency.
2. To take over sick units: Before taking over a sick unit, the government or an outside agency may be interested in conducting the operational audit. If it is found out that the sickness is due to operational inefficiency, the interested party may take over the sick unit. If it is found out that the sickness is due to reasons beyond the control of the management and not due to operational inefficiency, the sick unit may not be taken over since there is little hope of rehabilitation.
3. Any financial corporation or bank may decide to participate in the equity capital of an organization or may propose to extend a huge amount as loan. Before implementing such decisions, they may conduct operational audit to ensure the efficiency of performance of the functional areas.
The concept of operational audit is rather new and may serve the purpose as an excellent tool of management information system.