What is an Operational Audit ?

1. What is an Operational Audit ? • Evaluation made of management's performance and conformity with policies and budgets. • The organization and its operations are analyzed, including appraisal of structure, controls, procedures, and processes. • An operational audit is a comprehensive form of an internal audit. This type of audit attempts to improve the efficiency and the effectiveness of the internal operations. • What is the Objective (Generally) • The objective is to appraise the effectiveness and efficiency of a division, activity, or operation of the entity in meeting organizational goals

2. An Operational audit is designed to: • -Understand the responsibilities and risks faced by an organization; • -Identify, with management participation, opportunities for improving control; • -Provide senior management of the organization with a • detailed understanding of the Operations.   • Normally, this involves the following Five steps

3. 1) Preliminary Preparation • The process normally begins with an introductory meeting to inform the unit's senior management that an audit will take place, to explain the process, and to gather background information. • Following the introductory meeting, the auditor performs a preliminary gathering of information using various sources of information (for example, the unit's web site) to identify the possible components and concerns. At the end of this stage, a binder is prepared and is used in the risk assessment meeting with the auditees.

4. 2) Field Survey • The Field Survey involves meeting the key managers of the Company or faculty or unit to be audited. One objective of the Field Survey is to obtain confirmation of the components and major concerns of the company • project.

5. 3) Program Development • The auditor begins to develop his audit program by meeting with the managers of the high-risk areas to identify the key management objectives and the key control activities performed. After these meetings, the auditor documents the key management objectives and the key controls.

6. 4) Audit Application • . • This is usually the most time consuming step in the audit and it is important for all information to be carefully recorded and documented in order to be able to refer to it after the physical audit has taken place. If the audit application step is done effectively, the reporting and follow-up step is much easier to perform.

7. 5) Reporting and Follow up • This is perhaps the most critical part of the operational audit. A good audit report will effectively communicate the recommendations and conclusions to management. The report will be supported by all the documented facts, findings, and opinions that were gathered during the audit application. The reporting step should include a follow up step to determine what if any action needs to take place in order to improve the operations of the company. • The draft report uses the following standard structure: • Purpose • Scope • Results • Audit Opinion • Recommendations • The report review and discussion process is designed to arrive at agreed action plans to resolve identified issues. Any management-accepted risks and differences of opinion are also reported.

8. Operational Audits vs Traditional audits Financial Audit Operational Audit • A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity, resulting in the publication of an independent opinion on whether those financial statements are relevant, accurate, complete, and fairly presented • Standards- ISA International Standards on Auditing • The objective of an audit of financial statements is to enable the auditor to • express an opinion whether the financial statements are prepared, in all • material respects, in accordance with an applicable financial reporting • framework. • An operational audit is a more comprehensive form of an internal audit. This type of audit is attempts to improve the efficiency and the effectiveness of the internal operations. Its objectives vary a lot and are determined by the management of the company, based on their own scope • Standards -Not governed by ISA (International Standards on Auditing)

9. How do companies become Profitable under an Operational Audit ? • Operational audit focuses on the appraisal of the effectiveness and efficiency of a division, activity or an operation of an organization in order to determine whether it meets management objectives and achieves other established criteria. The operational audit helps you judge the level of control a management exercises on various organizational activities, functions or business units and provide an insight into management achievement in terms of performing its responsibilities and mitigating the risks associated with the business operations. If Conducted regularly an operational audit will eliminate the risk of encountering cash shortages and assist companies facing operational issues that could easily have been avoided through proper planning, and improve business productivity. The earlier an operational audit is instituted in a business entity, the better it is for the health of the business.

10. Operational Audit Checklist Grade • Production Areas Sales Issues Marketing and Promotion • Low Low Low • Medium Medium Medium • High High High • N/A N/A N/A • Advertising and Branding Customer Service • Low Low • Medium Medium • High High • N/A N/A

11. Operational Audit Checklist Descriptions • Of critical importance to manufacturing and product-creation companies, the production function details form a major section of the audit. Checklist items often include relationships with suppliers and staff, inventory management and control, alternate sourcesof raw materials, and all items involved in product creation, ongoing maintenance procedures, production-employee training programs, processing procedure documentation, use of best available technology, and environmental protection policies. Production Areas

12. Operational Audit Checklist Descriptions • Sales departments require examination of all facets of this critical function. Operational audit checklists typically include analyzing the company's competition and customers, product pricing, sales channels, sales philosophies, and sales personnel. If the company conducts electronic (or telephone) sales along with or in lieu of the brick-and-mortar variety, their back-office or call-center operations will appear on operational audit checklists. Sales Issues

13. Operational Audit Checklist Descriptions • Marketing and promotion activities occupy important positions on operational audit checklists. Quality and effectiveness of websites is usually examined in detail. It is sometimes challenging for internal or external auditors to comment on how attractive the site is, but quality, ease of navigation, and timeliness of content can be evaluated. Other promotional activities, like community involvement, charitable efforts, and other for-profit or non-profit partnerships that promote the organization are viable checklist items. Marketing and Promotion

14. Operational Audit Checklist Descriptions • Customer service checklist items include quantity and quality of customer service personnel responses, feedback to determine customer satisfaction levels, timely customer question/problem follow-up, and level of company understanding of its customer base. Identifying areas needing improvement may generate further detailed checklist items to evaluate specific operational enhancements that could increase customer satisfaction. Customer Service

15. Organization A - Hotel • Declining visitor arrivals, low occupancy • ( poor economy) • Production Issues N/A • Sales Issues Low • Marketing Medium • Advertising Medium • Customer Service High • Status : • Operational Audit Checklist Grades :

16. Organization A - Hotel Operational Audit Assessment: To become Profitable • Better understanding of competitors • Retraining of sales Personnel • Competitive pricing • Revamping of Marketing and advertising

17. Organization B - Gas & Service Station • Increased Gas and fuel charges (Global) • Led to increased price of Gas • Customer dissatisfaction • Status :

18. Organization B - Gas & Service Station • Production Issues Medium • Sales Issues Low • Marketing Medium • Advertising Medium • Customer Service low • Operational Audit Checklist Grades

19. Organization B - Gas & Service Station To Become profitable • Operational Audit Assessment: • Better understanding of competitors ( What is Shell doing) • Retraining of sales Personnel (Educate Staff) • Reengineered of Marketing and advertising programs

20. Organization C - Government Secondary High School • Government has reduced budget & fewer Teachers available to teach • Status

21. Organization C - Government Secondary High School • Production Issues N/A • Sales Issues N/A • Marketing low • Advertising& Branding low • Customer Service low • Operational Audit Checklist Grades :

22. Organization C - Government Secondary High School To Become Profitable • Operational Audit Assessment: • - Improved local Community involvement • ( may increase the number of students) • -retraining of School Official in managing Parents • - Perhaps employ part time teachers

23. Conclusion • For all organizations to be successful, it is essential to conduct some form of audit at regular intervals. An increasing number of organizations, whether private or public, big or small, have been deploying various auditing services, such as value-for-money auditing, efficiency auditing, performance auditing, management auditing and most of all operational auditing, over the past few years. Although these various terms may appear vastly different, their ultimate goal is the same - to boost the operational efficiency and effectiveness of an enterprise. • Operational auditing itself is not new — but the operational auditing methodologies of today's world class organizations are. And in order for a company to remain profitable I would strongly suggest the implementation of a comprehensive detailed financial analysis, such as an Operational Audit.