Regularly analyzing the internal workings of your company is the best way to guarantee that all of its procedures are helping it function as effectively as possible. For example, a firm could do an operational audit to evaluate the effectiveness of its existing processes and protocols. In another instance, increasing sales numbers and decreasing operating expenses are two ways auditing may help a company become more competitive. In addition, an operational audit finds areas where a firm may enhance its operations.
An operational audit allows the organization to make adjustments that will make its procedures more productive or efficient. Therefore, having a good understanding of how to execute an audit correctly may help your firm function more efficiently and accomplish its organizational goals.
In this article, we will explain in detail what an operational audit is, how the procedure is carried out, and the purpose of an operational audit. You will also learn the advantages and disadvantages of operational audits for your business. But first, let us have look at what an audit is and the main purpose of an audit or auditing.
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What Is An Audit?
An audit is a thorough inspection or review of a business’s financial information and accounting records. Although most people associate the phrase with examining an organization’s financial records, audits can also take various forms.
An inspection of documents is carried out during an audit to verify that a company’s financial statements are true and accurate representations of its operations. After an initial review of the financial statement, an auditor will conduct physical inspections of the inventory and ensure that all transactions have been accurately documented.
Who Is An Auditor?
According to Kul Narsingh Shrestha, an auditor is a person or a firm appointed by a company to execute an audit. To be qualified to carry out the duties of an auditor, a person must either be certified by the accounting and auditing regulatory authority or meet a set of prerequisite credentials. In most cases, a person has to get a certificate of practice from the regulatory body to perform the duties of an external auditor for a corporation.
What Are The Various Audit Types?
There are different types of audits carried out by different kinds of organizations. For instance, a plastic manufacturing firm may consider the cost of raw materials used to produce polythene bags. Therefore, the firm type determines the audit to be carried out. Hence the following are the most common types of audits carried out by most businesses.
An impartial third party, like the Internal Revenue Service (IRS) or an accountant, does an external audit for a business. External audits follow auditing standards. The main goal is accounting accuracy.
Most governments demand yearly external audits for large enterprises. In a major corporation, shareholders nominate directors to administer the firm on their behalf, requiring an external audit. Investors want reliable financial reporting. An external audit gives shareholders trust that financial statements are accurate.
In this type of audit, a firm employee conducts an internal audit and reports to the board’s audit committee. Internal audits assist companies in identifying areas for development and meeting goals. For example, an external audit focuses on finances. In contrast, an internal audit can encompass everything that affects business goals, such as examining company processes’ economy, efficiency, and effectiveness. He also monitors compliance, checks internal controls, and suggests improvements – Financial and operational data review.
During tax audits, the IRS examines the accuracy of a company’s tax forms and the amount of money that was either paid out or reimbursed. Certain states require routine tax audits for corporations, while others use a polling mechanism to choose businesses for audits randomly.
In every circumstance with potential legal repercussions, a forensic investigation is obligatory. Moreover, the results of a forensic audit are frequently presented in legal proceedings as an expert opinion on finance-related topics.
During this audit, an organization’s environmental and social implications are reviewed. More firms are integrating environmental and sustainability reports in their annual reports. The socio-environmental audit is therefore increasing the requirement for environmental audits. The socio-environmental audit of a company looks into the environmental effects such as toxic gas emissions and the efforts it’s taking to reduce them.
What Are The Reasons For An Audit?
Generally, the purpose of an audit is to identify loopholes in a business’s finances or bookkeeping errors. Therefore, an audit serves a very important purpose for businesses and assists the businesses in getting back on track when these errors or loopholes are discovered.
In summary, the under-listed are the major purpose of an audit.
Fraud Detection And Prevention
When frauds are undiscovered in a workplace; they can cause permanent damage to a company or even ruin its reputation entirely. An audit helps determine if fraud has been perpetrated or is possible. It equally detects system weaknesses and finds controls to prevent fraud.
It Helps In Budgeting And Planning
The information acquired during an audit can be useful for future financial planning, decision-making, and budgeting since an audit verifies the correctness of financial statements by thoroughly examining a company’s sources of revenue and spending and its assets and liabilities.
It Ensures That Businesses Meet Regulatory Standards
A major reason to audit is to verify a firm’s compliance with all regulatory obligations and industry benchmarks. An audit gives a company’s owner or its investors security that it’s meeting all of its regulatory requirements and won’t face penalties or damage to its reputation.
Audit Suggests Rooms For Improvement
Because an audit provides a detailed examination of systems and controls, businesses can benefit from auditing in this regard. In addition, auditors will frequently suggest adjustments that might make a business more efficient and make room for improvement.
Having discussed what an audit means, let us now look at what is an operational audit and what is the purpose of an operational audit.
What Is An Operational Audit?
An operational audit evaluates a company’s daily and overall operations. It is more in-depth than other types of audits, which may just focus on a department or the organization’s finances. An operational audit, unlike a regular audit, examines how a company operates to improve its efficiency. Businesses can undergo an operational audit regularly to determine and evaluate their operating activities.
Operational auditing includes analyzing the processes, procedures, and systems that are currently in use inside the organisation. In addition to analysing the organization’s financial standing, the management procedures of the company are scrutinised in this kind of audit.
What Is The Purpose Of An Operational Audit?
The purpose of an operational audit is to identify areas of the organization’s operations that might be improved in order to increase their levels of productivity, efficiency, and effectiveness. By conducting an operational audit of the company’s internal rules and processes, the firm may locate potential points of contention and run more efficiently.
A typical objective of an operational audit is for the auditor and the management team to be in a position to put these points into action and simplify future procedures when they have the audit report. This audit report can come from an internal auditor or an external auditor, but most preferably the one from an external auditor because it is seen as one from an unbiased point of view in most cases.
The general benefits or purpose of an audit apply to operational audits, but specifically, there are reasons for which operational audits should be carried out regularly. The advantages or purposes of an operational audit include:
To Maximize Efficiency
Operational audits are should be carried out to acquire a deeper comprehension of how the policies and processes of the future might enhance effectiveness.
To Understand Changes And Their Effects.
An audit can delve further into the impact of any modifications to internal controls if it examines each stage of the operational process that is being performed.
There are several operational hazards that businesses face, ranging from those of health and safety to cyber attacks. During a comprehensive operational audit, risks such as these, in addition to possible concerns connected to fraud and compliance, are identified and evaluated.
It Is A Source Of Inspiration And Motivation
Managers have set goals for which they conduct audits. They may utilise these goals to motivate staff by setting a standard to reach. The goals serve as clear instructions for employees, ensuring they know the company’s expectations and successful work ethics.
Types Of Operational Audits
The act of auditing at most times involves more than one form of an audit. Hence, to successfully carry out an operational audit, other forms of audits must be carried out. These other types of audits that come together to ensure a successful operational audit are defined as the types of operational audits. They include the following:
- Department Audit
- Compliance audits
- Investigative audits etc.
An operational audit should be considered for a variety of different reasons. When carried out by an independent third party, it gives a firm an unbiased perspective on the ways in which it conducts its business. These can result in fresh ideas that lead to increased sales, reduced production processes, and simplified organisational structures. If risks are identified in advance, a company may better protect itself from suffering losses in the future.