Operational audit: Definition, Types, Processes, Purpose, and Reporting

Definition:

Operational audit is the type of audit service that the review is mainly focused on the key processes, procedures, system, as well as internal control which the main objective is to improve productivity, as well as efficiency and effectiveness of the operation.

The operational audit has also targeted the leak of key control and processes that cause waste of resources and then recommend for improvement.

Operational audit is the part of the internal audit and their main aim is to add value to the business their professional services. Systematic and highly disciplined is also the part that helps to make sure the operational audit adds value to the organization.

What is the purpose of an operational audit?

An operational audit is a systematic and objective evaluation of an organization’s operations to assess how effectively it uses its resources to achieve its objectives.

An operational audit aims to identify areas where the organization can improve its efficiency, effectiveness, and compliance with regulations and policies.

Here are the key purposes of operational audit:

  1. Identify Inefficiencies: One of the primary purposes of an operational audit is to identify areas of inefficiency in an organization’s operations. By reviewing the organization’s processes, policies, and procedures, auditors can identify areas where the organization wastes resources, time, or money. For example, an operational audit may identify redundant or unnecessary steps in a process or equipment not being used to its full potential.
  2. Improve Efficiency: Once inefficiencies are identified, the operational audit recommends how the organization can improve its efficiency. This may involve streamlining processes, removing redundancies, or reallocating resources. The organization can reduce costs, increase productivity, and improve its overall performance by implementing these recommendations.
  3. Increase Effectiveness: Another purpose of an operational audit is to assess the effectiveness of an organization’s operations. The audit can help identify areas where the organization is not meeting its objectives and make recommendations for improving its performance. For example, an operational audit may identify areas where the organization is not meeting its customer’s needs or identify a need for additional training to improve employee performance.
  4. Ensure Compliance: Operational audits also help ensure an organization complies with regulations, policies, and procedures. By reviewing the organization’s operations, auditors can identify areas where the organization may be at risk of non-compliance and make recommendations to improve its compliance. For example, an operational audit may identify a need for additional training to ensure employees follow the organization’s policies and procedures.
  5. Improve Risk Management: An operational audit also helps identify organizational operations risks. By reviewing the organization’s processes, policies, and procedures, auditors can identify areas where the organization may be at risk of fraud, errors, or other issues. By making recommendations to address these risks, the organization can improve its risk management and reduce the likelihood of adverse outcomes.
  6. Support Decision-Making: An operational audit can support decision-making by providing objective and reliable information about the organization’s operations. By identifying areas of inefficiency, recommending improvements, and identifying risks, the operational audit provides decision-makers with the information they need to make informed decisions about the organization’s operations.
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An operational audit aims to objectively and systematically evaluate an organization’s operations, identify areas where it can improve efficiency and effectiveness, ensure compliance with regulations and policies, improve risk management, and support decision-making.

By conducting operational audits, organizations can identify improvement opportunities and make the necessary changes to achieve their objectives.

Types of operations to be audited:

There are many areas that which internal auditors perform their operational audits. And before the review could be performed, an internal audit needs to identify the audit-able areas, and process first. Those could be identified by obtaining input from the management of the companies.

For example, the chief of operation might raise some concern about the wrong information that could be provided to the customer by the sales team. The finance director might raise some concerns related to a miss-match between invoices with good delivery noted.

For this case, sales processes and issuing invoices processes might need to review. The auditor could also identify the processes or operations to be audited by themselves through obtaining an understanding of the big picture of business first.

Then, they could identify the key processes and well business units that related. Once all of these are identified, the auditor should perform the assessment to identify the related to risks related to controlling and processes.

Who is normally perform the operational audit?

Operational audit services are normally performed by internal auditors since this is also part of their job to assess the efficiency and effectiveness of internal audits and operations.

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Normally, the internal auditor performs their review on the three key types including financial statements audit, compliance audit, and operational audit.

However, the entity might consider engaging these services to external firms if the entity does not have an internal audit department or internal audit team does not have enough experience and knowledge for certain key operations.

Operational auditing process:

The operational auditing process involves a series of steps to evaluate an organization’s operations and assess its efficiency, effectiveness, and compliance with regulations and policies. 

Here are the critical steps involved in the operational auditing process:

  1. Planning: The first step in the operational auditing process is to plan the audit. This involves defining the scope of the audit, identifying the audit objectives, and developing an audit plan. The audit plan should include details on the audit team, methodology, timeline, and the resources needed to conduct the audit.
  2. Preliminary Review: The next step is to conduct an initial review of the organization’s operations. This involves gathering information about the organization’s goals, policies, procedures, and processes. The auditors will review relevant documents, interview key personnel, and identify areas of concern that require further investigation.
  3. Fieldwork: The fieldwork involves collecting data and evidence to support the audit findings. This includes reviewing documents, observing processes, and interviewing personnel. The auditors will use various techniques to collect and analyze data, including sampling, statistical analysis, and flowcharting.
  4. Analysis: Once the data has been collected, the auditors will analyze the information to identify inefficiency, ineffectiveness, or non-compliance. This involves reviewing the data, identifying patterns and trends, and comparing the organization’s performance against relevant benchmarks or best practices.
  5. Reporting: The auditors will prepare a report summarizing the audit findings. The report should include details on the scope of the audit, the audit objectives, the methodology used, and the audit findings. The report should also include recommendations for how the organization can improve its operations, increase efficiency, and ensure compliance with regulations and policies.
  6. Follow-Up: The final step in the operational auditing process is to follow up on the audit findings. This involves monitoring the organization’s progress in implementing the recommendations made in the audit report. The auditors may conduct a follow-up audit to ensure that the organization has taken the necessary steps to address the issues identified in the initial audit.
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In summary, the operational auditing process involves the following:

  • Planning the audit.
  • Conducting a preliminary review.
  • Collecting data.
  • Analyzing the information.
  • Preparing a report.
  • Following up on the audit findings.

By following this process, organizations can identify improvement areas and make the necessary changes to improve their operations, increase their efficiency, and ensure compliance with regulations and policies.

Written by Sinra