OPERATIONAL AUDITING
📌 Definition
● A systematic evaluation of an organization’s efficiency and
effectiveness in operations.
● Adds value, improves performance, and detects potential problems
early.
📌 Objective:
Assist the organization in performing functions more efficiently and
economically with a focus on the efficiency and effectiveness of operations
and an early warning system for the detection of potentially destructive
problems
📌 Differences: External vs. Operational Audit
Feature External Audit Operational Audit
Appropriate Financial statements Effectiveness, efficiency, and
subject matter compliance of operations
3-party RP: Management RP: Operational Management
relationship Intended user: BOD/ Intended user: Senior
Shareholders Management
Practitioner: External Practitioner: Operational
auditor auditor
Suitable GAAP/IFRS Policies, KPIs, COSO
Criteria
Sufficient Risk assessment, Process evaluations,
evidence substantive procedures, interviews, and performance
and control testing analysis
Conclusion Opinion on FS Internal findings and
within report recommendations
SCOPE OF OPERATIONAL AUDITING
✔ Middle-of-the-road approach – Reviews internal controls AND other
operational issues.
✔ Based on COSO Framework:
● Effectiveness & efficiency of operations
● Reliability of financial reporting
● Compliance with laws & regulations
PHASES OF OPERATIONAL AUDIT
1️⃣ Planning & Risk Assessment – Define scope, gather background
info.
2️⃣ Evidence Collection & Evaluation – Use documentation, inquiry,
analytical procedures, and observation.
3️⃣ Reporting & Follow-up – Findings are tailored to management
needs.
AUDIT APPROACHES: THE THREE & SIX E’S
✔ Three E’s
● Economy – Doing things cheap
● Efficiency – Doing things right
● Effectiveness – Doing the right things
✔ Six E’s (Extended):
● Equity – Fairness & diversity
● Environment – Sustainability
● Ethics – Legal & moral conduct
RESOURCING INTERNAL AUDIT
🔹 Internal auditors need technical knowledge.
🔹 If expertise is lacking, Chief Audit Executive (CAE) can:
1. Exclude complex areas from the audit (limited scope engagement)
2. Train staff
3. Hire external experts
PERFORMANCE MEASUREMENT SYSTEMS
Purpose:
a. Identify whether there is any initial potential for improvement
b. Monitor that the required levels of performance are maintained
📊 Key performance measures:
● Workload PM – Output volume
● Economy PM – Waste reduction
● Efficiency PM – Optimal resource use
● Effectiveness PM – Goal achievement
● Equity PM – Social responsibility
VALUE FOR MONEY (VFM) AUDITING
💰 Focuses on cost vs. performance
📌 Uses KPIs to assess whether operations provide good value
📌 Applies the Three E’s (Economy, Efficiency, Effectiveness)
BENCHMARKING
📍 Definition: Comparing own performance with others to improve
operations.
📍 Objectives:
✅ Maintain competitive advantage
✅ Identify best practices & trends
✅ Improve quality & customer satisfaction
PRACTICE EXAM – APPROACHES TO OPERATIONAL
AUDITING
PART I: MULTIPLE CHOICE
(Choose the best answer.)
1. What is the primary objective of operational auditing?
a) To detect fraud in financial statements
b) To assess efficiency, effectiveness, and economy in operations
c) To ensure compliance with tax laws
d) To prepare financial statements
2. The Three E’s in operational auditing are:
a) Efficiency, Effectiveness, Excellence
b) Economy, Equity, Environment
c) Economy, Efficiency, Effectiveness
d) Ethics, Equity, Environment
3. What is the middle-of-the-road approach in operational auditing?
a) Auditing only financial statements
b) Focusing on compliance auditing only
c) Reviewing both internal controls and operational concerns
d) Ignoring minor operational inefficiencies
4. What does benchmarking in auditing refer to?
a) Comparing performance against industry best practices
b) Auditing internal financial records only
c) Implementing strict cost-cutting measures
d) Identifying fraudulent transactions
5. The six E’s in operational auditing include all EXCEPT:
a) Economy
b) Equity
c) Evaluation
d) Ethics
PART II: IDENTIFICATION
(Write the correct term for each description.)
6. The systematic evaluation of an organization’s efficiency, effectiveness, and
economy.
- Operational auditing
7. The process of comparing an organization’s performance with others to
identify best practices.
- Benchmarking
8. A measurement system that determines how well an entity achieves its
goals.
- Performance measurement system
9. The type of audit that focuses on assessing how well an organization
operates rather than its financial statements.
- Operational audit
10.The principle that ensures organizations do things cheaply without
unnecessary spending.
- Economy
PART III: ENUMERATION
(List the required items.)
11. Three phases of operational auditing.
- Planning and risk assessment
- Evidence collection and evaluation
- Reporting and follow-up
12.Three E’s of operational auditing.
- Economy
- Efficiency
- Effectiveness
13. Six E’s of operational auditing.
- Economy
- Efficiency
- Effectiveness
- Equity
- Environemnt
- Ethics
14.Three options available when internal auditors lack technical knowledge.
- Exclude complex areas from the audit
- Train staff
- Hire external experts
15. Five examples of performance measurement systems.
- Workload PM
- Economy PM
- Efficiency PM
- Effectiveness PM
- Equity PM
PART IV: ESSAY
(Answer in 3-5 sentences.)
16.Explain the difference between operational auditing and external auditing.
- Operational auditing focuses more on efficiency, effectiveness, and
economy, helping management to improve business processes. On the
other hand, external auditing ensures financial statements comply with
accounting standards and provides assurance to external stakeholders.
17. How does benchmarking contribute to better internal audit practices?
- Benchmarking allows auditors to compare the organization’s
performance with industry best practices, helping to identify areas for
improvement and setting performance goals.
18.Why is it important for an organization to conduct value-for-money (VFM)
auditing?
- VFM auditing ensures that resources are being used efficiently to
maximize economic, efficient, and effective operations, leading to cost
savings and improved services.
19.Describe the role of performance measurement systems in operational
auditing.
- They help auditors quantify operational performance, identify
inefficiencies, and provide objective data to assess whether an
organization is meeting its goals.
20.How does the middle-of-the-road approach help auditors provide better
recommendations?
- This approach balances reviewing internal controls and broader
operational concerns, allowing auditors to provide more relevant and
actionable insights to management.
