Module 2 - Operations Audit PDF

MODULE 2 DEFINITION, CHARACTERISTICS, AND GUIDANCE RTCanlas Operations Auditing TOPICS LEARNING OBJECTIVES 1. Introduction The learners are expected to be able to:...

MODULE 2 DEFINITION, CHARACTERISTICS, AND GUIDANCE RTCanlas Operations Auditing TOPICS LEARNING OBJECTIVES 1. Introduction The learners are expected to be able to:  Explain the foundational principles and significance 2. Definition and Characteristics of operational auditing, including its definition and 3. The Risk-Based Audit key characteristics. 4. Operational Threats and  Describe the risk-based audit approach and how it Vulnerabilities can be effectively applied to assess and manage operational risks. 5. The Skills Required for  Recognize common operational threats and Effective Operational Audits vulnerabilities, and outline the essential skills needed for conducting effective operational audits.  INTRODUCTION TO OPERATIONAL AUDITING Definition of Operational Auditing Importance of Operational Auditing Operational auditing refers to an evaluation of Such audits provide insights that enhance an organization’s operational processes, productivity, mitigate risks, and ensure efficiency, and effectiveness in achieving compliance with regulatory standards, objectives. ultimately driving business performance. Objectives of Operational Auditing Overview of Key Characteristics Primary goals include assessing operational Key characteristics document the foundational efficiency, identifying areas for improvement, principles of operational auditing, crucial for ensuring resource optimization, and providing executing rigorous and effective evaluations. suggestions for strategic management. INTERNAL AUDITING is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. INDEPENDENCE Definition of Independence: Independence in auditing signifies the auditor's ability to conduct an evaluation without being influenced or impaired by managerial pressures or relationships. Role of Independence: Independence ensures that auditors can form unbiased opinions based on objective evidence, which is paramount for maintaining credibility in the audit findings. Impact on Audit Quality: A higher degree of independence correlates with increased confidence in audit outcomes, ultimately enhancing the perceived integrity of the auditing process. OBJECTIVITY Defining Objectivity: Objectivity refers to the unwavering commitment of auditors to evaluate data and findings based solely on facts, free from personal beliefs or external pressures. ASSURANCE the auditors’ ability to give confidence and make statements regarding the condition of matters within the organization. THE NEED FOR ASSURANCE REPORT Provide shareholders more transparency Gain competitive advantage Transparency in reporting helps By demonstrating effective operations and shareholders understand how their strategic planning, a company can attract investments are being managed and more business and investment. whether the company is operating efficiently. Improve risk management capabilities Respond to stakeholder pressure Regular and detailed reporting helps Reporting helps address stakeholder organizations identify and assess potential concerns and expectations by providing risks early. information on the organization's practices, compliance, and social responsibility efforts.  AUDITOR'S ETHICAL RESPONSIBILITIES Ethics in Auditing: Ethical behavior in auditing encompasses integrity, objectivity, confidentiality, and professional behavior, collectively underpinning responsible auditing practices. Professional Guidelines: Established guidelines, such as those provided by IIA and AICPA, delineate ethical standards and responsibilities auditors must adhere to in their evaluations. Maintaining Integrity and Credibility: Auditors must consistently uphold ethical standards to maintain their credibility and the trust of stakeholders, ensuring the value of their insights is not undermined.  CONSULTING  giving advice to management and the board, and engaging in activities that helps the organization resolve nagging business issues.  address performance, how to improve organizational programs, processes, and activities, and how to become more flexible, nimble, and responsive to business challenge  relates to the special projects that internal auditors sometimes work on DESIGNED TO ADD VALUE Internal auditing is fundamentally designed to contribute to the organization’s success by ensuring that its operations are efficient, effective, and aligned with strategic goals. IMPROVE AN ORGANIZATION’S OPERATIONS Internal auditing plays a crucial role in improving an organization’s operations by identifying inefficiencies, enhancing compliance, strengthening controls, supporting strategic goals, facilitating better decision- making, and fostering a culture of accountability. HELP AN ORGANIZATION ACCOMPLISH ITS OBJECTIVES Internal auditing contributes to an organization’s success by aligning operations with strategic goals, managing risks, enhancing efficiency, ensuring compliance, promoting accountability, and supporting effective decision-making. Operational Audit Framework Audit Planning: Strategic audit planning involves identifying objectives, mobilizing resources, and establishing a roadmap to guide the audit process effectively. Execution Phases: Execution encompasses data collection, performing assessments, and drawing conclusions to provide a comprehensive overview of the operational effectiveness. Reporting Outcomes: Once the audit is completed, effectively communicating outcomes through clear reports allows for actionable insights and informed decision-making by management. Framework Importance: An effectively structured audit framework not only enhances audit efficiency but also aligns auditing practices with organizational goals, thereby maximizing the value delivered. A SYSTEMATIC, DISCIPLINED APPROACH. through its systematic and disciplined approach, it enhances the organization’s ability to achieve its objectives by ensuring thorough evaluation, effective risk management, process improvement, compliance, and continuous improvement. EVALUATE AND IMPROVE THE EFFECTIVENESS. Help to improve the organization’s ability to achieve the goals and objectives related to: a. Risk management. This refers to the identification, measurement, assessment, and response to risks. b. Control. This refers to those activities that mitigate relevant risks and helps the organization avoid surprises. c. Governance processes. Corporate governance is a wide subject that includes matters related to organizational structure, CONTROL reporting lines, span of control, resource allocation, accountability measures, discipline, and rewards mechanisms. THE RISK-BASED AUDIT 1. Broad View of Organizational Risks Beyond Financial Risks: Internal auditors are required to expand their focus beyond traditional accounting and financial risks to include a comprehensive range of risks that can impact an organization. These include: Operational Risks Customer-Related Risks Employee-Related Risks Data and System Risks THE RISK-BASED AUDIT 2. Challenges in Risk Identification: Many auditors struggle to fully identify, measure, and assess these broader risks and the mechanisms in place to mitigate them. 3. Diverse Auditor Backgrounds: Organizations are addressing this gap by hiring auditors with varied academic and professional backgrounds, such as engineering, nursing, and biology. This diversity enriches the audit department and provides valuable insights into different types of risks. 4. Competitive Edge: Emphasizing diversity in recruitment and skillsets enhances the internal audit function, ensuring that auditors possess the knowledge and proficiency to effectively manage and mitigate risks. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 1. OPERATIONS MANAGEMENT ISSUES Waste: Excessive and unnecessary use of resources, leading to increased costs. Inefficiencies: Suboptimal processes causing delays and higher operational costs. Late Supplies: Supplies arriving late, disrupting production schedules. Poor Customer Satisfaction: Inconsistent service levels leading to unhappy customers. Limited Growth Capacity: Inability to scale operations in response to market demands. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 2. HUMAN RESOURCES ISSUES Poor Supervision: Inadequate oversight leading to mismanagement of employees. Lack of Training: Employees not receiving necessary training, impacting productivity. Inadequate Evaluation: Improper performance evaluations, failing to identify areas for improvement. Unmotivated Employees: Lack of motivation resulting in decreased work efficiency. Unproductive Workforce: Overall decline in productivity due to various HR-related issues. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 3. IT ISSUES Inaccurate Understanding of Business Needs: IT systems designed without a proper grasp of the actual business requirements. Poor Data Capture: Ineffective mechanisms for collecting accurate and relevant data. Inadequate Reporting: Reports that fail to provide necessary insights for decision-making. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 4. MARKETING ISSUES Mass Marketing: Generic marketing strategies that fail to resonate with individual customer preferences. Targeting the Wrong Audience: Ineffective campaigns due to misidentification of target audience. Wasteful Campaigns: Resources wasted on marketing efforts that do not yield desired results. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 5. CSR ISSUES Child Labor: Exploitation of children in the workforce, violating their rights and hindering development. Sweatshop Conditions: Unfair and unsafe working environments for laborers. Abusive Management: Harsh and unethical treatment of employees by management. Inappropriate Waste Disposal: Improper disposal of industrial waste, causing environmental harm. AUDITING BEYOND ACCOUNTING, FINANCIAL, AND REGULATORY REQUIREMENTS 6. ENVIRONMENTAL HEALTH AND SAFETY (EHS) ISSUES Poor Ventilation: Inadequate airflow causing health issues and discomfort. Excessive Heat: High temperatures leading to unsafe and uncomfortable working conditions. Extreme Noise Levels: Loud environments contributing to hearing loss and stress. Workplace Hazards: Unsafe conditions posing risks to employees' health and safety. PRIMARY STAKEHOLDERS, NATURE OF INTEREST, AND POWER STAKEHOLDER INTEREST POWER Employees Maintain stable employment Bargaining power Receive fair pay Work actions, strikes, and Work in a safe, comfortable lawsuits environment Publicity Suppliers Receive regular orders for goods/services Refusing to meet orders Be paid promptly Supplying to competitors Customers Receive value and quality for Purchasing from competitors money Boycotting Receive safe, reliable Refusing to pay products Creditors Receive repayment of loans Calling loans Collect debts and interest Use legal authorities to repossess assets Investors Receive a satisfactory return Exercise voting rights on investments Ability to inspect company Realize an appreciation in records and reports value SECONDARY STAKEHOLDERS, NATURE OF INTEREST, AND POWER STAKEHOLDER INTEREST POWER Governments Promote economic development Adopting regulations and laws Raise revenues through taxes Issuing licenses and permits Media Keep the public informed Publicizing events that affect the public Monitor company actions Activist groups Monitor company actions for ethical and Lobbying government for regulations legal behavior Gaining public support Business support Provide research and information to Using staff/resources to help companies groups improve competitiveness Providing legal political support Communities Employ local residents Issuing/restricting operating licenses Ensure local development Lobbying government for regulations General public Minimize risks Supporting activists Achieve prosperity for society Pressing government to act Praising or condemning companies OPERATIONAL THREATS AND VULNERABILITIES Operational, such as maintaining operational capacity, speed of execution (i.e., cycle time), staffing levels, employee motivation, knowledge transfer, system development, and implementation Technological, including protection of intellectual property and personally identifiable information, denial of service attacks, business continuity due to staff turnover, and system development Strategic, referring to concerns related to strong customer and vendor relations, customer loyalty, building effective business partnerships, outsourcing arrangements, and mergers and acquisitions Environmental, which may include reliable supply of water and electricity, achieving a lower carbon footprint, and reducing the amount of natural resources used during business activities THE SKILLS REQUIRED FOR EFFECTIVE OPERATIONAL AUDITS According to the IIA Research Foundation Core Competencies Report, the following are the top general competencies of internal auditors: 1. Communication skills, such as 6. Conflict resolution/negotiation oral, written, report writing, and skills presentation skills 7. Staff training and development 2. Problem identification and 8. Accounting frameworks, tools, solution skills, such as conceptual and techniques and analytical thinking 9. Change management skills 3. Ability to promote the value of 10. IT/CT* framework, tools, and internal audit techniques 4. Knowledge of industry, 11. Cultural fluency and foreign regulatory, and standards changes language skills 5. Organization skills  The three common core competencies identified in the report are communication skills, problem identification and solution skills, and keeping up to date with industry and regulatory changes and professional standards. These results highlight the importance of individual and team competencies and the role they play in team effectiveness. --End of Module 2--