We explain what an administrative audit is, its principles, and the types that exist. In addition, its different objectives and methodology.
What is an administrative audit?
An administrative audit means a complete review of the organizational structure of a company or organization of any kind, as well as its control mechanisms, operation, and human and material resources. It is a procedure that evaluates the organization as a whole, comparing its performance with its objectives both globally and by unit, to get an idea about the effectiveness of its management model.
The term “administrative audit” was first used in 1935, when James O. McKinsey, a member of the American Economic Association, proposed the foundations for a review of a company in all its aspects, “in light of its present and future environment. probable”.
This concept would allow the subsequent emergence of ideas such as the self-audit proposed in 1955 and the development of this figure as an important mechanism in the field of competitiveness among organizations and in administrative theory.
An administrative audit complies with the following principles:
- Sense of evaluation. With this type of audit, the potential or suitability of the professionals or workers within the organization is not measured, as well as the management dynamics, that is, of the administrative managers responsible for coordinating the company’s internal forces.
- Importance of verification. An effective audit not only bases its conclusions on the information obtained but also offers scientific means to interpret it and verify that it is a reliable evaluation.
- Think in administrative terms. The focus of the auditors must always be on the administrative aspect of the company, and not on other areas subject to administrative management. It is an evaluation of processes and resources for the mission of the company.
Types of administrative audit
There are two fundamental types of administrative audits:
- Functional. It focuses on the performance and suitability of management positions and the dynamics proposed by them.
- Analytical. It focuses on understanding the processes themselves that are implemented within the structure of the company.
Characteristics of administrative audit
Management audits have multiple characteristics, or standards, that they must adhere to. Typically these characteristics are described in terms of actions the auditor should take while conducting the audit.
By following these basic standards, auditors can ensure that the audits they conduct are reliable and meet client needs.
A basic characteristic of a management audit is that the auditor must be trained to perform the audit correctly.
All audits must be performed by individuals who have adequate technical training. This includes formal education, field experience, and continuing professional training.
You must be familiar with the principles of accounting, as well as with business management and administration.
In most cases, a business or accounting degree, along with certification from organizations such as the Institute of Certified Public Accountants, provide a good test of the auditor’s capabilities.
The auditors must carry out the administrative audits independently. This means that they must remain objective throughout the entire process.
They must exhibit independence in their mental attitude. This characteristic requires auditors to maintain a neutral stance toward their clients. Furthermore, it implies that auditors are perceived by the general public as an independent.
In other words, it requires independence in fact and in appearance. Therefore, any auditor with a substantial financial interest in the client’s activities is not considered independent, even though the auditor is impartial.
If the auditor is not being objective, the results of the audit may be biased by his preferences or beliefs. Therefore, they will not represent what is really happening or what is best for the company.
Due professional care
The auditor uses all of his business and accounting knowledge to gather the necessary information. With it, you determine what is happening within the company to provide a logical and impartial opinion to managers.
You are also careful not to reveal confidential information to unauthorized parties. This characteristic describes the fiduciary duty of the auditors towards the company that uses their services.
Planning, supervision, and sufficiency
Planning is the first phase of all administrative audits. It is an important characteristic of audits because a failure in planning makes the auditor less efficient.
As the auditor and his assistants progress through their audit plan, they should gather sufficient information to meet the audit objectives and support the opinions expressed.
If an audit is successful, the auditor will explain in his report whether the information received adheres to current accounting standards.
It will also detail any circumstances that led the company to deviate from those standards if any deviations exist.
The auditor communicates whether the information received is accurate, expressing a formal opinion on the results of the audit. Otherwise, it shows why you couldn’t come to a conclusion.
Objectives of an administrative audit
Every administrative audit seeks to find the deficiencies or weaknesses of the different regions of a company, to correct or solve them. This means the following:
- Optimize the management of resources by the company.
- Evaluate the service (or product) provided by the company, in view of customer satisfaction.
- Increase levels of quality and competitiveness through various mechanisms and management plans.
- Identify administrative successes and replicate them in similar situations.
- Analyze the functions of each division of the company in relation to the others.
- Generate and propose new organizational schemes that solve problems at the macro or micro business levels.
Methodology of an administrative audit
Every administrative audit consists of four elementary steps:
- Planning. The parameters and guidelines that will serve to focus the audit review are established, that is, you must first define what to look for and what the specific search criteria will be. This goes through a reading of “symptoms” or apparent conflicts.
- Instrumentation. You choose between different models of data collection and measurement, depending on the business nature and the type of conclusions you want to reach.
- Examination. Planning is applied and data and statistics are collected or any other type of information that meets the established guidelines.
- Report. The closing of the audit results in a report in which the whole process is detailed and explained, the results are accounted for and, finally, the pertinent recommendations are made.
Importance of the administrative audit
The administrative audit is a fundamental tool to detect deficiencies and/or areas of opportunity that promote the continuous development of a company or institution.
Administrative audits must be carried out at least once a year, both in public and private companies, in order to obtain updated information about how it works, what it has, and what it lacks.
The result of the audit is of vital importance to then make the most correct decisions based on the good performance of the human and material work teams that allow the operation of the company.
On many occasions, it is through audits that the directors or senior managers of a company or institution have had to make the decision to carry out important investments, close plants, or even dispense with personnel.
Scope of the administrative audit
Administrative audits include different aspects that, when evaluated and analyzed, allow us to determine the current state of a company and how to improve or maintain its operation and quality of service.
The scope of the administrative audit determines how broad and deep the evaluation to be carried out will be since it can cover a department, area, or even the entire company.
Therefore, it deals with aspects such as the hierarchical level, development, and use of technologies, human resources, number of employees, communication systems, level of performance, work environment, and treatment of clients, among others.
Administrative audits are applicable to all organizations, especially if at the end of the process the company or institution obtains a quality certification.
What is an administrative audit for?
The purpose of a management audit is for an independent third party to examine the financial statements of an entity.
The management audit provides an objective third-party assessment of administrative transactions, financial reports, policies and procedures, and administrative functions related to the financial dealings of the company.
This examination generates an audit opinion as to whether this information has been presented fairly and in accordance with the applicable financial reporting framework.
This opinion greatly increases the credibility of financial statements for its users, such as lenders, creditors, and investors.
Administrative audits increase the reliability of financial information. Consequently, they improve the efficiency of capital markets.
Based on this view, users of financial statements are more likely to provide credit and financing to a business. This will possibly result in a reduction in the cost of capital for the entity.
Although it may not be designed to investigate or verify the absence or presence of fraud, it does seek to isolate policies and procedures that expose an organization to potential fraudulent activity.
The accountants of a company are primarily responsible for preparing financial statements. In contrast, the purpose of the auditor is to express an opinion on the management assertions that are in the financial statements.
The auditor reaches an objective opinion by systematically obtaining and evaluating evidence in accordance with professional auditing standards.
However, no auditing technique can be foolproof, and errors can exist, even when auditors apply the proper techniques. The auditor’s opinion is based, after all, on data samples.
A management team that participates in organized fraud, concealing and falsifying documents, can mislead auditors and other users, going unnoticed.
The best that any auditor can offer, even in the most favorable circumstances, is a reasonable assurance of the accuracy of financial reports.
In general, all companies listed on the Stock Exchange are subject to an administrative audit each year. Other organizations may require or request an audit, depending on their structure and ownership.
The objective of the management audit is for the auditor to express an opinion on the truth and fairness of the financial statements.
It is forming an opinion as to whether the information presented in the financial report, taken as a whole, reflects the financial situation of the organization on a given date, for example:
Are details of what is owned and what the organization owes recorded on the balance sheet?
Have the gains or losses been adequately assessed?
When examining financial reports, auditors should follow the auditing standards established by a government body. After the auditors have completed their work, they write an audit report. In this way, they explain what they have done and give an opinion drawn from their work.
For example, in the United States, auditing standards require the auditor to declare whether financial reports are presented in accordance with generally accepted accounting principles.
As a result of an audit, stakeholders can effectively evaluate and improve the effectiveness of risk management, control, and the management process over management.
Traditionally, audits were primarily associated with obtaining information on the financial systems and financial records of a company or business.
Administrative audits are performed to determine the validity and reliability of the information. Also to provide an assessment of the internal control of an administrative system.
As a consequence of this, a third party can express an opinion about the organization. The opinion issued will depend on the evidence obtained with the audit.
Due to existing restrictions, an audit provides only reasonable assurance that the statements are free from material misstatement. Therefore, statistical sampling is often adopted in them.
Administrative Audit Examples
Inaccurate financial information can be the result of deliberate misrepresentation, or it can be the result of unwanted errors.
One of the most egregious recent examples of a financial reporting failure occurred in 1995 at the Singapore office of Barings, a 233-year-old British bank.
The fraud was due to a lack of sufficient internal controls at Barings over a five-year period. During this time Nicholas Leeson, a clerk responsible for transaction accounting and settlement, was promoted to manager in Barings’ Singapore office.
With his promotion, Leeson enjoyed an unusual degree of independence. He was in the unique position of being both a manager and responsible for all operations. This allowed him to participate in unauthorized operations, which were not detected.
Although Leeson was losing huge sums of money to the bank, his dual responsibilities allowed him to hide his losses and continue operating.
When the collapse of the Japanese stock market led to a loss of $ 1 billion for Barings, Leeson’s shares were finally discovered.
However, Baring never recovered from the loss and was acquired by the Dutch insurance company ING Groep NV in 1995. It was subsequently sold again in 2004.
Interestingly, in this case, the management auditors warned management about the risk in the Singapore office months before the collapse. However, the warnings were ignored by senior executives, and the audit report was ignored.
Enron-Arthur Andersen case
Energy trading company Enron Corp., which had hidden losses in off-the-books companies and was involved in abusive pricing schemes, filed for bankruptcy in December 2002.
Shortly after Enron became the subject of an investigation by the Securities and Exchange Commission, the auditing firm, Arthur Andersen, was also named in a Commission investigation. Arthur Andersen finally closed its operations in 2002.
In approximately the same period, the telecommunications company WorldCom Inc. used deceptive accounting techniques to conceal expenses and inflate profits by $ 11 billion.
Background of the administrative audit
According to various investigations, the idea of administrative audit appears, but in other words, in the Hammurabi Code, in which the importance of keeping control of trade is mentioned, therefore this is not a new term.
In 1935 James O. McKinsey, was the author who determined the bases of the administrative audit, exposing the importance of carrying out the evaluation of the position of the company in order to determine where you want to go and the objectives you want. reach.
On the other hand, in 1959 Víctor Lazzaro published a book called Systems and Procedures where he presents the contribution and importance of carrying out an administrative audit in companies or institutions.
Later, in 1971, the author Agustín Reyes Ponce contributed his vision of how the audit of human resources is related to the administrative audit.
The term administrative audit, however, has been continuously adapted to the needs of modern administration, for which reason there have been numerous authors, who over the years have incorporated new points of interest into the subject.