What is an Operational Audit?

An operational audit is a formal evaluation of the internal systems and procedures a company uses to produce goods or services. Made of at least four major steps, it tests how efficient and effective production operations are, which ultimately boosts revenue and profits. It also can reveal ethical issues in the business. External or internal accountants may perform the review, based on the needs of the business. This process has some disadvantages, such as potentially high cost, but it also offers advantages, such as new perspectives and increased risk awareness.

In general, the tools and processes a business uses to get a product or service to the public have to work as intended and be efficient. When they aren't, the company usually can't make as much money and can't be as competitive. Businesses, therefore, use these types of audits to streamline what they're doing, with the ultimate goals being to decrease waste and boost revenue and profits.

Similar to other reviews, looking at how the company is functioning overall can uncover ethical problems, such as employees using company property for personal reasons. The results of the audit let managers identify who is involved in dishonest practices, which often leads to greater accountability on the job. Companies' disciplinary and general policies often connect closely to the review for this reason.

Staff accountants from public accounting firms usually conduct operational audits. These professionals are not otherwise associated with the businesses they audit, so they can provide a fairly objective opinion. Stakeholders often prefer using their services to internal auditors to get information because of this lack of bias, but hiring an outsider usually is more expensive.

In some cases, it is a better option to have someone from within the company go through the review process. Companies usually turn to internal audits when executives want a more continuous picture of what's going on in the business, sometimes going through several audits each year to stay innovative and keep revenue high. Although many employees are able to be honest and objective in an operational audit, some are not. Relying on an employee to perform the job carries the risk that the ending figures or analysis won't be entirely accurate, because an individual sometimes gets a bonus or pay increase based on how good the results are.

Accountants look at administrative departments during these types of audits, as well. These areas can increase costs by employing too many individuals or having an improper workflow. Changes in teams, policies or administrative equipment sometimes result at the conclusion to fight these problems.

Cost allocation refers to the process of figuring out what a company needs to operate and determining the common price for each of those items. It usually is based on using similar materials and labor to produce goods and services consistently. These methods have to be accurate in order for the business to earn high profits. Auditors review these methods because factors such as poor quality material and untrained labor can slow production and decrease profits.

Operational audits focus on decreasing the amount of time needed to produce and deliver goods or services to retailers and wholesalers, because delays result in fewer sales and increased business costs. Sometimes, the problem is as simple as poor scheduling or communications, but factors like outdated equipment or a low number of employees can also contribute to slowed production. These issues are more critical because they might require drastic changes to the company's budget, policies or standard methods.

Staff or internal accountants generally go through a standard set of steps when they conduct an audit of this type. In the first step, the accountant meets with leaders within the company to determine exactly what the scope of the process will be. This includes setting specific goals and objectives, as well as gathering some basic information about the business, such as its policies and history. The auditor develops a formal plan for how and when the rest of the audit will happen.

Once the auditor has some background information and knows what the process is supposed to achieve, he observes and schedules formal meetings with managers. They discuss operations in depth, including whether workers are meeting expectations. From here, the accountant moves on to similar meetings and observations of the employees, getting their side of the story and departmental details. This is the fieldwork stage of the audit.

Following the manager and employee fieldwork, the auditor goes over all the information he's collected, tests as many processes as possible and analyzes his results. He writes a report about what he found, ending with some suggestions for how the company might address any problems. Depending on the scope of the process, these reports can be quite long.

At this point, the accountant meets with managers again and presents his report, discussing its content. The business leaders have a chance to respond to the findings and provide reasons if they don't think they can carry out any of the suggestions for improvement. The auditor usually schedules a follow-up audit at this meeting or very soon after, which usually takes place about six months after the main one. The follow-up gives executives and the accountant the opportunity to see if progress has been made.

Reviewing operational processes can be very time consuming and costly. When employees and managers are working with the auditor, they can't do other activities that might benefit the business, so projects or production might slow temporarily. Sometimes, the changes that a business makes are hard for workers to get used to, which can increase conflicts or confusion.

In addition to making the business more efficient and profitable in the long run, an operational audit almost always provides a company with some new, fresh perspectives. It makes executives aware of problems that might not have been found otherwise and lets them evaluate risks for the future. Managers also can use results to motivate employees, as the company always has something to work toward at the end of the process.