Financial audit and management audit are two important types of audits. While management audit is conducted according to specific requirements, financial audit is conducted on an annual basis. The key difference between financial audit and management audit is that financial audit is an audit conducted to present an opinion whether the company financial statements reflect a true and fair view whereas management audit is a systematic evaluation of capabilities of the company’s management with regard to effectiveness in achieving the strategic objectives of the company and quality of decision making.
CONTENTS
1. Overview and Key Difference
2. What is a Financial Audit
3. What is a Management Audit
4. Side by Side Comparison – Financial Audit vs Management Audit
5. Summary
What is a Financial Audit?
A financial audit is an audit conducted to present an opinion whether the company financial statements reflect a true and fair view. The main purpose here will be to assess whether the statements are prepared free of material errors, misstatements and in accordance with accounting standards of IFRS (International Financial Reporting Standards) or GAAP (Generally Accepted Accounting Principles), depending on the standards used by the company. In providing their opinion, auditors engage in a very time-consuming exercise that usually spans a period of around 3 months, inspecting each and every transaction that the company has conducted during the financial year. Financial statements are used by a number of stakeholders such as shareholders, potential investors, employees and the government; thus, the integrity and accuracy of them are essential. The following steps are involved in conducting a financial audit
- Monitor the systems put in place to communicate financial information
- Monitor the systems put in place to maintain company’s financial records and whether such records are being stored properly
- Identify and review each element of the company’s accounting system, including all individual accounts
- Compare internal records of income and expenses against external records such as invoices from supplier and customers, bank reconciliations
- Analyze the company’s internal tax records and official tax returns
Figure 01: Financial audit involves detailed inspection in financial statements
What is a Management Audit?
Management audit is a systematic evaluation of capabilities of the company’s management with regard to effectiveness in achieving the strategic objectives of the company and quality of decision making. Conducting a management audit becomes vital in a situation when the strategic direction of the company is subjected to change such as
Succession Planning
When the key management positions are about to become vacant as a result of the respective managers moving out of the company or retiring, the respective positions should be arranged to be filled with suitable successors.
Mergers and Acquisitions
In the case of consolidating the company with another company or acquiring a new company, the control and leadership of the company are subject to change.
Management audit is conducted by an employee of the company or an independent consultant. If the audit is conducted by an employee of the company it is cost effective and convenient since the employee has an increased knowledge about the management actions. However, the objectivity may be questionable and the employee’s opinion may be bias. The objectivity and effectiveness of the audit can be secured if it is conducted by an independent consultant, however, it may be costly.
What is the difference between Financial Audit and Management Audit?
Financial Audit vs Management Audit |
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| A financial audit is an audit conducted to present an opinion whether the company financial statements reflect a true and fair view. | Management audit is a systematic evaluation of capabilities of the company’s management with regard to effectiveness in achieving the strategic objectives of the company and quality of decision making. |
| Nature of Audit | |
| A financial audit is quantitative in nature as it only evaluates the financial information. | Management audit is a qualitative audit that assesses both financial and non-financial information. |
| Party Conducting | |
| Financial audit is conducted by the external auditor. | An employee of the company or an independent consultant conducts the management audit. |
| Spore Production | |
| Financial audit is conducted at the end of each financial year. | Management audit is conducted when the company is on the verge of a change in strategic direction. |
Summary- Financial Audit vs Management Audit
The difference between financial audit and Management audit can be easily understood based on the elements that are being audited in each audit. The integrity, completeness, and accuracy are audited in a financial audit where the auditors provide their opinion whether the statements present a true and fair view. Management audit assesses the quality of decision making and efficiency of the management. The success of these audits always depends on how objectively they can be conducted.
Reference:
1. “Financial Audit: Definition, Procedure & Requirements” n.d. Web. 22 May 2017. <http://study.com/academy/lesson/financial-audit-definition-procedure-requirements.html>.
2. “How to Conduct a Financial Audit.” Chron.com. Chron.com, 26 Oct. 2016. Web. 22 May 2017. <http://smallbusiness.chron.com/conduct-financial-audit-10228.html>.
3. “Management Audit.” Investopedia. N.p., 16 Nov. 2010. Web. 22 May 2017. <http://www.investopedia.com/terms/m/management-audit.asp>.
Image Courtesy:
1. “Microsoft 10-K Fiscal 2010 Selected Financial Data” By Microsoft – Microsoft (Public Domain) via Commons Wikimedia