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“Management audit can be defined as an objective and independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives and policies. Its aim is to identify existing and potential management weaknesses within an organization and to recommend ways to rectify these weaknesses”.

Management Audit is an important tool for the continuous appraisal and evaluation of the methods and performance of an enterprise. The prime objective of Management Audit is to locate defects of irregularities in the areas covered by the audit and to suggest possible improvements.

Objectives of management audit:

(a) To ensure optimum utilization of human resources and available physical facilities.

(b) To point out deficiencies in objectives, policies, procedures and planning.

(c) To suggest improved methods of operations.

(d) To point out weak links in organizational structure and in internal control systems and suggest improvements.

(e) To help management by providing early signals of sickness, ways and means to avoid the same; and

(f) To anticipate problems and suggest remedies to solve them in time.

Scope of Management Audit:

The scope of Management Audit has no limitations. The areas of review depend on the objectives of the business.

Accordingly, the scope of Management Audit may include:

(a) The suitability, practicability and present compliance or otherwise of the organization with its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its own particular industrial or commercial field.

(c) The rate of return on investors’ capital – whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

Process of management audit:

  1. Identify the objectives 

  2. Break- down the objectives

  3. Evaluation of the organisation structure

  4. Evaluation of performance

  5. Suggestions and review

Weaknesses Revealed by Management Audit:

The weaknesses that a Management Audit might reveal may include:

(a) Weaknesses among the members of the Board of Directors.

(b) A lack of awareness among directors and managers of the objectives of the organization and the extent to which these are being achieved, failure to define clearly the objectives and responsibilities of individual managers.

(c) Inadequate steps taken to provide adequate finance.

(d) Lack of technical competence of managers.

(e) Retaining authority by managers for matters which ought to have been delegated.

(f) Lack of clear and identifiable management style in the organization.

(g) Lack of proper staff/management training.

(h) Failure on the part of managers to measure and assess the performance of their subordinates.

Advantages of Management Audit

1. Management audit helps in decision making areas such as make or buy, closing down of an unit, acquisition of a business, etc.

2. It also helps in assessing the efficiency of the executives. It serves as a moral check on the executives.

3. Management audit suggests ways to utilize the resources of the organization effectively.

4. Management audit helps in rehabilitation of sick units.

Disadvantages of Management Audit

1. Management audit involves high cost and it is suitable only for big organizations.

2. Management audit may create a fear in the minds of the executives and may curb their initiative and innovation.

3. The management auditor may lack independence and may simply take instructions from the top management.