What is operational auditing?

An operational audit refers to a method of examining how an organization

conducts business. It requires analyzing the processes, procedures and systems
used within the company. This type of audit looks beyond the organization's
financial circumstances and examines its management practices. An operational
audit aims to find areas in need of improvement to make the organization's
operations more efficient, productive and effective.

Related: What Is Auditing?

What is the operational auditing process?

The typical operational audit process involves the following steps:

Determine the auditor

Typically, a company conducts an operational audit internally. They may have

an internal auditor or audit team whose job is to manage internal or operational
audits. However, some companies may not have an internal audit team or an
internal auditor with the necessary knowledge or experience needed, so they may
hire an external specialist to conduct the audit.

Related: Learn About Being an Internal Auditor

Plan the audit process

The auditor meets with relevant managers to discuss and plan their audit method.
During this discussion, the auditor gains an understanding of the business and any
potential concerns. They can then identify areas that may require process
improvements, providing challenges for them to focus on during the audit.
Through this conversation, the auditor also establishes the scope and timeline of
the audit.

Next, they can begin establishing the audit's goals and strategies. These objectives
vary but should aim to support the organization's needs and overall objectives.
They may focus on a specific area of the company and its related processes. For
example, a company may perform an operational audit on its hiring practices. The
auditor and managers must establish objectives for those processes to meet, such
as increasing the number of employees hired over a set period. Then the auditor
uses those objectives to assess the company's current procedures and find
improvements.

Conduct the audit

Now the auditor examines the business areas within the scope of their audit
program. The auditor needs to assess the existing processes and procedures to
determine whether they meet the goals set earlier in the audit process. They have
conversations with managers and employees to discuss whether the processes
meet expectations. The auditor also may observe employees as they conduct those
procedures and examine every step.

Once the auditor understands and reviews the processes or procedures, they can
develop tests to evaluate them. Through those tests, the auditor may find specific
factors that need improvement and generate and experiment with solutions that
help fulfill their objectives. An ideal process works without issues and enables the
company to conduct the task in a cost- and time-efficient manner.

Report audit findings

The auditor develops a report on their findings and includes any recommendations
for improvements. Depending on those recommendations, the auditor may also
draft an implementation plan to help the company make the necessary changes.
They discuss these recommendations with relevant managers, ensuring that the
management team understands the findings and solutions. The management may
agree to follow all the suggestions or discuss why some changes may not be
feasible.

Perform a follow-up

After completing an audit, the auditor sets up a follow-up meeting with the
relevant management team and staff. Commonly, they hold the follow-up about
six months after the audit. During the follow-up, they discuss the changes made to
the processes and assess their results. They measure these results to the
objectives set forth by the audit and determine whether they meet those goals or
are making some progress towards them.

Types of operational audits

An operational audit examines the business processes and procedures within a
company. This type of audit may overlap with other types of audits, such as:

 Department audits: Different departments within a company use

different processes and procedures related to their goals or
responsibilities. An audit can assess those processes and find ways
to improve them. It can also examine the department's available
resources and how efficiently they use them when conducting
processes. For example, an operational audit could look into
specific departments such as human resources, marketing or IT.
 Investigative audits: If a company discovers or suspects an error
or security breach has occurred, they may conduct an investigative
audit to determine its cause. As part of this audit, they may assess
the processes performed by an employee or department. The
auditor may make suggestions to improve those processes or
related procedures to ensure the issue does not occur in the future.
 Compliance audits: This type of audit evaluates whether a
company follows relevant external laws, along with internal policies.
The auditor will assess current processes and procedures to ensure
they meet any necessary standards or regulations related to the
organization's industry. A company may also have rules for conduct
that all employees much follow, so the audit may inspect
compliance with processes for hiring and firing employees, for
example.
 Follow-up audits: After an operational audit, the company will
implement any necessary changes. They may then set a determined
time to conduct a follow-up audit to evaluate the changes'
effectiveness.

Advantages of an operational audit

Conducing an operational audit within an organization can bring numerous
benefits, such as:

The audit identifies opportunities and risks

The operations of a business may run smoothly, but an audit can identify areas for
improvement. These changes can make processes faster, less costly or improved
in other ways that support profitability and business goals. Through an audit,
managers may also discover risks or issues within their processes that they were
not aware of previously. The auditor helps identify these risks and provides
methods of resolving them. Now that staff understands the risks associated with
their business, they can better identify and evaluate future risks.

The audit can improve business effectiveness

An operational audit requires taking an in-depth look a the processes and

procedures involved with business operations. The purpose of the audit is to
ensure the business completes processes effectively and efficiently. Therefore, any
changes made serve that goal and result in improvements to company operations
and profitability. Sometimes, an auditor may identify an area of the business that
works efficiently and use it as an example to help boost another team's efficiency.

The audit can offer objective or new views

An auditor can help managers gain a fresh perspective on their business

operations. If the auditor has no regular involvement with the identified processes
or procedures, they can provide insights that someone who regularly performs
them may not see. Because they base their assessment of the processes on
business goals, it serves as an objective evaluation method. It is not about whether
the auditor likes the process, but whether it meets the required goals.

The audit can provide motivation

During an audit, the auditor and management develop objectives they to achieve.
These goals aim to help the business perform better by making improvements to
specific processes and procedures. Management staff can use these goals to
motivate their employees by giving them a standard to work toward. The goals
also provide clear guidelines for employees, ensuring that they understand their
employer's expectations and know what constitutes good work.

Disadvantages of an operational audit

An operational audit aims to improve the processes and procedures within a
company, but it may come with some disadvantages. However, these
disadvantages may not matter in the long run due to the advantages of the
improvements made. Some of those disadvantages may include:

The audit may require making changes

Improving the processes and procedures within a company often requires

changing elements of them. Employees may need time to adjust to these changes
and become more comfortable with them. Some changes may even require
training staff on how to conduct the new and improved processes. As a result,
companies implementing changes due to an operational audit need to consider
developing a change management plan to help employees ease into the transition.

Related: Change Management: What It Is and Why It's Important

The audit comes with monetary costs

Like any other audit, an operational audit brings costs to the organization. While
typically handled by an internal auditor, a company may sometimes hire
an external auditor who charges a fee for their services. The audit may also deem
certain changes necessary to improve specific processes and procedures in the
business. The implementation of those improvements or training employees on
them could add costs to the company.

The audit can affect productivity

An operational audit could impact the productivity of the participating employees

participating. If the internal auditor typically performs other duties at the
company, conducting the audit takes them away from those responsibilities during
its duration. Similarly, the employees whose department or business area is being
audited need to spend time working with the auditor and going over their
processes and procedures. This task could slow down progress on their projects or
take time from day-to-day responsibilities. The processes highlighted for
improvements may be put on hold as the company implements any necessary
changes.

The audit can be time-consuming

It can take significant time for an auditor to review the business operations of a
company. They must examine every step of the processes they audit, and the more
complex the processes, the more time-consuming they can be. The task of
implementing solutions or improvements can also take time to complete. The
company may need to perform tests to ensure the solutions or improvements
make the processes more effective. If employees require training to learn how to
conduct changed processes, that can also take time away from their usual
responsibilities.

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How does an operational audit differ from an

internal audit?
An operational audit acts similarly to an internal audit because an internal auditor
conducts the process. Though they both look at internal processes, there are still
some differences between the two. Typically, a business may conduct an internal
audit when something goes wrong within its processes and procedures. The
internal audit will examine the mistake and what allowed it to occur. Then the
company can focus on improving its processes to ensure the error does not
happen again. An internal audit assesses success by seeing whether the process
gets completed with no mistakes.

An operational audit differs because it looks for the potential for improvement
within the company's business operations. It also tends to focus on factors related
to processes, such as their effectiveness and efficiency. Rather than performing an
audit due to an issue occurring, the operational audit examines business areas
that may benefit from process improvements. The operational audit will evaluate a
process by assessing whether it completed a task without mistakes and met
company standards for efficiency related to cost, time and resources used.