ADMINISTRATIVE AUDIT: BACKGROUND, CHARACTERISTICS AND EXAMPLE - DUDAS - 2025

The administrative audit is defined as the process of evaluating the efficiency and effectiveness of administrative procedures. It includes the evaluation of the policies, strategies and functions of the various administrative departments, the control of the administrative system in general, etc.

It is a systematic and independent examination of the books, accounts, legal records, documents and receipts of an organization. This determines the extent to which the financial statements and non-financial disclosures present a true and fair view of management. It also tries to ensure that the books of accounts are properly maintained, as required by law.

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The auditor observes and acknowledges the propositions that are presented to them for their examination, obtains evidence, evaluates the same and formulates an opinion on the basis of their reasonableness, which is communicated through an audit report.

Administrative audits provide a third party assurance that management is free from material error. The term is most often applied to audits of financial information related to a legal entity.

Audit result

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.

Background

Historians of accounting have noted Biblical references to common auditing practices. Among these practices are double custody of assets and segregation of duties.

For example, in the Book of Exodus (38:21) the first auditor is shown. It happens when Moses hired Ithamar to audit the contributions for the construction of the Tabernacle that will be used on his journey, which lasted 40 years.

On the other hand, there is evidence that the government accounting system in China, during the Zhao dynasty (1122–256 BC), included audits of official departments.

In the 5th and 4th centuries BC, both the Romans and the Greeks devised systems of controls to ensure the accuracy of their reports. The ancient Egyptians and Babylonians instituted auditing systems in which everything going in and out of warehouses was double checked.

In English-speaking countries, the Revenue Registers of England and Scotland (1130) have provided the first written references to audits.

In 1789, the United States government created the Department of the Treasury. This included a controller and an auditor, with Oliver Wolcott II being his first auditor.

19th and 20th centuries

From 1841 to 1850, the authorities of the expanding railways employed accountants as independent auditors of the administration.

It wasn't until the late 1800s, with the innovation of corporations (whose managers were not necessarily company owners) and the growth of the railways, that auditing became a necessary part of modern business.

The auditing profession developed to meet this growing need, and in 1892 Lawrence R. Dicksee published a Practical Manual for Auditors, the first textbook on auditing.

The Academy of Motion Picture Arts chose Price Waterhouse to oversee the voting for the Oscars in 1933. This was done in response to the widespread belief that the awards were adulterated.

In 1938, a company posted fictitious accounts receivable and non-existent inventory in its warehouses. This generated an auditing standard requiring physical observation of inventory and direct confirmation of accounts receivable.

In 1941, the Securities and Exchange Commission required that the auditor's report indicate that the examination was conducted in accordance with generally accepted accounting standards.

characteristics

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.

Training

A basic characteristic for 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 like the Institute of Certified Public Accountants, provide a good test of the auditor's capabilities.

Independence

Auditors must perform management audits independently. This means that they must remain objective throughout the entire process.

They must exhibit independence in their mental attitude. This feature requires auditors to maintain a neutral stance towards their clients. Furthermore, it implies that the general public perceives auditors as independent.

That is, it demands 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 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 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 must gather sufficient information to meet the audit objectives and support the opinions expressed.

Report

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.

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 evaluation 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.

Not infallible

The accountants of a company are primarily responsible for preparing the financial statements. In contrast, the purpose of the auditor is to express an opinion on the management statements that are in the financial statements.

The auditor arrives at 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 deceive 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.

goals

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 to form an opinion on whether the information presented in the financial report, taken as a whole, reflects the financial situation of the organization on a certain 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 giving 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.

Main objectives

- Understand the existing system, evaluating the strengths and weaknesses of the departments and administrative units. Thus, methods can be suggested to improve and overcome weaknesses.

- Identify bottlenecks in existing administrative mechanisms, thus recognizing opportunities to make reforms in the processes, administrative reforms, etc.

- Evaluate the optimal use of financial and other resources.

- Suggest methods for the continuous improvement of quality, taking into account the criteria and reports of the National Council for Evaluation and Accreditation and other organizations.

Example

-Barings case

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 running all operations. This allowed him to participate in unauthorized operations, which were not detected.

Collapse

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 partnerships 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 roughly the same period, telecommunications company WorldCom Inc. used deceptive accounting techniques to hide expenses and inflate profits by $ 11 billion.

References

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4. Wikipedia, the free encyclopedia (2018). Audit. Taken from: en.wikipedia.org.
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6. Steven Bragg (2018). The purpose of an audit. Accounting Tools. Taken from: accountingtools.com.
7. Pwc (2018). What is an audit? Taken from: pwc.com.