What is an operational audit?

An operational audit refers to an evaluation of business processes and operations. In this context, the planned/designed audit procedures are not limited to individual transactions/internal controls but also includes overall process efficiency and business operations.

Why operational audit is important? 

The following aspects make this concept important.

1. Helps understand business risk—Understanding business risk is the first step towards operational audit. As part of risk assessment, the auditor is required to assess and quantify the overall risk due to internal control failure and the nature of the business processes.
2. Identify and improve internal control gaps—Identifying internal control gaps/weaknesses helps understand where processes need improvement. This can be a valuable tool for controlling cost and vulnerability.    
3. Helps improve policies and procedures—Reviewing policies and procedures is essential to assessing overall business risk and related procedural formalities. Hence, policy gaps can be improved with the audit.   
4. Improves financial performance – The improved operations aid in higher business process efficiency, leading to improved financial performance.

Who is responsible for the operational audit?

The business management primarily remains responsible for planning and executing this audit. The management usually outsources the operational audit or hires an in-house internal audit department to conduct it.

Procedural formalities related to operational audit

The following procedural formalities are related to audit execution.

1. Develop business understanding in terms of operations and implemented internal controls.
2. Assess and quantify the risk based on the understanding obtained in the first step.
3. Go through applicable policies and procedures to identify gaps/weaknesses.
4. Design tailored audit procedures in line with assessed risk.
5. Obtain statistical audit evidence via audit procedures.
6. Conclude your findings and communicate your recommendations.
7. Follow up with the concerned department/authority.

Conclusion

Operational audit refers to reviewing processes and controls implemented by businesses. Interconnected business processes can be reviewed to identify gaps and recommend improvements.

Business management is generally responsible for testing and improving operational processes.

It’s considered essential due to various aspects, such as understanding the business, improving internal controls, improving policies, and improving financial performance.