A horizontal audit, also known as a process audit, is a detailed examination that focuses on a particular process within a business to evaluate whether it is in compliance with the organization’s planned arrangements and whether these arrangements are implemented effectively and are suitable to achieve objectives.
Instead of looking at an entire system or different parts of a system as in a vertical audit, a horizontal audit follows a single process through various interconnected systems within the organization. This type of audit analyzes the inputs, actions, and outputs of a process to evaluate its effectiveness and identify areas for improvement.
For instance, in a manufacturing business, a horizontal audit might focus on the procurement process. The audit would follow the process from the beginning, such as the identification of material needs, through the selection of suppliers, the purchasing of materials, the receipt and inspection of the materials, to the payment of the supplier. The audit would review all the connected systems, controls, and procedures to ensure they are working effectively and meeting business objectives.
In a nutshell, while vertical audits tend to provide a more comprehensive overview of the entire organization or system, horizontal audits enable a more in-depth examination of a specific process.
Example of a Horizontal Audit
Let’s consider an example of a horizontal audit in a manufacturing company where the auditors are focusing on the “Order Fulfillment Process”.
The auditors would begin at the start of the process – when a customer order is received – and follow the order through every stage of the process. The steps might include:
- Order Receipt: The auditors would verify if the company has a reliable and secure system to receive and record customer orders, ensuring no orders are lost or improperly recorded.
- Order Processing: The auditors would check if the company has a system in place to quickly and accurately process orders, such as entering them into a production schedule or inventory management system.
- Inventory Management: The auditors would review how the company manages inventory to fulfill orders, looking for issues like stock shortages that could delay order fulfillment.
- Shipping: The auditors would inspect the company’s shipping process to ensure orders are shipped out accurately and on time, and that shipping costs are being controlled and minimized where possible.
- Invoicing and Payment: Lastly, the auditors would examine how the company invoices customers and processes payments, checking for accuracy and timeliness.
By looking at the “Order Fulfillment Process” from start to end, the auditors can understand how well the process is functioning, where bottlenecks or inefficiencies might be occurring, and where improvements can be made. This is the essence of a horizontal audit.