Performance Audit

Unleashing the power of superior management and performance

With the February 2009 budget speech once again emphasising that efficient and effective
utilisation of resources by the public sector should be a priority, the relevance of the performance
audit has never been more important.

Performance audits offer management invaluable insights into their organisation’s operations by
assessing how successfully objectives are being met. Theses observations in turn enable
management to refine systems and further improve performance.

Definition

A performance audit is an independent evaluation of the measures implemented by management to

ensure the efficient, effective and economic use of resources.

A performance audit differs from the other audit functions that public sector organisations must
already perform each year:

 The external or statutory audit performed in accordance with relevant auditing and
accounting standards
 The internal audit which is control and risk-focused
 The audit of performance information which is a statutory obligation of the Auditor-General,
looking at performance against predetermined objectives.

Benefits of a performance audit

The performance audit is highly relevant at this time to public sector entities and government
departments, which are increasingly mandated to achieve more efficient levels of service delivery.
A performance audit creates a better understanding of the challenges that an entity is facing. It
assesses the organisation as it is presently and analyses how best to move forward in achieving its
goals.

Improving organisational performance

One of the key qualities of a performance audit is its flexibility. The audit scope can vary, focusing
on financial and/or non-financial information – and it is customised to suit the needs of that entity.
It can review the whole organisation; a particular division; a service line or function, such as human
resources, that cuts across the entire operation; or a single issue that can involve several separate
organisations.

Performance audits are not governed by the rigid standards and frameworks governing statutory
audits. The audit methodology is tailored to suit the unique circumstances of each audit according to
its objectives – with the overriding aim being to objectively and systematically assess programmes,
functions and activities to help officials improve their use of scarce resources. In essence, a
performance audit contributes to ensuring that the right things are done in the best way and that
maximum value is obtained for every rand spent by the organisation in delivering its services.
A tool to increase efficiency

Performance audits aim to improve accountability and support good governance. In its assessment
of how resources are being used, a performance audit would highlight areas where improved service
delivery is required; identify potential cost savings and services that can be reduced or eliminated
and analyse inefficient gaps or overlaps in programmes or services.

Policy and performance

What performance auditing will not do is to question an organisation’s policy. The formulation of
policy remains the mandate of government at all levels. Rather, a performance audit would examine
policy-making measures, the effects of policy and how well policy objectives are being met. For
example: have policy goals and objectives been set, are they clearly defined and approved at the
appropriate level by the appropriate authority; are supporting policies and procedures aligned with
higher level policy; and are policy assumptions based on appropriate motivations and relevant and
reliable information?

Legal imperative

Performance auditing is not a new concept in South Africa. With its origins in the Canadian public
sector, it was first introduced into South African legislation in 1975. The Auditor-General first
initiated performance audits in 1986.

Parliamentary and treasury legislation in South Africa strongly supports the implementation of
performance audits in government – the Constitution, the Public Finance Management Act, the
Municipal Finance Management Act, the Municipal Systems Act, the Public Audit Act, among
others. All these statutes place great responsibility on all public sector officials to make more
economical, efficient, effective and transparent use of resources.

The right team for the job

Performance audit findings can have a profound impact on an organisation and its employees. With
such a great responsibility, the independent team conducting a performance audit must be equipped
with high-level and diverse skills to ensure that it is properly planned and executed. As there are no
predefined standards or guidelines that dictate how a performance audit should be carried out, the
audit process is more subjective, reinforcing the need to have knowledgeable senior staff carrying
out the assignment and providing audit conclusions that are clearly and credibly supported.

Why PricewaterhouseCoopers

PricewaterhouseCoopers’ (PwC) unique performance audit service gives clients the opportunity to
refine systems and unlock greater value within their operations while enhancing the functionality of
their performance management practices.

As the leading provider of financial services in the public sector, both in South Africa and globally,
the firm brings an enviable track record and unmatched blend of local, national and international
experience, knowledge and skills to maximise the outcomes of every assignment we undertake.
Performance audit

Performance audit refers to an examination of a program, function, operation or the management

systems and procedures of a governmental or non-profit entity to assess whether the entity is
achieving economy, efficiency and effectiveness in the employment of available resources. The
examination is objective and systematic, generally using structured and professionally adopted
methodologies.

In most countries, performance audits of governmental activities are carried out by the external
audit bodies at federal or state level. Many of these audit bodies have established guides for
conducting performance audits which explain how performance audits are planned, conducted and
its results reported.

INTOSAI, the international association of Supreme Audit Institutions, has published generally
accepted principles of performance auditing in its implementation guidelines. In the United States,
the standard for government performance audits is the Generally Accepted Government Auditing
Standards (GAGAS), often referred to as the "yellow book", maintained by the federal Government
Accountability Office (GAO). Similarly, the European Court of Auditors (ECA) has developed a
"performance audit manual" for its audits of the sound financial management of the European
Commission and the programmes funded through the EU budget.

Performance audits may also be conducted by Internal Auditors who are employees of the entity
being audited. However, some national governments require agencies, departments and branches to
periodically retain outside auditors to conduct them.

In the USA, all auditors who follow GAGAS standards are required to maintain independence,
supervision, continuing professional education, and conduct the audit using a specific process
designed to increase the quality of the audit and reduce the politicization of audit work. Although
there are separate professional credentials and certifications for Financial Auditors, the persons that
conduct Performance Audits in the USA are often Certified Public Accountants, Certified Internal
Auditors, or have a broad background in public policy, business or public administration.

The scope of performance audits may include the detection of fraud, waste and abuse, although
often these are not included in the scope. Prior to engaging in a performance audit, the auditor must
have a scope and plan defined which will be used to guide the audit process.

Performance auditing differs from performance measurement, the latter being the responsibility of
management of the entity. In addition, performance measurement may include a broad variety of
activities that do not meet the rigour of an independent external assessment.
Performance Audit
A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accountability and facilitate
decision-making by parties with responsibility to oversee or initiate corrective action [Reference :
Government Auditing Standards , US , www.gao.gov ]

Performance audits include economy and efficiency and program audits:

a. Economy and efficiency audits include determining (1) whether the entity is acquiring,
protecting, and using its resources (such as personnel, property, and space) economically and
efficiently, (2) the causes of inefficiencies or uneconomical practices, and (3) whether the entity has
complied with laws and regulations on matters of economy and efficiency.

b. Program audits include determining (1) the extent to which the desired results or benefits
established by the legislature or other authorizing body are being achieved, (2) the effectiveness of
organizations, programs, activities, or functions, and (3) whether the entity has complied with
significant laws and regulations applicable to the program.

Economy and efficiency audits may, for example, consider whether the entity
a. is following sound procurement practices;
b. is acquiring the appropriate type, quality, and amount of resources at an appropriate cost;
c. is properly protecting and maintaining its resources;
d. is avoiding duplication of effort by employees and work that serves little or no purpose;
e. is avoiding idleness and overstaffing;
f. is using efficient operating procedures;
g. is using the optimum amount of resources (staff, equipment, and facilities) in producing or
delivering the appropriate quantity and quality of goods or services in a timely manner;
h. is complying with requirements of laws and regulations that could significantly affect the
acquisition, protection, and use of the entity's resources;
i. has an adequate management control system for measuring, reporting, and monitoring a program's
economy and efficiency; and
j. has reported measures of economy and efficiency that are valid and reliable. Program audits may,
for example
a. assess whether the objectives of a new, or ongoing program are proper, suitable, or relevant;
b. determine the extent to which a program achieves a desired level of program results;
c. assess the effectiveness of the program and/or of individual program components;
d. identify factors inhibiting satisfactory performance;
e. determine whether management has considered alternatives for carrying out the program that
might yield desired results more effectively or at a lower cost;
f. determine whether the program complements, duplicates, overlaps, or conflicts with other related
programs;
g. identify ways of making programs work better;
h. assess compliance with laws and regulations applicable to the program;
i. assess the adequacy of the management control system for measuring, reporting, and monitoring
program's effectiveness; and
j. determine whether management has reported measures of program effectiveness that are valid and
reliable.
18.9.2 Objectives of performance auditing –
The objectives are evaluation of economy, efficiency, and effectiveness of policy, programmes,
organization and management. Policy is usually defined as an effort to achieve certain aims with
certain resources and perhaps within a certain time. A programme can be described as a set of
interrelated means-legal, financial, etc. to implement a given policy. Organisation can be defined in
different ways, but mostly it is taken to mean the aggregate of people, structures and processes that
have the aim of achieving particular objectives.
In an organized set up or entity, the entity’s goal and objectives are governed by its constitution. As
well known to us, the Memorandum and Articles of Association of a company forms the
constitution of the company as also the basic document for entering into a contract with that entity.
Authority is delegated to the management. Management generally refers to a person or group
person(s), like Board of Directors in a company, vested with powers to take all decisions, actions
and framing rules for the steering, accounting and development of human, financial and material
resources. Management decisions are mainly internal to the operations of an organization. Policies
and programmes decided by the legislature, the executive or executive official, relating to a specific
organization (and its internal activities and performance) are the broad guidelines or parameters
within which the management is supposed to function. The management is accountable in so far as
public sector enterprises are concerned to the legislature and the executives in the Govt. The basic
principle of public finance, which not only applies to Govt. expenditure but also forms part of
prudential norms of finance in any organization, is that the delegated authority shall observe that
care and due diligence in sanctioning of any expenditure as an ordinary man of average prudence of
his caliber would have had. Management’s action is watched by other statutory authorities like
CAG, CVC, etc. as to utilization of the money sanctioned for the purpose of sanction and also
within the sanction especially from the angle of reasonability and the benefits flowing from such
expenditure. Efficiency is the input-output ratio and in the case of public spending efficiency is
achieved when the output is maximized at the minimum of expenditure. These two aspects mainly
relates to economy and efficiency while efficacy is measured by the benefits flowing from such
spending. Whilst performance auditing does not question political goals, it can point out the
consequences of a given policy.
Take for example the audit of performance of enforcement mechanism for administering the
provision of Minimum Wages Act which is a social welfare legislation. The auditors, who
undertake performance audit of a program or unit, must posses knowledge of the industries or labor
contracts where these provisions are applicable and also identify the population thereof before
carrying out audit program. The auditor shall evaluate, as part of performance audit, the standard of
living before implementation and after implementation of the Act. Further he shall have to evaluate
the evidence available before him as to nature of returns prescribed and obtained for taking
appropriate action. Auditor shall also have to evaluate the economy, efficiency and effectiveness in
the welfare systems to be audited. The performance auditor can then study the shortcomings in the
coordination between different agencies like labor department, EPF and ESI organization and the
control systems and point out a set of relevant problems. Auditor shall also point out lacuna, if any
in the existing legal frame work or enforcement mechanism to strengthen the objective of
leglislation. Another possible area of critical audit may be to study actual level of compensation
required in each area keeping in mind the local living conditions and where the minimum wages
prescribed in the statute is demonstrably different from this level he may report the same to the
Govt. for taking appropriate action. In this manner, the performance audit can not only examine the
reasons for such vagaries but also ensures that the legislation serves the intended purpose. By
reporting the same to the legislature, the corrective is made possible.
Planning for Performance Audit
Following steps are suggested to the auditors for planning while conducting the performance audit:
(A) Work is to be adequately planned –
In planning, auditors should define the audit's objectives and the scope and methodology to achieve
those objectives. The objectives are what the audit is to accomplish. They identify the audit subjects
and performance aspects to be included, as well as the potential finding and reporting elements that
the auditors expect to develop.
Audit objectives can be thought of as questions about the program that auditors seek to answer.
Scope is the boundary of the audit. It addresses such things as the period and number of locations to
be covered. The methodology comprises the work in data gathering and in analytical methods
auditors will do to achieve the objectives.

Auditors should design the methodology to provide sufficient, competent, and relevant evidence to
achieve the objectives of the audit. Methodology includes not only the nature of the auditors'
procedures, but also their extent (for example, sample size).
In planning a performance audit, auditors should:
a. Consider significance and the needs of potential users of the audit report.
b. Obtain an understanding of the program to be audited.
c. Consider legal and regulatory requirements.
d. Consider management controls.
e. Identify criteria needed to evaluate matters subject to audit.
f. Identify significant findings and recommendations from previous audits that could affect the
current audit objectives. Auditors should determine if management has corrected the conditions
causing those findings and implemented those recommendations.
g. Identify potential sources of data that could be used as audit evidence and consider the validity
and reliability of these data, including data collected by the audited entity, data generated by the
auditors, or data provided by third parties.
h. Consider whether the work of other auditors and experts may be used to satisfy some of the
auditors' objectives.
i. Provide sufficient staff and other resources to do the audit.
j. Prepare a written audit plan.
Planning should continue throughout the audit. Audit objectives, scope, and methodologies are not
determined in isolation. Auditors determine these three elements of the audit plan together, as the
considerations in determining each often overlap.

(B) Significance and User Needs –

Auditors should consider significance in planning, performing, and reporting on performance
audits. The significance of a matter is its relative importance to the audit objectives and potential
users of the audit report. Qualitative, as well as quantitative, factors are important in determining
significance. Qualitative factors can include:
a. visibility and sensitivity of the program under audit,
b. newness of the program or changes in its conditions,
c. role of the audit in providing information that can improve public accountability and decision-
making, and
d. level and extent of review or other forms of independent oversight.
One group of users of the auditors' report is government officials who may have authorized or
requested the audit. Another important user of the auditors' report is the auditee, which is
responsible for acting on the auditors' recommendations. Other potential users of the auditors' report
include government officials (other than those who may have authorized or requested the audit), the
media, interest groups, and individual citizens. These other potential users may have, in addition to
an interest in the program, an ability to influence the conduct of the program. Thus, an awareness of
these potential users' interests and influence can help auditors understand why the program operates
the way it does. This awareness can also help auditors judge whether possible findings could be
significant to these other users.

(C) Understanding the Program –

Auditors should obtain an understanding of the program to be audited to help assess, among other
matters, the significance of possible audit objectives and the feasibility of achieving them. The
auditors' understanding may come from knowledge they already have about the program and
knowledge they gain from inquiries and observations they make in planning the audit. The extent
and breadth of those inquiries and observations will vary among audits, as will the need to
understand individual aspects of the program, Government Auditing Standards such as the
following.
a. Laws and regulations - Government programs usually are created by law and are subject to
more specific laws and regulations than the private sector. For example, laws and regulations
usually set forth what is to be done, who is to do it, the purpose to be achieved, the population to be
served, and how much can be spent on what. Thus, understanding the laws establishing a program
can be essential to understanding the program itself. Obtaining that understanding may also be a
necessary step in identifying provisions of laws and regulations significant to audit objectives.
b. Purpose and goals –
Purpose is the result or effect that is intended or desired, and can exist without being expressly
stated. Goals quantify the level of performance intended or desired. Legislatures set the program
purpose when they establish a program; however, management is expected to set goals for program
efforts, operations, outputs, and outcomes. Auditors may use the purpose and goals as criteria for
assessing program performance.
c. Efforts –
Efforts are the amount of resources (in terms of money, material, personnel, and so forth) that are
put into a program. These resources may come from within or outside the entity operating the
program. Measures of efforts can have a number of dimensions, such as cost, timing, and quality.
Examples of measures of efforts are dollars, employee-hours, and square feet of building space.
d. Program operations –
Program operations are the strategies, processes, and activities the auditee uses to convert efforts
into outputs. Program operations are subject to management controls.
e. Outputs –
Outputs are the quantity of goods and services provided. Examples of measures of output are tons of
solid waste processed, number of students graduated, and number of students graduated who have
met a specified standard of achievement.
f. Outcome –
Outcomes are accomplishments or results that occur (at least partially) because of services
provided. Outcomes can be viewed as ranging from immediate outcomes to long-term outcomes.
For example, an immediate outcome of a job training program and an indicator of its effectiveness
might be the number of program graduates placed in jobs. That program's ultimate outcome and test
of its effectiveness depends on whether program graduates are more likely to remain employed than
similar persons not in the program. Outcomes may be intended or unintended, and they may be
influenced by cultural, economic, physical, or technological factors external to the program.
Auditors may use approaches drawn from the field of program evaluation to isolate the effects of
the program from those of other influences.
One approach to setting audit objectives is to relate the elements of a program to the types of
performance audits. For example, audits concerned with economy could focus on efforts:
Were resources obtained at an optimal cost and at an appropriate level of quality? Audits concerned
with efficiency could focus on the program operations or the relationship between efforts (resources
used) and either outputs or outcomes to determine the cost per unit of output or outcome. Program
audits could be concerned with determining whether program outcomes met specified goals or
whether outcomes were better than they would have been without the program. Any type of
performance audit could encompass program operations if auditors are looking for reasons why the
program was successful or not.

(D) Criteria –
Criteria are the standards used to determine whether a program meets or exceeds expectations.
Criteria provide a context for understanding the results of the audit. The audit plan, where possible,
should state the Government Auditing Standards criteria to be used. In selecting criteria, auditors
have a responsibility to use criteria that are reasonable, attainable, and relevant to the matters being
audited. The following are some examples of possible criteria:
a. purpose or goals prescribed by law or regulation or set by management,
b. technically developed standards or norms,
c. expert opinions,
d. prior years' performance,
e. performance of similar entities, and
f. performance in the private sector.

(E) Audit Follow-Up - Auditors should follow up on significant findings and recommendations
from previous audits that could affect the audit objectives. They should do this to determine
whether timely and appropriate corrective actions have been taken by auditee officials. The audit
report should disclose the status of uncorrected significant findings and recommendations from
prior audits that affect the audit objectives.

Much of the benefit from audit work is not in the findings reported or the recommendations made,
but in their effective resolution. Auditee management is responsible for resolving audit findings and
recommendations, and having a process to track their status can help it fulfill this responsibility. If
management does not have such a process, auditors may wish to establish their own. Continued
attention to significant findings and recommendations can help auditors assure that the benefits of
their work are realized.

(F) Considering Others' Work - Auditors should determine if other auditors have previously done,
or are doing, audits of the program or the entity that operates it. Whether other auditors have done
performance audits or financial audits, they may be useful sources of information for planning and
performing the audit. If other auditors have identified areas that warrant further study, their work
may influence the auditors' selection of objectives. The availability of other auditors' work may also
influence the selection of methodology, as the auditors may be able to rely on that work to limit the
extent of their own testing.

If auditors intend to rely on the work of other auditors, they should perform procedures that provide
a sufficient basis for that reliance. Auditors can obtain evidence of other auditors' qualifications and
independence through prior experience, inquiry, and/or review of the other auditors' external quality
control review report. Auditors can determine the sufficiency, relevance, and competence of other
auditors' evidence by reviewing their report, audit program, or working papers, and/or making
supplemental tests of their work. The nature and extent of evidence needed will depend on the
significance of the other auditors' work and on whether the auditors will refer to that work in their
report.