CHAPTER -3

Performance Audit

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 Contents
 Meaning & Definition
 Scope and Objectives
 Performance Audit Vs. Traditional Audit
 Benefits of Performance Audit
 Challenges of Performance Audit

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 Overview
 Performance audits examine the extent to which
government programs or activities have achieved
expected performance.(Compare plan and Actual).
 Governments are expected to obtain and use inputs
economically, efficiently, and produce effective
outputs that result in effective achievement of intended
outcomes.

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 3.1. Performance Audit Definition
What is Performance Audit?
 Performance auditing is an independent auditing process aimed
at evaluating the measures instituted by management or the lack
of these measures to ensure that.

 Resources have been acquired economically, and then

utilized efficiently and effectively (South African Institute of
Chartered Accountants: SAICA)

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 Performance Audit Definition: Cont’d
 Measures instituted generally fall under categories: policy
making, planning, organizing, coordinating and monitoring.
 Performance audit is “An independent examination of the
efficiency and effectiveness of government undertakings,
programs or organizations, with due regard to economy, and the
aim of leading to improvements”.

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 Performance Audit Definition: Cont’d
 Performance audit is an audit of sound resources
management, namely of the economy, efficiency and
effectiveness with which audited entities have carried
out their responsibilities.
 Performance Audit invariably is referred to as value-for-
money audit or operational audit.

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Performance Audit Definition: Cont’d
 Performance audit is an objective and systematic
examination of an entity’s program, activity,
function, or management systems and procedures to
provide an assessment of:
 whether the entity in pursuit of predetermined goals has
achieved economy, efficiency, and effectiveness in the
utilization of its resources.

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 3.2. Performance Audit in Public Sector
 Laws usually provide legislative support for internal
and external auditors in the public sector to conduct
performance audits.
 Internal auditors may investigate whether there are
adequate measures and procedures for the proper
application of sound economic, efficient and effective
management of public funds.

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 Performance Audit in public sector: Cont’d
 Performance audit in the public sector takes place in an
environment where it is the responsibility of the management of
a given public sector unit to institute measures to:
1. Economy
2. Efficiency, and
3. Effectiveness
What is economy, Efficiency, and Effectiveness?

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 Performance Audit in public sector: Cont’d
1. Economy
 Acquire resources of the right quality, in the right quantity, at the
right time and place at the lowest possible cost.
2. Efficiency
 Achieve the optimal relationship between output of services or
other results and the resources used to produce them (match the
input and output), and
3. Effectiveness
 Achieve policy objectives, operational goals and other intended
effects.
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 Performance Audit in public sector: Cont’d
 Apart from examining aspects of economy, efficiency and
effectiveness, performance audit also looks at whether
management measures are in place that are adequate for
ensuring attainment of the 3 E’s.
 Therefore, performance audit would ensure that:
 the reasons for inadequate management measures or
 the causes for the ineffectiveness, inefficiency and
uneconomical procurements are identified.

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 Performance Audit in public sector: Cot’d
Summary of Performance Audit
 Performance audit is anchored on three pillars referred to as the 3
E’s:
Economy

Efficiency Performance
Effectiveness
Audit

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 3.3. Scope of Performance Audit
What is the scope of Performance Audit?
 The scope of performance audit includes:
Impact of Management Measures
 Assessment of the effects or impact of management measures
on the 3E’s,
 Inadequate management measures
 to determine what the effects or impact of the inadequate
management measures were on service delivery.
Recommendation
 Recommendations for corrective measures.

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 Scope of Performance Audit: Cont’d
Equity
 The performance auditors will also be expected to address
concerns relating to equity while assessing the effectiveness of a
program.
 Equity relates to fairness and impartiality in use of public
funds.
 Ethics
 The performance auditors will also be expected to address
concerns relating to ethics while assessing the effectiveness of a
program. 14
 Scope of Performance Audit: Cont’d
 It enjoins the qualities of honesty and integrity.
 The ethical issues should be viewed distinctly from the efficiency
concept which is concerned with use of human, financial and
other resources to maximize the output.
 Environment
 Due care of environment is being taken while carrying out
activities of entity/Scheme.

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 3.4. Objectives of Performance Audit
What are the Objectives of Performance Audit?
 It has to confirm independently that adequate measures exist to:

1. Ensure that the stated standards for economy, efficiency, and

effectiveness are achieved.
2. Provide management with information on adequate and
inadequate management measures by means of a structured
reporting process.
3. Explain the effect or impact of the management measures on 3
E’s

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 3.5. Performance Audit Model
 The underlying model for undertaking a performance audit
involves first clarifying the objective of the audit. This involves
determining:
whether the performance audit is aimed at auditing the
economy of input use,
the efficiency of program processes, or
the effectiveness of program outputs and outcomes

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 Performance Audit Model: Cont’d
 If the objective is to measure the efficiency of a program, the
performance audit would involve the following steps:
 Establish the efficiency measures (or indicators) that will be used
for the audit.
 Determine the validity of the efficiency reports produced by the
program
 Determine whether the achieved efficiency levels meet the
established goals or criteria
 Determine what causes the efficiency rates to vary from the criteria
 Formulate the performance audit finding and recommend
efficiency improvements 18
 3.6. Conducting the Performance Audit
 Performance auditing is carried out in three phases:

1. Planning
2. Fieldwork, and
3. Reporting.
1. Planning
 Planning involves the following steps:

1. Gathering information on the activity, reviewing the activity’s enabling

legislation, and familiarizing themselves with its plans, budget and
expenditure trends, and program processes.
2. Assessing risks: identifying the inherent risks, ranking the risks based on the
potential impact on the organization, and prioritizing the risks.

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Conducting the Performance Audit: Cont’d
3. Assessing vulnerability to risks: assessing vulnerability by
evaluating the controls and making judgments about whether the
controls are likely to be effective.
4. Defining/refining the audit objectives towards:
• Understanding the primary report user
• Identifying the subject, problem, or concern that will be explore
• Decide which aspect or aspects of performance to include in the
audit (economy, efficiency, effectiveness).
5. Determine the audit scope, methodology, fieldwork program,
and audit budget. 20
 Conducting the Performance Audit: Cont’d
2. Fieldwork
 The fieldwork program sets out the required tasks and maps out processes
for each aspect of fieldwork. The rigor and security of data collection
play an important role in the data’s ultimate credibility as audit evidence.
 The audit team’s composition, characteristics, and training must be
adequate to minimize bias and interpretation errors.
 When undertaking data analysis and interpretation, it is important to
ensure that all competing explanations for causes and effects are
considered.

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 Conducting the Performance Audit: Cont’d
3. Reporting
 The decision on reporting medium will be based on the audit
organization’s relevant auditing standards and the customer’s
needs—both for timeliness in receiving the audit results and for
the ultimate use to which the findings will be put.

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 3.7. Financial vs. Compliance vs. Performance Auditing
Financial Compliance Performance
Objective Attest to the fairness of Determine the adherence to Evaluate and help improve
financial statements policies, procedures, laws, the effectiveness, efficiency,
and regulations and economy of operations
Information Legislators Regulators Management,
primarily for Stakeholders Audit Committee,
Policymakers, and
Oversight bodies

Direction of Looking Back Looking back Looking at the present and to

Audit the future
Audits based on Financial reporting Specific laws and Mission, vision, and
standards such as regulations; Government objectives of the organization
IFRS standards of business and its management
conduct; internal policies;

Examples Annual audits Contract audits; All other audits such as those
performed by public business conduct reviews; of departments, processes,
accountants - may be audits by banking or other information systems and
supported by specific regulators other functions
internal audits
 3. 8. Benefits of Performance Audit
What are the Benefits of performance Audit?
 Benefits of performance audits in the public and private sectors
are generally similar, although in the private sector focus is
largely on improving efficiency and effectiveness of operations in
order to maximize profits and value to shareholders.
1. To fulfilled its responsibilities with regard to accountability for
resources.
2. Helps in holding implementers of Government programs
accountable for the economic, efficient and effective discharge
of programs.
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 Benefits of Performance Audit: Cont’d
3. Promote better public service delivery while enhancing public
accountability and management.
4. Helps in the identification of problem areas, including factors that
cause problems.
5. This helps in finding alternative solutions, that is, through
recommendations for improvements to policies, procedures and
structure which could help in reducing wastage and

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 Benefits of Performance Audit: Cont’d
6. Helps in evaluating performance of individuals and departments
or sections in an organization.
7. Helps citizens obtain insight into the management of different
government programs and activities.
8. Performance audits may serve as a basis of decisions on future
funding and priorities.

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 3.9. Challenges of Performance Audit
 Implementing performance audits in the public sector has generally
come with a number of challenges, given that this type of audit is
relatively new.
1. Outputs and outcomes are hard to identify and measure especially in
the short term.
2. National plans may not be linked to strategic plans for Ministries,
regions and Spending Agencies. Consequently, outputs and outcomes
are hard to identify and measure
3. Budgetary constraints in the sense that programs and activities may not
be fully implemented due to either inadequate or lack of funding

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 Challenges of Performance Audit: Cont’d
4. While the auditor general has been regularly conducting
performance audits, internal auditors on the other hand has not been
carrying out such audits. The major challenges faced by internal
auditors to conduct performance audit, among others, include the
following:
Inadequate staffing
Lack of expertise to thoroughly conduct performance
audits; and
Lack of guidelines on how to conduct performance
audits 28
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End of Chapter 3

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