Performance Audit

A performance audit is an assessment of operations or functions, efficiency, effectiveness, and compliance to legal and other requirements of an entity to determine whether functions are working as intended . It is done  to implement improvements so that desired goals can be achieved. It is mostly done in case of the governmental organizations and nonprofit making organizations.

It is the process of independently assessing the organization’s performance so that in case of any deviation from the required procedure, proper measures and action can be taken on time to prevent any loss or inefficiency. This leads to a transparent professional network within the entity.

• A performance audit is an independent examination of an organization, program, or activity to assess its efficiency and effectiveness in achieving its objectives.
• Performance audits are conducted to provide information that can be used to improve operations, enhance accountability, and identify areas for improvement.
• Performance audits can cover various topics, such as financial management, program effectiveness, and compliance with laws and regulations.
• Performance audits may be conducted by internal auditors who work within the organization or by external auditors hired by the organization to conduct an independent assessment.

In Governmental and Nonprofit making organizations, a performance audit is conducted to determine the efficiency and effectiveness of the program and various functions of the entity to improve and make it more efficient. An organization performs this audit to decide whether or not they achieved proprietary objectives like spending amounts where needed and didn't spend excess money than required.

Performance audit guidelines also determines whether optimum utilization of resources is done and areas where improvement is needed. Also, whether fraud or fraudulent transactions are detected or whether the entity achieved its objectives or worked correctly to achieve its goals. Also, if legal and other compliance applies to the entity, it is necessary to comply in the said manner.

It to determine whether an entity is running efficiently and effectively. Also, to bring out the unlawful activities by organizations in management and government's eyes.

Performance audit guidelines differ from a financial audit regarding purpose and other means, as a financial audit is an external audit. In contrast, a performance audit is a kind of internal audit where the purpose of a financial audit is to determine whether financial statements present true and fair views and are free from misstatements.

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The organization conducts this audit to determine:

1. Whether the principle of the economy, i.e., minimizing the cost of resources, is achieved!
2. Whether an entity is working in such a way that the desired objectives it will achieve;
3. Whether the public fundraise is put for the intended use.
4. Whether loans raised from the bank are used for the purpose applied.
5. Whether an entity is complying with legal and other laws;
6. To suggest improvements, if any.
7. Whether an entity conducts any fraudulent or unlawful activities;
8. Whether grants or other money given by governmental authorities are spent for the purpose they are given.
9. Whether activities or functions are conducted with efficiency and effectiveness;

Let us take the example of ABC Ltd, a company with is into retail sales of office furniture and equipments like tables, chairs, printing machines, stationary for office use, etc. They have a huge warehouse where the inventory is stored and a sales office that deals with all the procurement from manufacturers, collecting orders, finances, picking, packing and despatching, after sales customer service.

The management has noticed that the very often the inventory is not enough to meet the sales and frequent procurement has to be done even though sales has not gone up to a significant extent. Even the cash is often not enough to meet the day to day expenses due to which many payments are pending whereas the accounts receivable is not being collected on time.

After proper performance audit report has detected that there is a lot of cash misappropriation going on due to which bills are not being paid on time. The collection team is not working upto their full capacity resulting in pending receivables. Even the inventory management is not proper and a lot of stock is being mishandled and sold outside without the management’s permission.

With due and thorough performance audit the problems were identified and solved. Many incompetent persons and employees were terminated from there job due to dishonestly and lack of accountability.

It is undertaken in governmental and nonprofit organizations to determine the degree of assurance that governmental and nonprofit organizations are working to achieve optimum utilization of resources. For example, they use finance through initial public offers, grants, loans, and other means for the intended purpose and are not wasted on unnecessary things or bribes. Also, it is conducted to make the degree of assurance on the following things:

#1 - Business Ethics

This audit is carried out to determine whether an entity follows the basic ethics of conducting business and trade.

#2 - Environmental Safety

Performance audit report also determines whether an entity operates within environmental laws so that government and environmental safety authorities get assurance.

#3 - Equity Principle

A performance audit is conducted to determine whether everyone is treated fairly and equally as in governmental organizations, there is communication with the local public involved. Hence one of the perspectives behind the performance of these audits is to determine whether everyone is treated fairly.

#4 - Quality Maintenance

This audit aims to determine whether Governmental or Nonprofit making entities provide quality goods or services. As there is no profit involved hence checking quality becomes very necessary.

#5 - Price

The purpose or perspective behind it is to determine whether the price charged for goods or services is reasonable and according to fair business policy. And there is no bribe involved to increase or decrease the price or get the contract etc.

Let us look at the standards of performance audit process.

#1- General Standards

This kind of audit standard will determine mattres lije tge auditor’s capability and level of competence to perform the audit, the level of quality check done, etc. In other words, it helps in identifying whether the auditor is able to perform the job properly keeping in mind all the rules and regulations.

#2 – Reporting Standards

Reporting standards of performance audit process help in identifying whether the findings are peroperly and clearly communicated in the report. It gives a lot of importance to the structure, format and the communication clarity.

#3- Field Standards

The field standard defines the process of how the material information or data is gathered for performance audit. It states the planning, collection and management of information and how, why, when and from where the details is to be collected.

Let us check the advantages of performance audit standards.

• It helps the management of the company understand the situation and identify and loophole or problem that needs immediate attention. Accordingly immediate step can be taken to correct the same.
• It helps in implementing changes in the operation process which also leads to ungradation and use of resources in a cost effective way.
• Follow up is possible which helps in assessing if the changes that have been implemented are truly effective or not.
• In case of governmental organizations, this kind of audit helps to identify whether the process is being properly followed or not and accordingly hold departments or individuals accountable for miscommunication, mismanagement or lack of transparency.
• This audit process provide authentic and legal information to the general public who use this results to make informed decision regarding voting purpose.

• A performance audit determines whether an organization is working efficiently and effectively.
• Conducted to determine there are minimum wastage and optimum utilization of resources;
• It verifies each operation of the organization is running efficiently.

There are many disadvantages of performance audit standards as follows.

• The data and information required for performing such an audit may not always be readily available or may not be authentic.
• Even though the organization identifies problems and loopholes in the system that requires immediate attention, there may be lack of ideas or strategies that will help in fixing them. There may not be enough experiences or skilled individuals who are competent enough to design method of process improvement.
• There may not be enough sense of responsibility among departments or management to implement the changes. There may be lack of accountability within the organization due to which ideas may not be put to action.
• Feedback is very important, without which it is not possible to understand the improvement. The management may not take the responsibility of followup.
• Government organization may not be prompt enough to follow this entire process of performance audit. Unnecesary waste of time may lead to wastage and resource without the desired result.
• uditors charge fees for conducting the performance audit. It increases the cost of the organization.
•  Each operation is checked to determine the degree of assurance; hence time involved is more.
•   A Performance audit is not a surprise audit, and financial experts do not do it; hence there are chances of planning fraud, and these frauds may not be detected as it is a test audit.

• A performance audit is conducted in Governmental or Nonprofit making organizations. They conduct it to determine that the organization maintains efficiency and effectiveness and the optimum utilization of resources. It ensures no manipulation concerning the price or quality of the products or services and ensures that Governmental or nonprofit organizations perform no fraudulent or unlawful activities. The Comptroller and auditor general of India conducts it in case of government entities and any other qualified person in case of non-profit-making entities.
• An organization conducts a financial audit if its turnover crosses the threshold limit given in the law. It can be a governmental organization, non-governmental organization, profit-making, or not-for-profit organizations. They conduct it to determine financial statements free from material misstatement and prepare as per the applicable financial reporting framework. It presents a true and fair view of its state of affairs. A chartered accountant conducts it.

This article has been a guide to what a performance audit is. Here we discuss the purpose and perspective of performance audit and its benefits and drawbacks. You may learn more about financing from the following articles –

• Performance Budget
• Audit Cycle
• Audit Objectives
• Audit Committee