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including examination of information systems, performance measures and monitoring
arrangements and procedures followed by audited entities for remedying identified
deficiencies;
Audit of the effectiveness of performance in relation to the achievement of the
objectiveness of the audited entity and audit of the actual impact of activities
compared with the intended impact.”
Performance auditing is an independent assessment or examination of the extent
to which an entity, program or organization operates efficiently and effectively,
which due regard to economy.
In practice, there can be an overlap between compliance and performance
auditing and in such a cases, classification of a particular audit will depend on the
primary purpose of that audit. Compliance audit embraces attestation of financial
accountability involving expression of opinion on financial statements, audit of
financial systems and transactions, including an evaluation of compliance with
applicable statues and regulations, audit of internal control and internal audit
functions and audit of probity and propriety of administrative decisions taken within
the audited entity.
Public sector performance auditing is a way for taxpayers, financiers,
legislatures, executives, ordinary citizens and the media to obtain information about
the running and outcome of different government operations. Performance auditing
also provides answers to questions such as do citizens get value for money, or is it
possible to spend the money better or more wisely.
Public sector performance audit tends to be of two types:
Those where the State Audit Office examines how government ministries are
managing and evaluating their own operations to ensure that they achieve economy,
efficiency and effectiveness;
Those where the State Audit Office directly evaluates whether economy,
efficiency or effectiveness have been achieved by government ministries.
1.1.3 Features of performance audit
As stated in the Auditing Standards of INTOSAI, performance auditing is not
overly subject to specific requirements and expectations. While financial auditing
tends to apply relatively fixed standards, performance auditing is more flexible in its
choice of subjects, audit objects, methods, and opinions. Performance auditing is not
a regular audit with formalized opinions, and it does not have its roots in private
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auditing. It is an independent examination made on a nonrecurring basis. It is by
nature wide-ranging and open to judgments and interpretations. It must have at its
disposal a wide selection of investigative and evaluative methods and operate from a
quite different knowledge base to that of traditional auditing. It is not a checklist-
based form of auditing. The special feature of performance auditing is due to the
variety and complexity of questions relating to its work. Within its legal mandate,
performance auditing must be free to examine all government’s activities from
different perspectives.
The character of performance auditing must not, of course, be taken as an
argument for undermining collaboration between the two types of auditing.
1.1.4 Meaning of economy, effectiveness and efficiency in performance
audit
As stated above, performance auditing is mainly concerned with the
examination of economic, efficiency, and effectiveness. According to the Auditing
Standards (AS 1.0.40), an individual performance audit may have the objective of
examining one or more of these three aspects.
Figure 1.1: Meaning of economy, effectiveness and efficiency in performance
audit
(Source: Performance Audit Guide- EC project)
Economy
Economy
Efficiency
Effectiveness
Minimizing
Input costs
and keeping
right quality
Increasing output
for same input or
reducing input for
same output - at
right quality
Meeting or
exceeding
policy objectives and
delivering intended
impacts
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Economy is minimizing the cost of resources used for an activity, having regard
to the appropriate quality. Economy issues focus on the cost of the inputs and
processes. Economy occurs where equal- quality resources are acquired at lower
price, spending less.
Judging economy in itself implies forming an opinion on the resources
(human, financial and material) deployed. The central question is to assess whether-
given the context- resources have been acquired, upheld and used economically. The
question to be asked by a performance auditor is, do the means chosen represent the
most or at least a reasonable economical use of public funds?
Efficiency
Efficiency is relationship between the outputs, in terms of goods, services or
other results and the resources use to produce them. Efficiency is where the use of
any given set of resources inputs, or input is minimized for any given quantity and
quality of output, spending well.
The main question related to efficiency is whether the resources have been put
to an optimal or satisfactory use or whether the same or similar results in terms of
quality and turn- around time could have been achieved with fewer resources. The
question refers to the relationship between the quality and quantity of goods and
services yielded and the cost of resources used to product them, in order the results
achieved.
A finding on efficiency can be formulated by means of a comparison with
similar activities, with other period or with a standard, which the entity has explicitly
adopted, sometimes, standards such as best practices are applicable. Assessments on
efficiency might also be based on condition which related to specific standard, when
matters are so complex that are no standards. In such case, assessment must be based
on the best available information and arguments and in compliance with the analysis
carried out in the audit.
Effectiveness
Effectiveness is the extent to which objectives and achieved the relationship
between the intended impact and the actual impact of an activity. Effectiveness
addresses the issue of whether the program/ activity has achieved its objectives,
spending wisely. When focus on effectiveness, it is important to distinguish between
the immediate outputs or products and the ultimate impacts or outcomes.
Effectiveness is achieved, for instance, where there is improved achievement of a
program’s objectives. Outcomes are important to the effectiveness of program/
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activities but may be difficult to measure and assess than the inputs and outputs.
Outcomes will often be influenced by external factors and many required long- term
rather than short- term assessment.
Effectiveness is essentially a goal- attainment concept. It is concerned with the
relationship between the objectives set up. Outputs provided and objectives met.
Some of the questions to ask in effectiveness assessment are. A the objectives of the
policy being employed and the results achieved consistent with the objectives of the
policy and- perhaps the most difficult- are the impacts really the results of the policy
rather than other circumstance? The last ones may be difficult to establish in most
cases and will call for a caution approach.
Performance auditor may come across situation where the inputs stated to have
been used and outputs states to have been derived are not correctly stated. Unless the
correctness of inputs and outputs are validated with the help of appropriated audit
test, the evaluation of efficiency may be yielded incorrect results. It is, therefore
incumbent upon the performance auditor to verify correctness of the reported data of
“inputs” and “outputs” while applying the test of efficiency. For example, the money
stated to have been utilized on a program might not be used entirely on the program.
Part of the inputs may have been used on other items, part could be unutilized in the
form of deposits, another part could be advances to vendors, analyzing of inputs,
particular the financial inputs with the help of a finance inverse free may establish the
resources actually utilized for the program. Similar analysis for other inputs and all
outputs may be necessary to carry out an accurate analysis for efficiency.
1.1.5 Differences between Performance Audit and Financial Audit
It is possible that both financial audit and performance audit might cover the
same audit area e.g. controls over debt management systems or systems to prevent
fraud. In practice the type of audit being undertaken is determined by its
fundamental objective i.e.:
If the main objective of the audit is to check that controls are working
satisfactorily, than it is financial audit;
If the main objective of the audit is to answer questions about economy
efficiency or effectiveness, then it is performance audit.
Another way to decide if an audit is a performance audit is to look at the
questions the audit is trying to answer. Performance audit usually tries to answer two
basic questions:
Are things being done in the right way?
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Are the right things being done?
1.1.6 Influence of public management to performance auditing
The form of public management employed will necessarily influence priorities
in performance auditing. In countries where public management is mainly concerned
with means and less involved with ends, audits also tend to focus on whether rules
have been observed and enforced rather than whether the rules serve or are seen to
serve their intended purpose. In countries that have acknowledged management by
objectives and results, the audit focus is different. Public sector management
generally displays a combination of these philosophies.
As mentioned above, management by objectives and results tends to promote
interest in auditing efficiency and effectiveness. As a result, the auditor might not
have to confront a traditional, rule-bound government administration but an
administration whose mandate has been widened considerably in terms of how the
intentions of the legislature should be put into operation and which means should be
employed in order to achieve them.
Typically, following questions would be of interest to a performance auditor:
Is there a clear structure of performance goals and have the appropriate
priorities and instruments been chosen for the use of public funds?
Is there a clear distribution of responsibility between the different levels of
authority, bearing in mind the principle of subsidization?
Is there a general cost awareness and an orientation towards production of
services, putting citizens’ needs in focus?
Is there an adequate emphasis on management controls and reporting
requirements?
Ministries and their subordinate bodies are responsible for ensuring that good
internal control routines are established. In this context, it is the particular task of the
performance auditor to keep an eye on whether this responsibility has been properly
taken care of. The extent to which it has in fact also been observed by the auditor or
the auditors in their operations is for the financial auditor to judge.
In addition, a common objective of most governments today is to improve the
quality of public services, particularly as people’s expectations (often with reference
to the service they receive from the private sector) of what constitutes quality
continue to increase. To promote improvements of this type, many governments have
embarked on modernization programs to deliver better services that are, for instance,
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more easily accessible and convenient, provide citizens with more choice, and are
delivered more quickly. The quality of public services is an increasingly important
issue, which members of parliaments and governments across the world expect the
SAIs to address in their performance audit reports.
Relationship between performance auditing and performance
measurement and program evaluation
Both the executive branch and the legislature need evaluated information to
help them make decisions about the programs they are responsible for this
information tells them whether, and in what important ways, a government
undertaking or program is working well or poorly, and why. Many analytical
approaches have been employed over the years by agencies and others to assess the
operations and results of government programs, policies, activities, and
organizations. Performance audit and evaluation studies are designed to judge how
specific programs are working and may differ a great deal. One particular aspect is
the relationship between performance measurement, program evaluation, and
performance auditing.
Performance measurement
Performance measurement normally means the ongoing process of monitoring
and reporting on program accomplishments, particularly progress towards pre-
established goals. Performance measures may address the type or level of program
activities conducted (process), the direct products and services delivered by a
program (outputs), and/or the results of those outputs (outcomes). Performance
measurement focuses on whether a program has achieved its objectives or
requirements, expressed as measurable performance standards. Performance
measurement, because of its ongoing nature, can serve as an early warning system to
management and as a vehicle for improving accountability to the public. The ongoing
process of ensuring that a government program or body has met the targets set is a
matter of internal management and control, not a task for external auditors. It is the
responsibility of the financial auditors – not the performance auditors – to confirm
that the accounts are correct. However, in the area of performance measurement – the
check on the quality of performance-related information produced by the executive
branch for the legislature – both financial and performance auditors might be
involved, either in separate activities or in joint audits.11 Performance indicators can
sometimes also be used as indicators or references in planning individual
performance audits. One topic for performance auditing is whether performance
measurement systems in government programs are efficient and effective. For
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example, questions could be developed that address whether the performance
indicators measure the right things or whether the performance measurement systems
involved are capable of providing credible measured results.
Program evaluation and performance auditing
Program evaluations are individual systematic studies conducted to assess how
well a program is working. Program evaluations typically examine a broader range of
information on program performance and context than is feasible to monitor on an
ongoing basis. A program evaluation may thus allow for an overall assessment of
whether the program works and what can be done to improve its results. Program
evaluations are one type of study that might be executed by a SAI under the general
heading of performance audits. In recent years, the concept of program evaluation has
been a growing subject of discussion amongst SAIs. Whether or not program
evaluation is an important task for a SAI has been discussed. A special group
(INTOSAI Working Group on Program Evaluation) has been set up to promote
principles and guidance in this area. It is generally accepted that program evaluation
has objectives identical or similar to those of performance auditing in that it seeks to
analyze the relationship between the objectives, resources, and results of a policy or
program. It has also been agreed that program evaluation is an important task for a
SAI that has the authority and competence to carry out such studies. Program
evaluation has been described as an epitome of activities and methods that have aim
to make exhaustive assessments of an issue, using more or less sophisticated
scientific approaches. Although performance auditing may use the same approaches
and methodologies as program evaluation, it does not, according to the INTOSAI
Working Group on Program Evaluation, necessarily engage in assessing policy
effectiveness or policy alternatives. In addition to examining the impact of outputs,
program evaluation may include issues such as whether the stipulated aims are
consistent with general policy. This issue has been the subject of discussion among
SAIs. Some SAIs has the right to evaluate government and/or agency policy
effectiveness and include program evaluation in their performance audit mandate.
Others are not required to conduct such audits. According to INTOSAI’s Working
Group on Program Evaluation, auditing and evaluation may be divided into the
following seven categories:
• Compliance audit: are regulations complied with? Are regulations complied
with?
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• Economy audit: do the means chosen represent the most economical do the
means chosen represent the most economical use of public funds for the given
performance?
• Efficiency audit: are the results obtained commensurate with the resources
employed?
• Effectiveness audit: are the results consistent with the policy? Are the results
consistent with the policy?
• Evaluation of the consistency of the policy: are the means employed by are the
means employed by the policy consistent with the set objectives?
• Evaluation of the impact of the policy what is the economic and what is the
economic and social impact of the policy?
• Evaluation of the effectiveness of the policy and analysis of causality: are the
observed results due to the policy, or are there other causes?
In practice classifications vary. One SAI with many years’ experience of
program evaluation is the General Accountability Office of the US. It defines four
common types of program evaluations in performance auditing:
(1) Process evaluation
This assesses the extent to which a program is operating as intended. Typically,
it is concerned with the program activities’ conformity with statutory and regulatory
requirements, program design, and professional standards or customer expectations.
It is increasingly important to assess whether the quality of the operations – for
instance application forms, processing times, service deliveries and other client-
oriented activities – meets the people’s expectations.
(2) Outcome evaluation
This assesses the extent to which a program achieves its outcome-oriented – and
client-oriented – objectives. It focuses on outputs and outcomes (including side
effects and unintended effects) in order to judge program effectiveness, but it may
also put emphasis on quality issues and client perspectives. An outcome evaluation
may also assess program processes in order to fully understand a program and how
outcomes are produced.
(3) Impact evaluation
This assesses the net effect of a program by comparing program outcomes with
an estimate of what would have happened in the absence of the program. This form
of evaluation is employed when external factors are known to influence the
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program’s outcomes, in order to isolate the program’s contribution to the
achievement of its objectives.
(4) Cost-benefit and cost-effectiveness evaluations
These are analyses that compare a program’s outputs or outcomes with the costs
(resources expended) to produce them. When applied to existing programs, they are
also considered a form of program evaluation. Cost-effectiveness analysis assesses
the cost of meeting a single goal or objective, and can be used to identify the least
costly alternative to meet that goal. Cost-benefit analysis aims at identifying all
relevant costs and benefits.
1.2. Performance audit criteria
1.2 Basic concepts of performance audit criteria
Performance audit criteria are standards which are rational and able to reach
about economy, effectiveness and efficiency.
So, performance audit criteria gather all standards in management, using
economic resources of audited unit’s activities. Auditors have to collect all of it to
evaluate economy, effectiveness and efficiency of audited unit’s activities. Selected
criteria to evaluate have to suitable for the target of the audit; Standards for
performance audit evaluation is quantitative factor about using and spending
economic resources for audited unit’s activities. Performance audit criteria have to
build on suitable area, suitable trade and suitable audited bodies.
2.2 Role of performance audit criteria
Audit criteria are reasonable and attainable standards of performance against
which the economy, efficiency, and effectiveness of activities can be assessed. They
reflect a normative model for the subject matter under review. They represent best or
good practice, a reasonable and informed person’s expectation of “what should be.”
When criteria are compared with what actually exists, audit findings are generated.
Meeting or exceeding the criteria might indicate “best practice,” but failing to meet
criteria would indicate that improvements could be made.
3.2 Requirements of performance audit criteria
Some characteristics of suitable criteria include the following.
Reliability: Reliable criteria result in consistent conclusions when used by
another auditor in the same circumstances.
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Objectivity: Objective criteria are free from any bias of the auditor or
management.
Usefulness: Useful criteria result in findings and conclusions that meet users’
information needs.
Understandability: Understandable criteria are clearly stated and are not subject
to significantly different interpretations.
Comparability: Comparable criteria are consistent with those used in
performance audits of other similar agencies or activities and with those used in
previous performance audits of the entity being audited.
Completeness: Completeness refers to the development of all significant criteria
appropriate to assessing performance.
Acceptability: Acceptable criteria are those that independent experts in the field,
audited entities, legislature, media, and general public are generally agreeable to.
Criteria can perform a series of important roles to assist the conduct of a performance
audit, including:
• Forming a common basis for communication within the audit team and with
SAI management concerning the nature of the audit;
• Forming a basis for communication with the auditor’s management;
• Forming a basis for the data collection phase by providing a basis on which to
build procedures for the collection of audit evidence; and
• Providing the basis for audit findings and helping to add form and structure to
observations.
Their level of detail and the form they take often determines the degree to which
criteria are successful in serving these uses. It is unrealistic to expect that those
activities, systems, or levels of performance in economy, efficiency, and
effectiveness areas will always fully meet the criteria. It is important to appreciate
that satisfactory performance does not mean perfect performance, but is based on
what a reasonable person would expect, taking into account auditor circumstances.
The audit criteria must be set objectively. The process requires rational consideration
and sound judgment. The auditors must for instance:
• Have a general understanding of the area to be audited, and be familiar with
relevant legal and other documents as well as recent studies and audits in the area;
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