What is Performance Audit?
A performance audit is an assessment of operations or functions, efficiency, effectiveness, and compliance to legal and other requirements of entity to determine whether functions are working as intended along with the goal of implementing improvements so that desired goals can be achieved and the same is mostly done in case of the governmental organizations and non-profit making organizations.
- In Governmental and Non-Profit making organizations 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 spent amount where needed and didn’t spend excess money more than required.
- It also determines whether optimum utilization of resources is done or not, and areas where improvement needed. Also, whether there is any fraud or fraudulent transactions detected or whether the entity achieved its objectives or entity is working correctly to achieve its goals. Additionally, whether legal and other compliance applicable to the entity, comply in the said manner.
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The organization conducts this audit to determine:
- Whether the principle of the economy, i.e., minimizing the cost of resources is achieved!
- Whether an entity is working in such a way that the desired objectives it will achieve;
- Whether the public fund raised is put for the intended use.
- Whether loans raised from the bank are used for the purpose applied.
- Whether an entity is complying legal and other laws;
- To suggest improvements, if any.
- Whether an entity conducts any fraudulent or unlawful activities;
- Whether grant or other money given by governmental authorities are spent for the purpose, they are given.
- Whether activities or functions are conducted with efficiency and effectiveness;
The Perspective of Performance Audit
It is undertaken in governmental and nonprofit making organizations to determine the degree of assurance that governmental and nonprofit making organizations are working in the manner so that optimum utilization of resources can be achieved. Finance used by them through initial public offers, grants, loans, and by other means are used for the intended purpose and are not wasted on unnecessary things or in 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 is following the basic ethics of conducting business and trade.
#2 – Environmental Safety
It is also determined whether an entity is operating within environmental laws so that government and environmental safety authorities get assurance.
#3 – Equity Principle
A performance audit is conducted with the view to determine whether everyone is treated fairly and equally as in governmental organizations, there is communication with the local public involved at large. Hence one of the perspectives behind performance this audits is to determine whether everyone is treated fairly.
#4 – Quality Maintenance
The idea behind this audit is to determine whether Governmental or Non-profit 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 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 to get the contract etc.
Performance Audit vs. Financial Audit
- A performance audit is conducted in Governmental or Non-profit making organizations. They conduct it to determine that organization is maintaining efficiency and effectiveness along with the optimum utilization of resources. It ensures no manipulation concerning the price or quality of the products or services, ensures that Governmental or Non-Profit making 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 that are free from material misstatement and prepared as per the applicable financial reporting framework. It presents a true and fair view of its state of affairs. A chartered accountant conducts it.
The benefits are as follows:
- Determines Efficiency and Effectiveness: Performance audit determines whether an organization is working efficiently and effectively.
- Checks Optimum Utilization of Resources: Conducted to determine there are minimum wastage and optimum utilization of resources;
- Verification of Operations of Organization: it verifies each operation of the organization is running efficiently.
- Reliability by Finance providers.
- Assurance of Funds used for the end purpose;
- Suggest Improvements
The drawbacks are as follows:
- High Cost: Auditors charge fees for conducting the performance audit. It increases the cost of the organization.
- High Time Involved: Each operation is checked to determine the degree of assurance; hence time involved is more.
- Planned Frauds cannot be Detected: As 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.
- The problem in Determining Cost Minimization: For entity, there may be a minimum cost approach used, but for the auditor, opinion can differ.
- Chances of window dressing of accounts;
- Planning of fraud and other unlawful activities at the management level cannot be detected.
It is conducted by Governmental and Non-Profit making organizations to determine whether an entity is running efficiently and effectively. They conduct it to check if there is optimum utilization of resources and minimum wastage. Also to bring out the unlawful activities by organization in the eyes of management and Government.
A performance audit is different from financial audit in terms of 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 financial statements are presenting true and fair view and are free from misstatements.
This article has been a guide to what is performance audit. Here we discuss the purpose and perspective of performance audit along with benefits and drawbacks. You may learn more about financing from the following articles –