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.
Explanation
- 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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Purpose
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 offersInitial Public OffersInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.read more, 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 auditFinancial AuditFinancial audit is an independent examination of the financial statements of an entity irrespective of its size. It is done by auditors or audit firms who provide an opinion regarding the accurate and fair view of the facts & figures mentioned in the financial statements.read more 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 organizationsNot-for-profit OrganizationsA not-for-profit organization refers to a legal entity that isn't created to generate profits or revenue for its owners but aims at social, educational, religious or public welfare and service. Such an organization is tax-exempted and run through donations or any other income it makes.read more. They conduct it to determine financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more that are free from material misstatement and prepared as per the applicable financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more framework. It presents a true and fair view of its state of affairs. A chartered accountant conducts it.
Benefits
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
Drawbacks
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 auditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more, opinion can differ.
- Chances of window dressing of accounts;
- Planning of fraud and other unlawful activities at the management level cannot be detected.
Conclusion
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 auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more where the purpose of a financial audit is to determine financial statements are presenting true and fair view and are free from misstatements.
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