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 with the goal of improving and making an entity more efficient. This audit is done to determine whether proprietary objectives are achieved like amount is spent where it was needed and doesn’t spend excess money i.e. more than required.
- It also determines whether optimum utilization of resources is done or not, areas where improvement needed, whether there is any fraud or fraudulent transactions detected, whether the entity’s objectives are achieved or entity is working in such a way that objectives will be achieved, whether legal and other compliance applicable to entity comply in the said manner.
It is conducted to determine:
- Whether the principle of the economy i.e. minimizing the cost of resources are achieved!
- Whether an entity is working in such a way that the desired objectives of an entity will be achieved.
- Whether funds which are raised from the public are used 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 any fraudulent or unlawful activities are conducted by an entity.
- 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.
Perspective of Performance Audit
It is conducted 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 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 quality goods or services are provided by Governmental or Non-profit making entities. 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 service 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. It is conducted with a view to determining efficiency and effectiveness is maintained along with the optimum utilization of resources, ensure that there is no manipulation with regard to price or quality of the products or services, ensure that no fraudulent or unlawful activities are performed by Governmental or Non-Profit making Organizations. It is conducted by the Comptroller and auditor general of India in case of government entities and any other qualified person in case of non-profit-making entities.
- Whereas financial audit is conducted at every organization whose turnover crosses the threshold limit given in law whether it is a governmental organization or non-governmental organization, profit-making or not-for-profit organizations. It is conducted with a view to determining financial statements that are free from material misstatement and are prepared as per applicable financial reporting framework and presents a true and fair view of its state of affairs. It is conducted by a chartered accountant.
The benefits are as follows:
- Determines Efficiency and Effectiveness: Performance audit determines whether an organization is working in an efficient and effective manner.
- Checks Optimum Utilization of Resources: It is conducted to determine there is minimum wastage and optimum utilization of resources are done.
- 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 are 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 it is not done by financial experts hence there are chances of planning fraud and these frauds may not be detected as it is a test audit.
- Problem in Determining Cost Minimization: For entity, there may be 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 in an efficient and effective way. It is also conducted to check optimum utilization of resources is done and minimum wastage is done. It is also conducted 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 while performance audit is a kind of internal audit where the purpose of financial audit is to determine financial statements are presenting true and fair view and are free from misstatements.
This 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 –