What Is a Performance Audit?
A performance audit is an independent assessment of an entity's operations to determine if specific programs or functions are working as intended to achieve stated goals. Performance audits are typically associated with government agencies at all levels as most government bodies receive federal funding.
Understanding Performance Audits
In government, a performance audit is designed to examine the efficiency and effectiveness of a program, with the goal of implementing improvements. According to Generally Accepted Government Auditing Standards (GAGAS), the term "program" can include government entities, activities, organizations, programs, and functions.
The standards for the audits are laid out by the U.S. Government Accountability Office (GAO) and the principal aim is to provide objective data that may be used to reduce costs and make other improvements.
The specific objectives of an audit can vary. They may include effectiveness, economy, and efficiency of a program and compliance with legal requirements. An audit's scope is wide and can seek to determine fraud and wasteful processes that are a hindrance to the stated objectives of a program.
Requirements for a Performance Audit
The standards for the performance audit are laid out by the GAO and cover three areas: general, field, and reporting.
General Standards
General standards cover matters such as professional judgment, quality control (QC), and competence of the auditor and the audit process. General standards seek to ensure that the auditor is independent, capable, and abides by internal QCs.
Field Standards
Field standards apply to planning, gathering material for evaluation, and preparing quality documentation. This topic seeks to outline the objectives, their purpose, and the manner in which they will be sought.
Reporting Standards
Reporting standards relate to the content of the report and the communication of the findings. These touch on the format of the audit report and lay out to whom the report must be disseminated and how.
Purpose
The organization conducts this audit to determine:
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Whether the principle of the economy, i.e., minimizing the cost of resources is achieved!
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Whether an entity is working in such a way that the desired objectives it will achieve;
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Whether the public fund raised is put for the intended use.
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Whether loans raised from the bank are used for the purpose applied.
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Whether an entity is complying legal and other laws
Benefits
The benefits are as follows:
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Determines Efficiency and Effectiveness: Performance audit determines whether an organization is working efficiently and effectively.
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Checks Optimum Utilization of Resources: Conducted to determine there are minimum wastage and optimum utilization of resources;
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Verification of Operations of Organization: it verifies each operation of the organization is running efficiently.
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Reliability by Finance providers.
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Assurance of Funds used for the end purpose;
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Suggest Improvements
Drawbacks
The drawbacks are as follows:
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High Cost: Auditors charge fees for conducting the performance audit. It increases the cost of the organization.
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High Time Involved: Each operation is checked to determine the degree of assurance; hence time involved is more.
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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.
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The problem in Determining Cost Minimization: For entity, there may be a minimum cost approach used, but for the auditor, opinion can differ.
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Chances of window dressing of accounts;
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Planning of fraud and other unlawful activities at the management level cannot be detected.
The Perspective of Performance Audit
It is undertaken in governmental and non-profit making organizations to determine the degree of assurance that governmental and non-profit making organizations are working in the manner so that optimum utilization of resources can be achieved. Finance used by them through initial public offer, 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 Process
Project Selection
Project selection is how we select and narrow the focus of our audits to address areas of significance to citizens of British Columbia. It includes the process we use to choose topics included in the Performance Audit Coverage Plan and the preliminary work with the organization to determine the focus of the audit. During this phase, the team usually conducts preliminary interviews and documentary reviews to identify the areas that have the greatest financial, social, health or environmental impact on British Columbians. During this phase, you will be asked to assist the audit team in making arrangements for access to staff, and documents.
Planning
After the team, has done some preliminary work they will confirm with you that an audit will be undertaken and what the focus of the work will be. During the planning phase, the team will continue to gather information to develop the audit plan. Through this process the audit team discusses the audit’s purpose, timeline, scope and criteria with your organization. At the end of this process, we ask that the head of the organization review a summary of the audit plan and acknowledge that the organization is responsible for the subject matter of the audit and that the criteria used to assess performance is suitable.
Conducting
The audit team spends this phase interviewing, obtaining documents and holding progress meetings with your organization. At the end of this phase, the audit team discusses their findings and conclusions with the organization. We also request that the organization confirm that the audit team has received all the evidence requested and/or would impact the audit findings and conclusions.
Reporting
At the end of the audit we will produce a formal draft report. Your organization will have the opportunity to review and discuss the draft and prepare a response for inclusion in the final version. The Minister receives the final report at least seven days before the Speaker tables it with the Legislative Assembly. Once tabled, it is posted on our website.
Follow-Up
Your organization will be requested by the Select Standing Committee on Public Accounts (PAC) to prepare an action plan for implementing the recommendations. In addition, you will be asked for an annual update of this plan until all the recommendations are implemented. Our Office may decide to audit the submitted action plans and provide an independent assessment of progress to PAC for review. Therefore, it is important that the action plan is an accurate assessment of progress.
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