An objective of a performance audit is to determine whether an entitys

Performance/operational audits are engagements that provide assurance based on an evaluation of sufficient, appropriate evidence against stated criteria, such as specific requirements, measures, or defined business practices.  Performance audits provide objective analysis so that management and those charged with governance and oversight can use the information to improve program performance and operations, reduce costs, facilitate decision making, and contribute to public accountability.  Performance audit objectives may vary widely and include assessments of program effectiveness, economy, and efficiency; internal control; compliance; and prospective analyses.  Examples of audit objectives in these categories include:

• assessing the extent to which legislative, regulatory, or organizational goals and objectives are being achieved;
• determining whether a program produced intended results or produced results that were not consistent with the program's objectives;
• evaluating whether the audited entity is following sound procurement practices;
• determining whether incurred or proposed costs are in compliance with applicable laws, regulations, and contracts or grant agreements;
• assessing whether the purpose of the program, the manner in which it is to be conducted, the services delivered, the outcomes, or the population it serves is in compliance with laws, regulations, contract provisions, grant agreements, and other requirements.

A performance audit is an assessment of operations or functions, efficiency, effectiveness, and compliance to legal and other requirements of an entity to determine whether functions are working as intended along to implement improvements so that desired goals can be achieved, and the same is mostly done in case of the governmental organizations and nonprofit making organizations.

Table of contents

• What is a Performance Audit?
  • Explanation
  • Purpose
  • The Perspective of Performance Audit
    • #1 – Business Ethics
    • #2 – Environmental Safety
    • #3 – Equity Principle
    • #4 – Quality Maintenance
    • #5 – Price
  • Performance Audit vs. Financial Audit
  • Benefits
  • Drawbacks
  • Conclusion
  • Recommended Articles

Explanation

• In Governmental and Nonprofit making organizations, a 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 spending amounts where needed and didn’t spend excess money than required.
• It also determines whether optimum utilization of resources is done and areas where improvement is needed. Also, whether any fraud or fraudulent transactions are detected or whether the entity achieved its objectives or 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:

1. Whether the principle of the economy, i.e., minimizing the cost of resources, is achieved!
2. Whether an entity is working in such a way that the desired objectives it will achieve;
3. Whether the public fundraise is put for the intended use.
4. Whether loans raised from the bank are used for the purpose applied.
5. Whether an entity is complying with legal and other laws;
6. To suggest improvements, if any.
7. Whether an entity conducts any fraudulent or unlawful activities;
8. Whether grants or other money given by governmental authorities are spent for the purpose they are given.
9. Whether activities or functions are conducted with efficiency and effectiveness;

The Perspective of Performance Audit

It is undertaken in governmental and nonprofit organizations to determine the degree of assurance that governmental and nonprofit organizations are working to achieve optimum utilization of resources. For example, they use finance through initial public offersInitial Public OffersAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more, grants, loans, and other means for the intended purpose and are not wasted on unnecessary things or 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 follows the basic ethics of conducting business and trade.

#2 – Environmental Safety

It also determines whether an entity operates within environmental laws so that government and environmental safety authorities get assurance.

#3 – Equity Principle

A performance audit is conducted to determine whether everyone is treated fairly and equally as in governmental organizations, there is communication with the local public involved. Hence one of the perspectives behind the performance of these audits is to determine whether everyone is treated fairly.

#4 – Quality Maintenance

This audit aims to determine whether Governmental or Nonprofit 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 it 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 get the contract etc.

Performance Audit vs. Financial Audit

• A performance audit is conducted in Governmental or Nonprofit making organizations. They conduct it to determine that the organization maintains efficiency and effectiveness and the optimum utilization of resources. It ensures no manipulation concerning the price or quality of the products or services and ensures that Governmental or nonprofit 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 free from material misstatement and prepare as per the applicable financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.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: A 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: 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 an 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 dressingWindow DressingWindow dressing in accounting refers to the intentional manipulation of financial statements by company management in order to present a more favourable picture of the company to users of the financial statement before it is released to the public.read more of accounts;
• Planning fraud and other unlawful activities at the management level cannot be detected.

Conclusion

Governmental and nonprofit organizations conduct it to determine whether an entity is running efficiently and effectively. They conduct it to check the optimum utilization of resources and minimum wastage. Also, to bring out the unlawful activities by organizations in management and government’s eyes.

A performance audit is different from a 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 whether financial statements present true and fair views and are free from misstatements.

Recommended Articles

This article has been a guide to what a performance audit is. Here we discuss the purpose and perspective of performance audit and its benefits and drawbacks. You may learn more about financing from the following articles –

What are the three main features of performance audit?

What is the main objective of the audit of an entity's financial statements?

What are the 3 audit objectives?

What is the importance of performance audit?