INTRODUCTION TO PERFORMANCE AUDITING

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INTRODUCTION TOPERFORMANCE AUDITING

• DAY 1
• SESSION NO.3 (THEORY)
• BASED ON CHAPTER 1
• PERFORMANCE AUDITING GUIDELINES

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Learning Objective

• In the previous session we discussed the need for
  separate guidelines and structure of the New
  Performance auditing courseware.
• Now in this session we will discuss
• 1. Mandate for performance audit
• 2. Definition of performance auditing, 3 Es
  concept, Equity and Ethics
• 3. Specific nature of Performance Audit
• 4. Performance Audit and Programme evaluation
• 5. Common types of Programme Evaluation
• 6. Performance Audit Process

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Cont

• 7. Expected outcomes of performance auditing.
• 8. Objectives of Performance Auditing
• 9. Difference between Performance audit and
• Regularity audit.
• 10. What performance auditing requires from
  the auditors.
• 11. Analyse the performance auditing cycle.
• 12. Importance of documentation of decisions
  at various
• stages of the performance audits.
• 13.  Recognize why the impact of the performance
• auditing needs to be evaluated.

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Mandate for performance audit

• Mandate derived from the Constitution as
  established by the C A Gs DPC Act, 1971
• Mandate for performance audit governed by
  sections 13, 14, 15, 16, 17, 19 and 20 of the DPC
  Act,

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CAGS DPC Act, 1971

• Section 13 deals with
• (a)audit of all expenditure from the
  Consolidated Fund of India and of each State and
  of each Union territory having a Legislative
  Assembly.
• (b) to audit of all transactions of the Union and
  of the States relating to Contingency Funds and
  Public Accounts

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CAGS DPC Act, 1971

• audit of all trading, manufacturing profit and
  loss accounts and balance-sheets and other
  subsidiary accounts of Union or of a State
• and in each case to report on the expenditure,
  transactions or accounts so audited by him.

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CAGS DPC Act, 1971

• Section 14 deals with the
• Audit of receipts and expenditure of bodies or
  authorities substantially financed from Union or
  State Revenues

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CAGS DPC Act, 1971

• Section 15 deals with
• Functions of Comptroller and Auditor-General in
  the Case of Grants or Loans given to other
  Authorities or Bodies

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CAGS DPC Act, 1971

• Section 16 deals with the
• Audit of Receipts of Union or of States which are
  payable into the Consolidated Fund of India and
  of each State and of each Union territory having
  a Legislative Assembly

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CAGS DPC Act, 1971

• Section 17 deals with
• the Audit of accounts of stores and stock kept
  in any office or department of the Union or of a
  State.

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CAGS DPC Act, 1971

• Section 18 deals with the authority-
• CAG shall have authority to inspect any Office of
  accounts under the control of union or State.
  For this books and records can be called for
  where ever he wants.
• Any information can be called for by him or his
  representatives.

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CAGS DPC Act, 1971

• Section 19 deals with the Audit of Government
  companies and corporations
• Section 19ALaying of reports in relation to
  accounts of Government companies and corporation
• Section 19(3) of DPC Act enables the States to
  request the CAG to audit their accounts

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CAGS DPC Act, 1971

• Section 20 deals with
• Audit of accounts of certain bodies or
  authorities not covered in earlier sections.
• Govt. shall consult the CAG for undertaking the
  audit.
• Terms and conditions shall also be settled
  between Govt. and CAG.

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Performance auditing - Definition

• Performance audit is concerned with the audit of
  economy,efficiency and effectiveness and
  embraces
• Audit of economy of administrative activities in
  accordance with sound administrative principles
  and practices and management policies
• Audit of efficiency of utilisation of human,
  financial and other resources, including
  examination of information system, performance
  measures and monitoring arrangements, and
  procedures followed by audit entities for
  remedying identified deficiencies.

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Performance audit Definition (Cont)

• b. Audit of the effectiveness of performance
• in relation to the achievement of the
• objectives of the audited entity, and audit
• of the actual impact of activities compared with
• the intended impact.
• Performance Audit is an independent assessment or
  examination of the extent to which an entity,
  programme or organisation operates efficiently
  and effectively, with due regard to economy

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The components of Performance Auditing

• ECONOMY
• EFFICIENCY
• EFFECTIVENESS
• EQUITY
• ETHICS

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Economy

• Economy is minimizing the cost of resources used
  for an activity having regard to the appropriate
  quality. Economy issues focus on the cost of the
  inputs and processes. Economy occurs where equal
  quality resources are acquired at lower prices
  i.e.., spending less.

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Example for Economy

• Reduction in costs through better contracting,
  bulk buying, etc
• reduction in costs through economies on usage of
  personnel or other resources
• introduction of charges where none were
  previously imposed, or revision of charges
• rationalisation of facilities

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Efficiency

• Efficiency is the relationship between the
  output,in terms of goods,services or other
  results and the resources used to produce them.
  Efficiency exists where the use of financial ,
  human,physical and information resources in such
  that output is maximised for any given set of
  resources inputs,or input is minimised for any
  given quantity and quality of output,
  I.e.spending well. resources.

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Example for Efficiency

• greater outputs from same inputs
• remedying duplication of effort or lack of
  coordination
• Were waiting times reduced, at no extra cost and
  with no reduction in quality of service?

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Effectiveness

• Effectiveness is the extent to which objectives
  are achieved and the relationship between the
  intended impact and the actual impact of an
  activity.

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Example for Effectiveness

• better identification/justification of need
• clarifying objectives and policies
• introducing better sub-objectives and targets
• better achievement of objectives by changing the
  nature of outputs or improved targeting

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Equity

• Equity in the context of programme management
  relates to fairness and impartiality in use of
  public funds

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Example for Equity

• Are outputs/services made available to intended
  groups without discrimination? Does everyone have
  access to the benefits due to them?
• Has management acted with fairness and
  impartiality

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Ethics

• Ethics in managing public affairs enjoins the
  qualities of honesty and integrity in personal
  conduct and devotion to the duty as manager of
  public funds. The ethics in management of public
  funds and affairs extends to the accountability
  system and accountability relationship for
  correctness and accuracy of the performance
  information by the managers

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Cont

• The concept of trusteeship should be applied
  to the matters in the realm of public affairs in
  the sense that the managers of public funds and
  affairs ought to hold the funds and be sensitive
  and accountable for public good within the policy
  parameters as trustees of public funds.

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Example for Ethics

• Intentional unauthorised siphoning of resources
  for other purpose than for which these are
  provided or negligent/incorrect performance
  information may relate to ethical integrity.

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What is three plus two issues

• Audit findings on ethics and equity should be
  included in the performance audit report only
  when the infringement of the standards of equity
  and ethics impacts the performance adversely.
  Thus economy, efficiency, effectiveness, equity
  and ethics are in effect three plus two issues
  rather than five issues. Equity and ethics issues
  in performance audits add value only if the audit
  findings against these two standards affect one
  or more of the three i.e. economy, efficiency and
  effectiveness.

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Specific nature of Performance Audit

• Given the size, complexity and diversity of
  entity operations, it is generally not
  practicable to attempt to assess the overall
  performance of departments or entities.
  Consequently, performance audits are usually
  directed towards specific functions, activities,
  programmes or operations of the entity.
• Performance audit findings are not a random
  assortment of various financial and regularity
  audit findings but an assessment of either the
  whole or the part of the programme/subject/functio
  n/system.

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Performance Audit and Programme Evaluation

• Apart from examining the impact of outputs,
• an evaluation could include issues such as
  whether
• entity planning reflected the programme
  objectives,
• and whether the objectives were consistent with
  policy.
• While performance auditing does address many
  issues, which are dealt with in an evaluation, it
  ought to
• stop short of questioning the policy or
  embarking
• on suggesting policy alternatives.

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Performance Audit and Programme Evaluation
(Cont)

• Auditing and evaluation by SAI may be
• divided into the following seven categories
• Regularity audit Are regulations complied with?
  
• Economy audit Do the means chosen represent
• the most economical use of public funds for
• the given performance?
• Efficiency audit Are the results obtained
• commensurate with the resources employed?
• Effectiveness audit Are the results consistent
• with the objectives of the policy?

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Cont

• Evaluation of the consistency of the programme
  with the policy Are the means employed for
  policy implementation consistent with the set
  objectives?
• Evaluation of the impact of the policy What is
  the economic and social impact of the policy?
• Evaluation of the effectiveness of the policy and
  analysis of causality Are the observed results
  due to the policy, or are there other causes? .

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Common Types of Programme Evaluation

• The contemporary common types of programme
  evaluation techniques used in performance
  auditing are
• Process evaluation assesses the extent to which
  a programme is operating as intended.
• Outcome evaluation assesses the extent to which
  a programme achieves its outcome-oriented
  objectives.
• Impact evaluation assesses the net effect of a
  programme by comparing programme outcomes with an
  estimate of what would have happened in the
  absence of the rogramme.

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Cont

• Cost-benefit and cost-effectiveness evaluation
  are analyses that compare a programmes outputs
  or outcomes with the costs (resources expended)
  to produce them.

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Expected Outcome of Performance Audits

• Performance Audits promote accountability,
  insights and transparency in governance and
  deliver credible, objective and reliable
  information on implementation of policy
  objectives and contributes to good governance.
  It is an important responsibility of the SAI
  management to ensure that through each
  performance audit one or more of these objectives
  are met.

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Cont

• The extent of positive impact on the policies and
  programmes through performance audit is the most
  important measure of its quality.
• It is a good practice for SAI management to
  evaluate the real impact on entity policies and
  programmes attributed to performance audits.

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Performance audit process

• The first stage in performance auditing is
  strategic planning for performance audits, which
  requires the development and maintenance of
  information on the entity that will assist in
  identifying potential areas for Performance
  Audit. Potential topics can then be analysed
  to form audit strategy documents.
• Once a subject has been selected, performance
  audit is initiated by developing a plan with
  details for the conduct of the audit.

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Cont

• The implementation stage of a performance audit
  involves
• Development and execution of an audit programme
• Collection and documentation of sufficient,
  relevant
• and reliable evidence, including
  quantitative and qualitative analysis
• Development of audit findings, conclusions and
• recommendations and
• Development of discussion papers/draft field
  audit reports, and confirmation of audit findings
  at exit conference.

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Objectives of Performance Audit

• To improve public sector administration and
  accountability by adding value through an
  effective programme of performance audits.
• To assist the peoples representatives in
  exercising effective legislative control and
  oversight over the policy objectives and their
  implementation.

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Cont

• Quality of information and advice available to
  the
• government for the formulation of policy
• The existence and effectiveness of administrative
  machinery in place to inform the government
  whether programme objectives and targets have
  been determined with a view to fulfilling policy
  objectives
• Whether, and to what extent, stated programme
  objectives have been met       

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Cont

• The economy, efficiency, effectiveness, equity
  and ethics of the means used to implement a
  programme/activity
• The intended and unintended direct and indirect
  other impacts of programmes/activities for
  example, the environmental impact of government
  activity, etc. and
• Compliance to applicable laws and regulations in
  the context of the performance audit objectives.

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Cont

• Performance not to confine to what has been done
  but to examine what has not been done to meet
  policy objectives

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Difference between Regularity Audit and
Performance Audit

• Scope
• Regularity audit
• Generally covers a financial period (annual,
  biennium, etc.)
• Coverage is for the whole of the entity for the
  period and
• Time bound- audit to be completed by a stipulated
  time.

• Performance audit
• Covers the subject/programme over a period of
  time
• Coverage is selective and
• Focused only on a part of the entitys
  activities/programme.

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Difference Objectives (Cont)

• Regularity Audit
• Attestation (opinion on) of financial
  accountability
• Existence and control for safeguarding of
  assets
• Evaluation of financial records
• Audit of financial systems
• Audit of internal control for safeguarding assets
  and completeness and accuracy of accounts
• Audit of propriety of administrative decisions
• Limited to financial matters and

• Performance Audit
• Audit of economy, efficiency and effectiveness
• Assessment of compliance to applicable laws and
  regulations required in the context of audit
  objectives
• Audit of internal controls that ensures economy,
  efficiency and effectiveness, ensuring adherence
  to management policies and timely and reliable
  financial and management information
• Extends to non-financial / governance subjects
  also and

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Difference Evidence (Cont)

• Regularity Audit
• Test for assuring compliance
• to laws, regulations and rules.
• Financial statements
• per se, accounting
• documents, etc.
• Transaction documents
• Conclusive nature of
• evidence

• Performance Audit
• Conclusions related to audit objectives.
• Variety of forms of evidence
• Quite often qualitative in nature
• Persuasive rather than conclusive
• Evidence related to pre-determined audit
  objectives and
• Materiality guided more by

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Difference Academic Base (Cont)

• Regularity Audit
• Materiality by amount
• and
• Budgetary assumptions
• and appropriation authorisations, etc
• Generally accounting knowledge.

• Performance Audit
• the nature or by context rather than amount
  alone, etc.
• Always knowledge-based of laws, social sciences,
  economics, development studies, public affairs,
  science, and technology, etc.

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Difference Approach and methodology (Cont)

• Regularity Audit
• More or less standar-
• dised manual generally
• forms the entire basis.

• Performance Audit
• Varies widely from subject to subject Manual
  generally
• serves as basis framework.

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Difference Assessment criteria (Cont)

• Regularity Audit
• Standardised (suitable to all audits) with little
  scope for subjectivity.

• Performance Audit
• Widely varying and subjective with ample scope
  for interpretations assessment criteria support
  the audit objectives, which are unique to the
  subject of performance audit.

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Difference Report (Cont)

• Regularity Audit
• Opinion on the financial statements
• Generally opinion on financial statements in
  standardised format
• Opinion on compliance to laws, regulations and
  rules
• Related to specific financial periods- there is a
  periodicity of reporting and
• Specific requirement and expectations.

• Performance Audit
• Report / conclusions on economy and efficiency
  with which the resources are acquired and used
  and the effectiveness with which the objectives
  are met
• Generally separate publications on each subject
  of performance audits.
• Wide-ranging in nature, open to interpretations
  and subjective judgement.

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Difference Overlap (Cont)

• Regularity Audit
• Financial audits do not generally include the
  elements of performance audits.

• Performance Audit
• There can be overlap
• in the sense that the performance audit may
  encompass techniques methodologies applied
• to financial audit.

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Requirements of Performance Audit

• In-depth knowledge of various laws , social
  sciences, economics, development studies, public
  affairs, science, and technology, etc.
• Performance audit to be taken up as an mission
  and to be planned and implemented by a dedicated
  team led by an officer of the middle management
  level

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Requirements of Performance Audit (Cont)

• Performance auditor to maintain
• Integrity
• Objectivity and fairness
• Confidentiality
• Technical standards
• It may be desirable that the performance auditor
  adopts an attitude of professional scepticism
  throughout the audit, recognising that
  circumstances may exist that could cause the
  information relating to performance to be
  materially misstated

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Audit Management Process Documentation

• The process documentation will consist
• documentation of performance audit management
• from strategic planning to follow up procedure
  .
• The process documentations of conscious decisions
• will apply, among others, to selection of
  evidence
• gathering techniques and sources of evidence
  to
• fulfill the audit objectives, evidence analysis
  techniques,efforts for continuous dialogue
• with the entity, assessment of skill and
  knowledge
• required for performance audit and those
  available
• in-house, need for expert/consultancy
  services,
• outsourcing etc..

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Impact Evaluation of Performance Audit

• Internal evaluation of the Impact of performance
  audits, at the close of each year, on governance
  in general, and on the entitys policies and
  programme management, in particular will help to
  attain a 3600 feedback for the performance Audit
  endeavour.

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Session Summary

• In this session we discussed
• Mandate for performance audit
• Definition of performance auditing, 3 Es concept,
  Equity and Ethics
• Specific nature of Performance Audit
• Performance Audit and Programme evaluation
• Common types of Programme Evaluation
• Performance Audit Process
• Expected outcomes of performance auditing.
• Objectives of Performance Auditing
• Difference between Performance auditing and
  Financial auditing.
• What performance auditing requires from the
  auditors.
• Analyse the performance auditing cycle.
• Importance of documentation of decisions at
  various stages of the performance audits.
•  Recognize why the impact of the performance
  auditing needs to be evaluated.