1. CHAPTER -7 Performance Audit 1

2. Contents  Meaning & definition  Scope and objectives  Performance audit Vs Traditional audit  Benefits of performance audit  Challenges of performance audit 2

3. Meaning  Performance audits examine the extent to which government programs or activities have achieved expected performance  Governments are expected to obtain and use inputs economically, conduct processes efficiently, and produce effective outputs that result in effective achievement of intended outcomes 3

4. Performance audit Meaning & definition  Performance auditing is an independent auditing process aimed at evaluating the measures established by management or the lack of these measures to ensure that  Resources have been acquired economically; and Utilized efficiently and effectively. (South African Institute of Chartered Accountants: SAICA) 4

5. Meaning & definition  Measures generally fall under categorizes namely:- Policy or policy making, Planning, Organizing, Coordinating and Monitoring.  Performance audit is “An independent examination of the efficiency and effectiveness of government undertakings, programs or organizations, with due regard to economy, and the aim of leading to improvements”. ( International Organization of Supreme Audit Institutions INTOSAI) 5

6. Meaning  Performance audit is an audit of sound financial management, namely of the economy, efficiency and effectiveness with which audited entities have carried out their responsibilities  Performance Audit invariably is referred to as Value-for-money audit or Operational audit 6

7. Meaning of PA  Performance audit is an objective and systematic examination of an entity’s program, activity, function, or management systems and procedures to provide an assessment of:  whether the entity in pursuit of predetermined goals has achieved economy, efficiency, and effectiveness in the utilization of its resources 7

8. PA  Laws usually provide legislative support for internal and external auditors in the public sector to conduct performance audits  Internal auditors may investigate whether there are adequate measures and procedures for the proper application of sound economic, efficient and effective management of public funds. 8

9. PA in public sector  From government’s perspective, PA assures government and through them the public that a program/activity is achieving the objectives set by the government.  Performance audit in the public sector takes place in an environment where it is the responsibility of the management of a given public sector unit to institute measures to:- 9

10. PA in public sector 1.Acquire resources of the right quality, in the right quantity, at the right time and place at the lowest possible cost (Economy); 2. Achieve the optimal relationship between output of services or other results and the resources used to produce them (Efficiency); and 3.Achieve policy objectives, operational goals and other intended effects (Effectiveness) 10

11. PA in public sector  Performance audit is anchored on three pillars referred to as the 3 E’s: Economy  Efficiency Effectiveness Performance audit 11

12. PA  Apart from examining aspects of economy, efficiency and effectiveness, performance audit also looks at whether management measures are in place or that are inadequate for ensuring attainment of the 3 E’s.  Therefore,performance audit would ensure that the reasons for inadequate management measures or the causes for the ineffectiveness, inefficiency and uneconomical procurements are identified 12

13. The full input-output model 13 Economy Efficiency Input Activities at the auditee Goals Output Effects Effectiveness

14. The 3 E’s B3.14 EconomyEfficiencyEffectiveness Minimising INPUT costs Maximising OUTPUT/INP UT ratios Achieving intended effects at low cost

15. VFM 15

16. Scope of PA  The scope of performance audit also includes assessment of the effects or impact of management measures on the 3E’s, followed by recommendations for corrective measures.  It is necessary to determine what the effects or impact of the inadequate management measures were on service delivery 16

17. Scope of PA  PA makes a significant difference and benefits the whole community in general. This was argued to be achieved through:  Improved public administration and then through improved governance  Professionalism and independent evidence  Examining and learning from prior program implementations  Fostering continuous improvement  Addressing issues of concern to the public, parliament and government 17

18. Objectives of PA  The primary objective of performance audit is threefold: It has to confirm independently that adequate measures exist to: 1.Ensure that the stated standards for economy, efficiency, and effectiveness are achieved 2.Provide management with information on adequate and inadequate management measures by means of a structured reporting process 3.Explain the effect or impact of the management measures 18

19. PA Model  The underlying model for undertaking a performance audit involves first clarifying the objective of the audit. This involves determining  whether the performance audit is aimed at auditing the economy of input use,  the efficiency of program processes, or  the effectiveness of program outputs and outcomes  In other words, the aspects of performance to be examined 19

20. PA Model  If the objective is to measure the efficiency of a program, the performance audit would involve the following steps:  Establish the efficiency measures (or indicators) that will be used for the audit: A key step is critiquing existing measures against standard criteria for good measures and identifying where measures are deficient. 20

21. PA Model  Establish the criteria to be used  Determine the validity of the efficiency reports produced by the program  Determine whether the achieved efficiency levels meet the established goals or criteria  Determine what causes the efficiency rates to vary from the criteria  Formulate the performance audit finding and recommend efficiency improvements 21

22. Conducting PA Conducting the Performance Audit  Performance auditing is carried out in three/four phases: planning, fieldwork, and reporting A. Planning: Unlike financial audits, performance audits are seldom repeated: This variation among the government’s programs means that auditors must create a unique audit to evaluate the most significant issues of each program. 22

23. Conducting PA  Planning involves the following steps 1.Gathering information : on the type of activity, review the activity’s enabling legislation, and familiarize themselves with its plans, budget and expenditure trends, and program processes 2.Assessing risks: Identify the inherent risks, rank the risks based on the potential impact on the organization, prioritize the risks 23

24. Conducting PA 3. Assessing vulnerability to risks: assess vulnerability by evaluating the controls and making judgments about whether the controls are likely to be effective. 4. Defining/refining the audit objectives: Towards this, - Understand the primary report user - Identify the subject, problem, or concern that will be explored 24

25. Conducting PA  -Create an “input-process-output- outcome” diagram, and determine if it concerns processes, outputs, or outcomes.  Decide which aspect or aspects of performance to include in the audit (economy, efficiency, effectiveness 5.Determining the audit scope, methodology, fieldwork program, and audit budget 25

26. Conducting PA B. Fieldwork  The fieldwork program sets out the required tasks and maps out processes for each aspect of fieldwork. The rigor and security of data collection play an important role in the data’s ultimate credibility as audit evidence  The audit team’s composition, characteristics, and training must be adequate to minimize bias and interpretation errors 26

27. Conducting PA  When undertaking data analysis and interpretation, it is important to ensure that all competing explanations for effect and cause are considered C. Reporting  The decision on reporting medium will be based on the audit organization’s relevant auditing standards and the customer’s needs— both for timeliness in receiving the audit results and for the ultimate use to which the findings will be put. 27

28. The report will include. Suggested improvement in the operation with existing policies of the unit. A list of situations in which compliance with existing policies and procedures is less than adequate. 28

29. 29 D. Follow-up After completion of the draft report there is a need to an exit conference to review deficiencies disclosed in the audit report are satisfactorily handled This follow-up responsibility may be given to a line organization or staff group, but most frequently is held to be a responsibility of the audit staff. It is some times desirable to make brief reexaminations after a reasonable time to ensure that all significant recommendations have been implemented

30. PA Vs. traditional audit Audit ComponentPerformance AuditingInternal Auditing Objective To evaluate management measures in order to ascertain achievement of the 3 E’s To assess compliance, risk management, governance and controls Focus Mainly programs, projects, systems or activities; specific attention is directed management measures associated Risk management processes, governance and controls. Audit Criteria Usually more subjective but often based on best/better practices which represent “good management”. Varies from audit to audit Relatively fixed and usually predefined e.g. by legislation Compliance with prescript and all types of legislation tested MethodologySymptom/indicator – basedRisk – based 30

31. Quiz 10 minute What is the difference between an performance audit and a Financial audit from an internal audit department perspective ? Explain with Example take one public organization for discussion 31

32. Discussion 1. what are the Benefits of performance audit ? 2.List Challenges of conducting performance audit 32

33. Benefits of PA  Performance audit in the public sector provides the Government with an avenue to demonstrate to the public whether it has fulfilled its responsibilities with regard to accountability of resources  Performance Audit, therefore, helps in holding implementers of Government programmes accountable for the economic, efficient and effective discharge of programmes 33

34. Benefits of PA  This may promote better public service delivery while enhancing public accountability and management.  Benefits of performance audits in the public and private sectors are generally similar, although in the private sector focus is largely on improving efficiency and effectiveness of operations in order to maximize profits and value to shareholders 34

35. Benefits of PA More specifically, PA  Helps in the identification of problem areas, including factors that cause problems.  This helps in finding alternative solutions,that is, through recommendations for improvements to policies, procedures and structure which could help in reducing wastage and inefficiencies 35

36. Benefits of PA  Helps in evaluating performance of individuals and departments or sections in an organization. Evidently, performance audits assist in obtaining a critical view of compliance with legal requirements, policies, objectives and procedures  Helps citizens obtain insight into the management of different government programs and activities  Performance audits may serve as a basis of decisions on future funding and priorities 36

37. Challenges of PA  Implementing performance audits in the public sector has generally come with a number of challenges, given that this type audit is relatively new.  The major pitfall of conducting performance audits in the public sector arise from the following salient issues 37

38. Challenges of PA 1.Outputs and outcomes are hard to identify and measure especially in the short term 2.National plans may not be linked to strategic plans for Ministries, regions and Spending Agencies. Consequently, outputs and outcomes are hard to identify and measure 3.Budgetary constraints in the sense that programs and activities may not be fully implemented due to either inadequate or lack of funding 38

39. Challenges of PA  While the auditor general has been regularly conducting performance audits, internal auditors on the other hand has not been carrying out such audits. The major challenges faced by internal auditors to conduct performance audit, among others, include the following:  Inadequate staffing  Lack of expertise to thoroughly conduct performance audits; and  Lack of guidelines on how to conduct performance audits 39

40. THE End ! Thank You All! 40

41. Inputs: – Measures or indicators of inputs concern the use of personnel, equipment, material etc. – Inputs are usually expressed as the amount of expenditure or staff time. When expressed as a ratio of outputs and outcomes, input indicators are used to measure efficiency and effectiveness. Outputs: – Outputs refer to the goods and services provided by a program or an activity (E.g. No of children vaccinated). – Output indicators are used to assess efficiency 41

42. Outcomes: – Outcomes correspond to the ultimate policy purpose, or the desired ends of a policy, that are achieved by producing the outputs (E.g. reduction in the number of cases of a particular disease) – The term impact is used as a synonym for outcome, is more properly defined as the value added from the activity. Intermediate outcomes: – Are expected to lead to the ends desired, but are not in themselves ends. 42