INTRODUCTION TO
PERFORMANCE
AUDITING
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Learning objectives
• By the end of this session you
will be able to understand the
background of performance
audit
• distinguish performance audit
from financial audit
• understand the significance of the 3 Es for
performance audit
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Accountability
Definition:
• Obligation to answer for responsibility
conferred
• This presumes the existence of at least
two parties namely
Party who allocates responsibility and resources
Party who accepts responsibility
with the undertaking to report
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ACCOUNTABILITY
RELATIONSHIPS
FEDERAL
COUNCIL
AUDITOR GOVERNMENT
GENERAL
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Public Spending and
Accountability
How government spends public money
is very important to citizens
o Federal Council authorizes government
spending and programs
o Government is obligated to account to
federal council how the money was
March 30, 2025 spent
Key question: How does federal council
get the assurance that the
information provided by government
is credible and complete?
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Historically auditor general’s
role has been to answer the
following questions
Is govt. keeping proper
accounts/records and presenting
financial information accurately?
(Financial Audit)
Did the govt. collect or spend the
funds authorized by federal council
and for the purposes intended?
(Compliance audit)
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Financial Audit
• Auditor examines auditee’s financial
statements and expresses opinion
as to whether accounts “present
fairly” (“give a true and fair view”)
• For each account (cash, etc.)
generally accepted accounting
principles (GAAP) define what
“presents fairly” means
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Compliance Audit
• Auditor examines whether auditee
is in compliance with laws,
regulations, rules and policies
• Separate compliance audits very
common in public sector
• Financial audits and performance
audits in public sector usually have
compliance with authority element
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Financial and compliance audits
Expressed opinions on financial
statements
•Dealt with issues of legality, regularity,
fraud
•Reported on control of financial
transactions
•Reported on collection/custody of
revenues
BUT
This approach did not provide
information on
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Whether expected results were achieved
70s/80s – DEMAND FOR CHANGE
Started in USA, Canada, Europe
Were public expenditures achieving value for
money
Were public expenditures efficient and effective
Greater accountability from public managers
Traditional auditing could not provide such
information
NEW APPROACH NEEDED
PERFORMANCE AUDIT
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Historical background to PA
• PA goes back to the 1960’s
• Some of the pioneering countries
were USA, Canada and Sweden
• Introduced in the
AFROSAI-E/SADCOSAI regions in
the 1990s
• PA is now used in many countries
all over the world – a part of
modern government auditing
• In the beginning PA was linked to
programme budgeting
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Performance auditing
• PA has a special purpose
• PA deals with many different problems
• PA differs around the world but the core
concepts are the same
• PA has many names
Value for money audit
3Es audit
Effectiveness audit
Management audit
Operational audit, etc.
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Objectives of Performance Audit
The main objectives of a performance
audit are:
• To maintain and enhance public
accountability;
• To act as a force for beneficial change
in the management of resources and
the achievement of value for money;
• To encourage improved value for
money in government departments,
agencies etc. where improvements
are found to be necessary and cost
effective;
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Objectives of Performance Audit...
• To identify well performing
government organizations as
possible lessons to be emulated by
others;
• To enable to provide independent
information, advice and assurance
about the 3Es in the major fields of
revenue, expenditure and management
of other resources; (mgt., support)
• To induce and assist audited entities to
take action where improvements are
shown to be necessary and cost
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WHAT IS PERFORMANCE
AUDIT?
Systematic examination of
government activities to determine
whether value-for- money was
obtained from public expenditures
Value-for-money means:
• Were resources used with due regard
for economy, efficiency, effectiveness
and the environment (4Es)?
• Were the benefits achieved greater
than the costs incurred?
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Definition of performance
auditing(INTOSAI)
“Performance auditing is antheaudit of
economy, efficiency and effectiveness with
which the audited body uses its resources to
achieve its goals.”(
Or simpler:
“Are they doing the right things in
the best way?”
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Definitions of PA/ GAO
“Performance audits include economy and efficiency
and program audits.
Economy and efficiency audits include determining;
whether the entity is acquiring, protecting and using
its resources (such as personnel, property, and space)
economically and efficiently,
the causes of inefficiencies or uneconomical practices,
and
Whether the entity has complied with laws and
regulations concerning matters of economy and
efficiency.
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Definitions of PA/ GAO Cont.
Program audits include determining
the extent to which the desired results or
benefits established by the legislature or other
authorizing body are being achieved.
the effectiveness of organizations, programs,
activities, or function, and
whether the entity has complied with laws and
regulations applicable to the program.”
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Definitions of PA/ EPAM.
“an audit of economy, efficiency and effectiveness with
which a government organization, a program, a
project, an activity or a function uses its resources in
carrying out its responsibilities.” It embraces:
audit of the economy of administrative activities in
accordance with sound administrative principles and
practices, and management policies;
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Definitions of PA/ EPAM cont.
audit of the efficiency of utilization of human,
financial and other resources, including
examination of information systems,
performance measures and monitoring
arrangements, and procedures followed by
audited entities for remedying identified
deficiencies; and
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Definitions of PA/ EPAM cont.
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.
audit of the environmental effects of
government activities.
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AUDITOR GENERAL CONDUCTS
Financial audits
Compliance audits
Performance audits
THEY ARE COMPLEMENTARY, NOT SUBSTITUTES
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PERFORMANCE AUDIT - MANY
NAMES
Performance audit
Value-for-money audit
Comprehensive audit
Management audit
4Es audit
Operations audit
In all cases auditor examines performance
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PERFORMANCE AND FINANCIAL AUDITS
SIMILARITIES
Both
Use financial data
Follow an audit process and plan
Adhere to auditing standards
Follow principles of
independence and competence
Are evidence oriented
Are concerned about
accountability
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PERFORMANCE AND FINANCIAL AUDITS DIFFERENCES
Financial audit Performance audit
•Transactions/voucher •Objectives oriented
oriented •Examines all or part of
•Examines financial statement auditee’s activities with
assertions and compliance to respect to 4Es and goes
financial rules beyond compliance
•Gives opinion on financial •Requires indicators,
position of organization standards and targets to
•Does not use performance measure performance
indicators, standards and •Usually considers cost-
targets benefit analysis
•Does not usually consider
cost-benefit analysis
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PERFORMANCE AND FINANCIAL AUDITS DIFFERENCES (contd.)
Financial audit Performance audit
•Does not comment on how •Evaluates extent to
target groups are benefiting which target groups are
•Does not make benefiting
recommendations on •Makes
improvements recommendations on
•Usually quantitative improvements
•Uses financial data •Usually qualitative
•Usually post event, •Uses financial and non-
retrospective financial data
•Considers past, present
and even future
performance
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Performance and financial audit
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THE FOUR Es
• ECONOMY
• EFFICIENCY
• EFFECTIVENESS
• ENVIRONMENT
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ECONOMY
Deals with the acquisition of inputs
(physical, financial, human resources and
information)
Were inputs acquired at the most
economical price (lowest cost) while
maintaining quality?
The lowest price is not the best deal if the
quality is different
The lowest competitive bid may not be
enough because bid rigging is possible
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EFFICIENCY
Relationship between inputs and outputs
Optimum utilization of resources
Obtaining best productivity from
resources
Maximizing outputs from given inputs
OR
Minimizing inputs to obtain given outputs
without sacrificing quality
Doing things well
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EFFECTIVENESS
Relationship between outputs and
outcomes/impacts
Achieving pre determined objectives
Different kinds of effectiveness
Organizational effectiveness
Program effectiveness
Operational effectiveness
Most difficult E to measure because
Objectives may not be well defined
Not clear at which level to measure
performance – output, outcome, impact
Longer time horizons for outcomes/impacts
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AUDIT OF ENVIRONMENT
Is the government meeting its national
and international commitments to
protect the environment and promote
sustainable development?
To what extent are departments
meeting the objectives in their
sustainable development strategies
and implementing their action plans?
What is the number, nature and status
of environmental petitions from
Canadians on environmental issues?
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RESULTS CHAIN
Inputs
Outputs
Outcomes
Impact
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INPUTS
Resources employed to create outputs
Money
Materials
Human resources
Information/data
Auditor examines ‘economy’: were
inputs obtained at the most
economical cost?
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OUTPUTS
Goods and services produced by utilizing
the inputs
• Schools/classrooms built
• Roads constructed
• Telephone service provided
• Audit services provided
Auditor examines ‘efficiency’: were
inputs used most productively to
produce the outputs?
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OUTCOMES/IMPACTS
Actual results of the goods and services produced
(outputs)
% change in:
• people with new skills, people with
jobs, people who can support family
• tons of pollution emitted, level of CO
in the air, people with respiratory
illnesses
• cases of fraud and funds
misappropriation
Auditor examines ‘effectiveness: were
organizational objectives in the above
areas being met?
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THE FULL INPUT-OUTPUT MODEL
Goals
Activities at
Input the auditee Output Effects
Economy Efficiency Effectiveness
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The 3 E’s-
Economy Efficiency Effectiveness
Minimising Maximising Achieving
INPUT OUTPUT/INPUT intended
costs ratios effects at
low cost
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PERFORMANCE AUDIT STANDARDS
General: Code of ethics, due care, independence,
competence, supervision, consultation and
advice, documentation, communications
Planning: Entity knowledge, audit objectives,
issue selection, audit scope, audit criteria, audit
plan
Examination: Evidence, analysis and evaluation,
observations, conclusions, recommendations,
clearance with auditee management
Reporting: Form – cover letter, date, signature;
Content – standards used, program/activity
audited, period covered, audit objectives,
scope and criteria, observations, conclusions,
recommendations, entity comments.
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Audit Funnel and Audit stages
Audit Area
(General Problem
Audit Issue
Audit Problem
Audit design
Sub issues and criteria
Main Study /
Investigation
FINDINGS
CONCLUSIONS
RECOMMENDATIONS
Audit
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BENEFITS/OBJECTIVES OF
PERFORMANCE AUDIT
Provide independent
information and assurance on
4Es
Identify problems and causes
Locate opportunities for
improvement
Suggest solutions
Create awareness of how well
public resources are spent
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DIFFICULTIES/LIMITS OF
PERFORMANCE AUDIT
Difficulty in defining audit objectives/scope of
audit
Lines of accountability may not be clear
Some AGs have mandate restrictions
Cannot audit whether govt. policy is right or
wrong, only its implementation
Access to information may be
difficult/restricted
Measurement criteria not available/difficult to
find
Lack of staff skills and experience
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ADDITIONAL THOUGHTS
•Government is a complex business
•Govt. policies may have multiple,
sometimes conflicting, objectives
and overlapping jurisdictions
•Auditor must understand
auditee’s business
•Auditor must be able to
appreciate the ‘big’ picture and
proper context
•Requires multidisciplinary skills
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GLAD TO ANSWER
QUESTIONS
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