INTRODUCTION TO
PERFORMANCE 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.
8.
9.
10.
11.
12.
13.
Expected outcomes of performance auditing.
Objectives of Performance Auditing
Difference between Performance audit and
Regularity audit.
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.
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Mandate for performance audit
 Mandate
derived from the Constitution as
established by the C & A G’s 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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CAG`S 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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CAG`S 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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CAG`S 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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CAG`S DPC Act, 1971
Section 15 deals with
 Functions
of Comptroller and AuditorGeneral in the Case of Grants or Loans
given to other Authorities or Bodies
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CAG`S 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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CAG`S 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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CAG`S 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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CAG`S DPC Act, 1971

Section 19 deals with the Audit of Government
companies and corporations

Section 19A
Laying 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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CAG`S 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
previously imposed, or revision of charges;
were
 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…
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.
 The
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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/function/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 programme’s 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 people’s 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 entity’s
activities/programme.
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Difference Objectives
(Cont…)







Regularity Audit
Performance 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

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…)
Performance Audit
Regularity Audit






Test for assuring compliance
to laws, regulations and rules.
Financial statements
per se, accounting
documents, etc.;
Transaction documents
Conclusive nature of
evidence;






Conclusions related to
audit objectives.
Variety of forms of
evidence
Quite often qualitative in
nature;
Persuasive rather than
conclusive;
Evidence related to predetermined audit
objectives; and
Materiality guided more by
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Difference Academic Base
(Cont…)
Performance Audit
 Materiality by amount;  the nature or by context
rather than amount alone,
and
etc.
 Budgetary assumptions
 Always knowledge-based
and appropriation
of laws, social sciences,
authorisations, etc
economics,
 Generally accounting
development studies,
knowledge.
public affairs, science,
and technology, etc.
Regularity Audit
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Difference Approach and methodology
(Cont…)

Regularity Audit
Performance Audit
More or less standardised manual generally
forms the entire basis.

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

Performance 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.



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
entity’s 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.
RTI, MUMBAI / CH 1
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