AUDIT:Economy, Effectiveness, Objectives of Performance Audit, Concepts

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Introduction To Public AdministrationMGT111

LESSON 31

AUDIT

At the end of lecture the students will be able to:

- Understand the concept of audit and audit in government

- Understand the concept of Performance Audit

- Understand Audit as control tool

Audit is a specialized area of financial management and control. Their instruments of control are

governments rules, regulations and procedures which must adhered to when making financial transactions.

Definitions of Audit

Following are some of the definitions of audit:

It is an examination and verification of a company's financial and accounting records and

supporting documents by a professional,

It is a formal examination of an organization's accounts or financial situation. An audit may also

include examination of compliance with applicable award terms, laws, regulations and policies after

transactions are made.

It is the examination of some or all of the following items: documents, records, reports, systems of

internal control, accounting procedures, and other evidence, for one or more of the following

purposes:

An examination and verification of a company's financial and accounting records and supporting

documents by a professional

A formal examination of an organization's individual accounts or financial situation. An audit may

also include examination of compliance with applicable award terms, laws, regulations and policies.

The examination of some or all of the following items: documents, records, reports, systems of

internal control, accounting procedures, and other evidence, for one or more of the following

purposes: (a) determining the propriety, legality, and mathematical accuracy of proposed or

consummated transactions; (b) ascertaining whether all transactions have been recorded; and (c)

determining whether transactions are accurately reflected in the accounts and in the statements

drawn there from in accordance with accepted accounting principles.

Article 169 of the Constitution gives the functions of the Auditor General, who heads the Audit &

Accounts organization of Government of Pakistan. This organization, under the Audit & Accounts Order

1973 ensures that the public money is spent and transactions are made in accordance with the financial

rules.

The accounts of federation and of provinces will be kept according to the principles and methods

given by the Audit & Accounts Order and rules and procedures. All the accounts will have to be submitted

to the President in the case of federation and to the Governors in case of the Provinces who will put before

the respective assemblies.

Use of Public Money

Public money is the money from tax and non tax revenue and borrowed money. This money has to

be spent according to the laid down procedures (Drawing and disbursing Handbook). The fundamental

principle of spending public money is to spend public money in a manner as one would spend ones own

money.

Definition of Performance Audit and Value for Money

While audit is like a "post mortem", after the event or financial transaction has taken place it

verifies whether rules were adhered to. In performance audit the whole working of the organization is

analyzed.

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Performance audits are value for money audit and the use of resources by public sector

organizations in relation to its achievement of goals. Although performance audit can be very wide-ranging,

in broad terms, it can be applied to:

Those activities involving a considerable level of resources

Projects that are at risk of failing in their objectives

Issues which are of concern to Parliament or the Public Accounts Committee, (Public

Accounts Committee is a committee of parliament which reviews the accounts of all

government organization every year).

The term "value for money" refers to the way in which resources (financial, human or physical)

have been allocated and utilized by the entity (organization).

Following definition has been used for performance audit:

"A performance audit "is an objective and systematic examination of a

public sector organization's programme, activity, function or management

systems and procedures to provide an assessment of whether the entity, in

the pursuit of predetermined goals, has achieved economy, efficiency and

effectiveness in the utilization of its resources".

Performance audit, therefore, involves an independent assessment of whether economy, efficiency

and effectiveness have been achieved by organization. Now let us see each of the word used in definition to

have better understanding of performance audit.

Economy

Economy is concerned with minimizing the cost of resources used (staff, materials and equipment)

for an activity in the pursuit of its objectives and whether they are in accordance with sound administrative

principles and practices and management policies. An economical organization acquires its input resources,

of the appropriate quality and quantity, at the lowest cost. In summary, economy means minimizing the cost

of resources used for an activity, having regard to quality i.e. spending economically, whilst maintaining

quality.

Example: Where standard items such as school or hospital supplies of a given quality are purchased at the

best possible price.

Example: Cost of a vehicle in comparison with another model of similar quality.

Efficiency

Efficiency is concerned with the relationship between goods and services produced (the outputs)

and the resources used to produce them (the inputs). An efficient entity produces the maximum output

from any given set of inputs. Alternatively, it may require minimum input. This will be reflected in increased

productivity and lower unit costs. In summary, efficiency means ensuring that maximum output of goods

and services has been gained from the resources used in their production i.e. spending well.

Example: Efficiency has improved when the unit cost of teaching children or providing hospital treatment

has been reduced over time; or where more children have been taught or hospital beds provided,

without additional resources.

Example: Reduction in repairs and maintenance cost of equipment, for example, vehicles, computers or

photocopiers, is a measure of efficiency

Effectiveness

Effectiveness is concerned with achieving predetermined objectives (specific planned

achievements) or goals and with actual impact (the output achieved) compared with the intended impact

(the objectives). Using a range of performance measures and indicators, it is possible to assess an entity's

effectiveness. In summary, effectiveness means ensuring that the desired results, objectives, targets or

policies have been successfully achieved i.e. spending wisely.

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Introduction To Public AdministrationMGT111

Example: Where there has been an improvement in school examination results or where sickness rates have

fallen as a result of medical care.

Example: Whether the purchased item or service provided was "fit for purpose".

The following model presented in Figure 1, illustrates the relationships between inputs, processes

and outputs and between economy, efficiency and effectiveness:

Figure 1

Economy, Efficiency and Effectiveness

Planned

Planned Inputs

Inputs

(Policy Objectives)

Economy

Efficiency

Effectiveness

Actual Inputs

Actual Outputs

Process

(Resources Used)

(Output Achieved)

The figure 1 illustrates that economy is related to plan inputs and actual input use which is

processed and it is what the actual outputs are. So there should be economy in use of resources, these

resources should be efficiently processed and should also be able to achieve/realize outputs, which will

show effectiveness in use of resources.

In practice, the boundaries between economy, efficiency and effectiveness are seldom clear-cut.

Examinations of Value For Money (VFM), therefore, normally pursue these various aspects of performance

simultaneously as part of the same exercise.

Objectives of Performance Audit

The primary objective of performance audit is to provide parliament with independent information,

assurance and opinion about economy, efficiency and effectiveness in major fields of revenue, expenditure

and the management of resources.

A secondary objective of performance audit is to identify ways of improving value for money and

to encourage and assist audit bodies to take the necessary action to improve systems and controls. Areas of

Performance Audit are that Performance reviews can be used to cover all types of management activities,

which must be audited for better use of resources.

Concepts

Audit:

it is the examination of financial records of an organization after

transactions have taken place at the end of financial year. It

reviews whether the rules of accounts were applied or not.

Performance audit:

it is the examination and analysis of all the activities of the

organization and it is seen that the money used has been able to

achieve objectives/goals economically, efficiently and effectively.

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