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INTRODUCTION TO PERFORMANCE AUDITING

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  1. INTRODUCTION TOPERFORMANCE AUDITING DAY 1 SESSION NO.3 (THEORY) BASED ON CHAPTER 1 PERFORMANCE AUDITING GUIDELINES RTI, MUMBAI / CH 1

  2. 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 RTI, MUMBAI / CH 1

  3. 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. RTI, MUMBAI / CH 1

  4. 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, RTI, MUMBAI / CH 1

  5. 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 RTI, MUMBAI / CH 1

  6. 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. RTI, MUMBAI / CH 1

  7. 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 RTI, MUMBAI / CH 1

  8. CAG`S 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 RTI, MUMBAI / CH 1

  9. 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 RTI, MUMBAI / CH 1

  10. 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. RTI, MUMBAI / CH 1

  11. 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. RTI, MUMBAI / CH 1

  12. CAG`S 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 RTI, MUMBAI / CH 1

  13. 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. RTI, MUMBAI / CH 1

  14. 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. RTI, MUMBAI / CH 1

  15. 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 RTI, MUMBAI / CH 1

  16. The components of Performance Auditing • ECONOMY • EFFICIENCY • EFFECTIVENESS • EQUITY • ETHICS RTI, MUMBAI / CH 1

  17. 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. RTI, MUMBAI / CH 1

  18. 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; RTI, MUMBAI / CH 1

  19. 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. RTI, MUMBAI / CH 1

  20. 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? RTI, MUMBAI / CH 1

  21. Effectiveness • Effectiveness is the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity. RTI, MUMBAI / CH 1

  22. Example forEffectiveness • 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; RTI, MUMBAI / CH 1

  23. Equity • Equity in the context of programme management relates to fairness and impartiality in use of public funds RTI, MUMBAI / CH 1

  24. 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 RTI, MUMBAI / CH 1

  25. 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 RTI, MUMBAI / CH 1

  26. 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. RTI, MUMBAI / CH 1

  27. 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. RTI, MUMBAI / CH 1

  28. 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. RTI, MUMBAI / CH 1

  29. 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. RTI, MUMBAI / CH 1

  30. 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. RTI, MUMBAI / CH 1

  31. 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? RTI, MUMBAI / CH 1

  32. 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? . RTI, MUMBAI / CH 1

  33. 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. RTI, MUMBAI / CH 1

  34. 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. RTI, MUMBAI / CH 1

  35. 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 moreof these objectives are met. RTI, MUMBAI / CH 1

  36. 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. RTI, MUMBAI / CH 1

  37. 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. RTI, MUMBAI / CH 1

  38. 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. RTI, MUMBAI / CH 1

  39. 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. : RTI, MUMBAI / CH 1

  40. 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;   RTI, MUMBAI / CH 1

  41. 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. RTI, MUMBAI / CH 1

  42. Cont… • Performance not to confine to what has been done but to examine what has not been done to meet policy objectives RTI, MUMBAI / CH 1

  43. 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. Difference between Regularity Audit and Performance Audit RTI, MUMBAI / CH 1

  44. 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 DifferenceObjectives (Cont…) RTI, MUMBAI / CH 1

  45. 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 Difference Evidence (Cont…) RTI, MUMBAI / CH 1

  46. 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. Difference Academic Base(Cont…) RTI, MUMBAI / CH 1

  47. 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. Difference Approach and methodology(Cont…) RTI, MUMBAI / CH 1

  48. 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. DifferenceAssessment criteria(Cont…) RTI, MUMBAI / CH 1

  49. 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. Difference Report(Cont…) RTI, MUMBAI / CH 1

  50. 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. Difference Overlap(Cont…) RTI, MUMBAI / CH 1