Module 4 - Introduction to Performance Audit_4A

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4A. Introduction to Performance Auditing (10%) 4A. Learning Outcomes On completion of this Module, students will be better able to: Define performance auditing as it is conducted in the public sector. Differentiate performance auditing from other types of audit engagements (notably financial and conformance). Differentiate between the performances audits of internal auditors and external auditors (especially those conducted by SAIs). Identify appropriate standards and competencies for performance auditing. Describe the importance of supervision in performance auditing. Describe the importance of materiality in performance auditing. Assess the importance of audit recommendations. 4A.1 The Role of Performance Audits in the Public Sector Performance audits (also known as operational or value for money audits) are a distinctive feature of public sector auditing (although they can be applied to private sector organizations and activities). They are routinely conducted by both internal auditors and external auditors. Definition of Performance Auditing The Institute of Internal Auditors (IIA) offers a brief definition of performance auditing in Practice Guide: Unique Aspects of Internal Auditing in the Public Sector: Evaluations of achievement of agency/program stated outcomes to determine whether public funds have been used with economy, effectiveness, and efficiency, also known as operational or value-for-money auditing. 1 For external auditors, performance audits are one of the three main types of engagements recognized by the International Organization of Supreme Audit Institutions (INTOSAI) (the other two being financial and compliance audits, with additional consideration given to jurisdictional audits). INTOSAI provides the following definition: Performance auditing carried out by SAIs [Supreme Audit Institutions] is an independent, objective, and reliable examination of whether government undertakings, systems, operations, programmes, activities, or organizations are operating in accordance with the principles of economy, efficiency, and effectiveness and whether there is room for improvement. 2 (The three key terms economy, efficiency, and effectiveness are defined below.) This definition is equally applicable to performance auditing conducted by internal auditors, although different (but comparable) professional standards are used, and the scope of an internal audit engagement is limited to the entity (or entities) to which the auditors are accountable. The scope of SAIs, by contrast, in evaluating the use of public funds in respect of national priorities, is the entirety of the public sector, although many entities and their 1 Practice Guide: Unique Aspects of Internal Auditing in the Public Sector, The IIA, 2022. 2 ISSAI 3000 Performance Audit Standard, INTOSAI, 2019. 6
activities, especially those of lower tier or local government, may be audited by other external providers according to legal and regulatory requirements. A definition specific to internal audit is offered as follows: Performance auditing is a technique used by internal auditors to evaluate the economy, efficiency, and effectiveness of the organisation’s operations so as to assure management that its strategic objectives are being carried out and whether or not they can be improved on. The scope of the audit is expanded beyond the verification of financial controls or compliance with policies as it looks for the existence of management measures such as leadership, employee empowerment, teamwork, risk assessment, management information, communication, resource allocation, productivity measurement, etc. Performance auditing therefore requires flexibility, imagination and analytical skills to provide organisations with innovative solutions and new ideas. 3 Describing it as a “technique” is not intended to narrow what in reality embraces a framework, approach, and set of activities which are collectively applied to performance auditing. The potential scope of performance audits is constrained only by practicalities such as resources. In principle, auditors can focus their attention to where it is most needed depending on perceived priorities which may be subject to change over time to include topical issues such as sustainability, public health, and matters relating to access, diversity, equity and inclusion. In general terms, all audits can be classified under two broad headings: Verification auditing, where auditors validate information prepared by another party. Information development auditing, where auditors develop new information. 4 In many cases, audit engagements include a combination of verification and information development. Compliance and financial audits belong to the former, performance audits to the latter. In practice, many performance audits include elements of compliance, financial, and IT audits as ways of evaluating performance (although the purpose is not to arrive at an opinion on the accuracy of financial statements). While the IPPF covers all internal audit services and makes no real distinction among types of audits, Standards 2120 (Risk Management) and 2130 (Control) direct internal auditors to make evaluations in the context of: Achievement of the organization’s strategic objectives. Reliability and integrity of financial and operational information. Effectiveness and efficiency of operations and programs. Safeguarding of assets. Compliance with laws, regulations, policies, procedures, and contracts. 5 3 Performing Auditing, KPMG, 2013. 4 See Rauum and Morgan, Performance Auditing: A Measurement Approach, The Internal Audit Research Foundation, 2009. 5 The International Professional Practices Framework, The IIA, 2016. 7
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Module 4 - Introduction to Performance Audit_4A

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