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New opportunities: a CPA's primer on performance auditing.

The need and demand for CPAs to conduct performance audits of government operations are increasing. Independent public accountants experienced in performing financial audits of governments are well suited to conduct performance audits. However, it's important they understand the differences in audit objectives and methodologies for performance audits, and be sensitive to the political nature of the environment. This article describes the types of performance audits and applicable auditing standards. It also explains the three stages of a performance audit: preliminary survey, field work and reporting. Illustrative audit objectives, subobjectives and program steps for a performance audit of a hazardous waste treatment program demonstrate the audit process.


Until recently, performance auditing of government operations had been considered primarily the responsibility of government auditors. However, three changes in the government environment have increased the need and demand for performance auditing by external auditors. Since the 1970s, shrinking government resources coupled with a growing demand for public services have pressured governments doing more with less. Ironically, this financial squeeze often limits budgetary support for the internal audit functions intended to ferret out inefficient and uneconomical practices. Consequently, governments often turn to external auditors to conduct performance audits.

Government auditing standards and generally accepted accounting principles for governments have progressively extended into performance-related areas. The 1988 revision of Government Auditing Standards (commonly referred ti) as the yellow book"), published by the comptroller general of the United States, details separate standards for financial and performance audits that closely mirror one another in assessing internal controls and compliance with legal and regulatory requirements. In addition, the Governmental Accounting Standards Board has been conducting research on the measurement and reporting of service efforts and other government accomplishments. Perhaps within this decade, reporting of performance indicators by government units will be required. Accompanying such a requirement would likely be some auditor attestation responsibilities akin to performance auditing.

There is an ever-widening "expectation gap" between users of government audit reports and auditors. Because of the increasing demand for public accountability, government audit report users often assume performance auditing is included in the scope of an engagement, even though such a requirement is not clearly stated in the audit objectives.


The yellow book defines two types of performance audits: economy and efficiency audits, and program audits. Economy and efficiency audits, the most common, include determining whether the government is acquiring, protecting and using its resources economically and efficiently, the causes of any inefficiencies or uneconomical practices and whether the government is in compliance with laws and regulations concerning economic and efficient operations. A sound financial auditing background is extremely useful in conducting this type of engagement. Economy and efficiency audits may, for example, entail evaluating the government's procurement practices, staffing or operating procedures to ensure resources are used efficiently and economically.

Program audits include determining the degree to which programs achieve the results desired or benefits expected by the governing body, program effectiveness and government compliance with applicable laws and regulations. Sophisticated auditing techniques often are employed in comparing actual and desired program performance. Audit techniques can range from evaluating statistical data for determining if an appropriate! number of clients were served, to user satisfaction surveys evaluating how well services were delivered. Sophisticated statistical applications, such as time series analysis and work sampling, may be used. Although the objectives of a program audit ma3, require the independent public accountant to obtain the services of specialists, the analytical skills gained through years of financial auditing will likely be useful as well.


The yellow book contains government auditing standards for conducting performance audits. Exhibit 1, page 63, outlines the general, field work and reporting dards for performance audits. These standards provide a useful framework for defining the scope of the audit, and can provide a "safe harbor" for the auditor in justifying the extent of audit work performed. This is particularly important for performance auditing, as expectations of report users often greatly exceed the auditor's work. Even if the government's request for an audit services proposal does not require adherence to applicable government auditing standards, the auditor would benefit from complying with them, and referencing them in the audit proposal, engagement letter and audit reports.

The most notable difference between financial and performance audits lies in their scope. The scope of financial audits is usually well defined, and generally accepted auditing standards provide specific guidance for audit planning, field work and reporting. In contrast, government auditing standards applicable to performance audits provide only general guidelines for conducting the audit, and the scope of performance audits varies considerably depending on audit objectives. Unfortunately, government officials contracting for a performance audit may not have clearly defined the audit objectives, placing the auditor at greater risk of not meeting user expectations. The auditor should make certain that agreement is reached on audit objectives, and may actually need to assist in defining these objectives. Exhibit 2, page 64, shows sample audit objectives for a performance audit of a hazardous waste treatment program.

Once audit objectives have been clearly defined, the audit progresses through three interrelated stages: a preliminary survey, audit field work and report preparation. Basically, a performance audit proceeds in the same manner as a finacial audit. The major differences in approach result from the nature of the audit objectives and the techniques and methodologies employed to meet these objectives.

Stage I-preliminary survey. This is a screening device that aids in assigning limited audit resources among audit objectives and subobjectives. The purpose of a preliminary survey is to obtain working knowledge of the program as quickly as possible, including identifying available data sources and areas for which further work may be necessary to meet audit objectives. An important outcome of the preliminary survey is a breakdown of specific audit areas to be addressed, in order of priority, and the allocation of audit hours budgeted for each area. This planning stage is critical to the timely and effective completion of the audit and may consume as much as 25% of total budgeted audit hours.

During a preliminary survey, the auditor obtains an understanding of the program through interviews with top agency management and other personnel and with knowledgeable individuals outside the organization. A variety of documents are reviewed, such as the agency's authorizing legislation, organizational chart, procedure manuals, mission statement, budget, financial statements and other documents related to the audit objectives. Reviewing previously issued studies dealing with similar programs of other agencies may help the auditor develop specific audit areas. The preliminary survey also affords the auditor a good opportunity to become familiar with any laws, rules and regulations governing program operations relating to audit objectives. During the preliminary survey and throughout the audit, the auditor gathers information on both potential problem areas and the principal accomplishments of the program.

After obtaining an understanding of the program, the audit may be broken down into component parts. Audit objectives should be broken down further into subobjectives, or specific audit areas that have the greatest potential for yielding operational improvements. Potential problem areas disclosed during the preliminary survey may develop into audit findings during the field work stage of the audit. As it is neither feasible nor desirable to evaluate all aspects of a program, identifying specific audit areas is important. Exhibit 3, page 66, shows sample subobjectives for the four audit objectives of the hazardous waste treatment program outlined in exhibit 2. As this example illustrates, subobjectives may be stated in the form of questions to be answered during field work.

The next step is to break down the subobjectives into specific tasks or audit steps to be completed during field work. Exhibit 4, page 69, outlines some of the steps an audit staff could complete under audit objective no. 3 for a hazardous waste treatment program. Care should be taken to ensure that audit procedures are designed to meet the standards included in the yellow book. For example, the audit should include an assessment of program compliance with laws and regulations necessary to meet audit objectives.

The audit objectives, subobjectives and specific audit procedures make up the audit program, which is completed as part of the preliminary survey. The yellow book requires that written audit programs be prepared including background information about the program, a description of the objectives and scope of the audit, audit methods to be employed, any necessary definitions or special instructions and a description of the resulting reports.

The preliminary survey is an important step for demonstrating and ensuring compliance with several general and field work standards of performance auditing, including adequately planning- the audit and exercising due professional care. This step is also important because its successful completion helps the auditor meet audit objectives within time and budget constraints, and can also improve the quality of the audit by focusing attention on areas with the greatest potential for improvement.

Stage 2-field work. As with a financial audit, performance audit field work consists of carefully executing the audit program and documenting the results. The field work standards for performance audits outlined in exhibit 1 closely parallel those for financial audits under government auditing standards. However, what constitutes sufficient, competent and relevant evidence in a performance audit can vary as widely as the audit objectives. This requires the auditor to exercise greater initiative and judgment in designing the audit program and conducting field work. For example, obtaining evidence supporting a finding that a governmental unit has not established a program to ensure that production of hazardous waste is minimized is significantly more complex than documenting that accounts receivable have! been overstated. The auditor will generally find more time is required for performance audits than for financial audits. The actual time required to complete a performance audit is largely controlled by the audit objectives.

One of the most difficult aspects of performance auditing is that criteria for assessing program performance are seldom readily available. In assessing financial operations, there are many agreed upon norms or standards for how financial operations should be conducted, but this is not the case in performance auditing. Ideally, at the time the program is established, governing bodies would define what constitutes successful performance and how it should be measured. This seldom occurs in practice. Consequently, the auditor must develop performance criteria.

Returning to the hazardous waste treatment program example illustrates how an auditor might develop audit criteria. Audit objective no. 2, in exhibit 2, requires the auditor to evaluate the procedures used to reduce hazardous waste production. Assuming the criteria for evaluating these procedures were not defined when the program was established, the auditor must develop performance criteria through inquiries of program administrators, federal oversight agencies, environmental organizations and others. Much of this information can be gathered during the preliminary survey. During field work, the auditor would consider whether program operations meet the standards for program success developed during the preliminary survey. This might include conducting onsite reviews of district operations, or interviews of sample businesses that generate hazardous waste to inquire about the level of oversight program officials have exercised to ensure waste is minimized.

Another customary method for developing performance measurement criteria is to gather program performance information from comparable programs in other jurisdictions, particularly those with a reputation for excellence. This provides the auditor with a standard against which to measure the program under audit and may yield recommendations for operational improvements. For instance, data about the number of on-site inspections made by program officials of businesses that generate hazardous waste could be compared with similar data for other jurisdictions.

Since a goal of performance auditing is to bring about operational improvements, it's important that a consensus be reached with program administrators that the performance criteria used will be appropriate. Frequent meetings with auditee staff and officials arranging for the audit can contribute significantly to developing meaningful audit recommendations. continued on page 66

All the audit techniques used in financial auditing are applicable in performance auditing. For example, inspections, interviews, systems flowcharts, statistical and nonstatistical sampling and ratio analyses may all be useful, depending on the performance audit objectives. However, a broad range of additional techniques may be necessary, particularly when audit objectives call for evaluations of program aspects such as service delivery, productivity or staffing levels. These evaluations may include user satisfaction surveys and industrial engineering techniques, such as work sampling and time studies, that may require expert assistance. Regardless of which audit techniques are used, it's important to evaluate the reliability of data sources, as would be done in a financial audit. The yellow book provides specific guidance for evaluating the reliability of computer-processed data.

Stage 3-reporting. Government auditing standards require that a written audit report be prepared to communicate the results of the audit. The report includes a statement of audit objectives and a description of the audit scope and methodology. The report also includes a discussion of the auditor's findings and conclusions. The findings reported in a performance audit are similar to those reported for financial audits in that both include as many of the five elements of criteria, condition, cause, effect and recommendations as practicable.

In order for performance audit reports to be complete, accurate, objective and convincing, the finding length tends to exceed that of a financial audit. This is understandable considering the potential complexity of audit objectives and the need to develop criteria. Although the reports should be as clear and concise as the subject matter allows, it is not unusual for a complex finding to exceed 10 pages. The length of the reports, and the fact the reports emphasize audit exceptions or problems, require the auditor to be sensitive to choice of words and tone.

The yellow book also requires the report to include a statement that the audit was made in accordance with generally accepted government auditing standards, and disclose when standards were not met. Significant internal controls assessed as part of the audit should be disclosed with any significant weaknesses identified. All significant instances of noncompliance and abuse, and all indications of illegal acts that could result in criminal prosecution uncovered during the audit, also must be disclosed. To provide a balanced presentation, the auditor may describe in the report any noteworthy accomplishments identified during the audit.

Similar to audit reports prepared in accordance with the federal Single Audit Act of 1984, performance audit reports include the auditee's response, incorporating the views of responsible program officials concerning the auditor's findings and recommendations, and a description of planned corrective action. The auditor can help narrow the expectation gap for report users by specifying any needed audit work not performed because it was unrelated to audit objectives.


The environment in which a performance audit is conducted is very different from that encountered in conducting a financial audit. A performance audit may seem more adversarial due to the sensitive nature of the questions addressed and the value judgments that must be made in evaluating programs. Program administrators may feel performance audits are more threatening since the reports may criticize management effectiveness, and often receive considerable attention by governing bodies, the public, and the media. Because few standards are available for conducting performance audits and for measuring program effectiveness, disagreements about approach and conclusions are more prevalent than in a financial audit environment.

lt's also important to recognize there may be more stakeholders, such as governing bodies, agency administrators, constituents and special interest groups, interested in the results of a performance audit. The results may affect the continued funding level of a program and possibly its existence. External auditors need to be sensitive to the political nature of performance auditing in the government sector.

Independent public accountants should not hesitate to venture into performance auditing since their background and experience would be beneficial in conducting such audits. Independent public accountants know how to gather and document evidence supporting audit conclusions. This expertise, coupled with the ability to solve problems creatively, can result in excellent performance audits.

The auditor also needs an appreciation of the distinctive nature of audit objectives, the variety of audit techniques necessary to address audit questions and the sensitive nature of performance auditing. Because of the variety of techniques utilized, the auditor needs to know when specialized outside assistance is necessary. However, these qualities and challenges make performance auditing interesting and rewarding. The demand for performance auditing is increasing, and the independent public accountant should seriously consider accepting the opportunity-and the challenge. n
COPYRIGHT 1991 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Blessing, Linda J.
Publication:Journal of Accountancy
Date:May 1, 1991
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