What Is a Performance Audit?

A performance audit is an independent assessment of an entity's operations to determine if specific programs or functions are working as intended to achieve stated goals. Performance audits are typically associated with government agencies at all levels as most government bodies receive federal funding.

Key Takeaways

  • A performance audit is an independent assessment of an entity's operations, typically associated with government agencies.
  • The goal is to evaluate the performance of stated programs to determine their effectiveness and make changes if needed.
  • The standards for the audits are laid out by the U.S. Government Accountability Office (GAO).
  • The scope of a performance audit varies, but usually includes an assessment of effectiveness, efficiency, and compliance with legal requirements.

Understanding Performance Audits

In government, a performance audit is designed to examine the efficiency and effectiveness of a program, with the goal of implementing improvements. According to Generally Accepted Government Auditing Standards (GAGAS), the term "program" can include government entities, activities, organizations, programs, and functions.

The standards for the audits are laid out by the U.S. Government Accountability Office (GAO) and the principal aim is to provide objective data that may be used to reduce costs and make other improvements.

The specific objectives of an audit can vary. They may include effectiveness, economy, and efficiency of a program and compliance with legal requirements. An audit's scope is wide and can seek to determine fraud and wasteful processes that are a hindrance to the stated objectives of a program.

Requirements for a Performance Audit

The standards for the performance audit are laid out by the GAO and cover three areas: general, field, and reporting.

General Standards

General standards cover matters such as professional judgment, quality control (QC), and competence of the auditor and the audit process. General standards seek to ensure that the auditor is independent, capable, and abides by internal QCs.

Field Standards

Field standards apply to planning, gathering material for evaluation, and preparing quality documentation. This topic seeks to outline the objectives, their purpose, and the manner in which they will be sought.

Reporting Standards

Reporting standards relate to the content of the report and the communication of the findings. These touch on the format of the audit report and lay out to whom the report must be disseminated and how. 

Benefits of Performance Audits

Once a performance audit is completed, the findings are delivered to the management of the specific organization or program. The goal is for them to use the findings to implement any changes to improve processes that will help them achieve the stated goals. Typically, a follow-up performance audit is done to assess whether management has implemented any of the audit findings and if there has been any improvement by doing so.

Performance audits serve a fundamental purpose of government accountability. Through performance audits government entities are held to objective standards of executing the responsibilities that they are legally authorized and charged to carry out.

Higher-level appointed staff and elected officials review the results of audits to oversee the proper, legal, and cost-effective operation of public services and programs. Publication of the results allows the public to see if certain programs are worth their tax dollars, and they can use the information to make educated voting decisions. 

Business Audits

Performance audits are also implemented in the business sector and follow many of the same stated goals and procedures.

In the investment world, a performance audit may be conducted on an asset manager by an outside accounting firm to verify that the performance figures shown to the public represent actual results. The CFA Institute has established performance guidelines, called Global Investment Performance Standards (GIPS). Though voluntary, they help ensure full disclosure of investment practices.