You may be regretfully in the process of either preparing for an audit as the auditee or the auditor and thinking “this is a pain in the butt”. Although the annual audit may be a pain, because it’s time consuming and costly, the performance audit may provide more tangible benefits and actually save money.

Performance audit refers to the process of an independent examination or assessment of a particular program, operation, system, or function to determine whether the organization is achieving efficiency, effectiveness, and the fulfillment of its goals. Most performance audits are carried out by internal or external auditors in response to poor operating results or the failure to achieve program objectives.

Most performance audits usually follow a general flow of activity:


First, the selection stage happens when management or the Board identifies areas of performance for review. These may be areas that have obvious gaps in performance such as programs that are having difficulties in fulfilling organizational objectives. Some programs may not be cost-effective and becoming hard to maintain. Once the organization determines the need, they must determine who will conduct the performance audit. The auditor selected may be a member of the Board, management team or an independent third-party.

2. Planning

Just as in the annual financial audit, the performance audit must be properly planned. During the planning stage, the auditor determines the nature, timing and extent of the work and outlines the schedule for the performance audit. In planning the engagement, the performance auditor will determine the scope or focus of the audit and establish expectations, budget, scheduling and milestones. It is also important to develop a tracking system in order to prevent engagement creep. The final stage of engagement planning entails staffing. The auditor will need to determine if resources are available and if some tasks should be out sourced.

3. Review

Third, the auditor reviews the pertinent procedures, policies, data, and documents during the performance audit. The auditor should first collect and review data in order to gain an understanding of the department, program or function under examination. The auditor should also interview supervisors and staff and perform a walk-through. Supervisors and staff can provide valuable input, regarding strengths, weaknesses and vulnerabilities in the current systems or programs. Depending on the scope of the review, the auditor should perform tests to determine compliance with management’s expectations and to identify inefficiencies in the operations. Surveys of staff, customers or other stakeholders can also be a useful tool in evaluating the effectiveness of a product or service. Surveys are easily quantifiable and can be utilized together with other information gathered from documents relating to the performance review.

4. Reporting

Fourth, the auditor prepares the report. The report contains conclusions from the assessment of the program and highlights those areas that need the organization’s attention. Preliminary reports during specific stages of the audit is also helpful in determining if milestones have been met and may identify areas where a change in scope may be appropriate. The final report should also contain recommendations on how to improve the problematic areas for better performance, improve effectiveness, and efficiency in the future.

5. Follow-up

Lastly, the performance auditor conducts a follow-up to confirm that management has a clear understanding of the results of the performance audit. A follow-up on the problematic areas can also provide feedback on how management responded to the recommendations.

In essence, this is the general flow of a performance audit. There are several types of performance audit, such as tax audit, construction audit, energy audit, investigative audit, operational audit, compliance audit, and so on. The primary objectives of these types of audits commonly revolve around finding inefficiencies and possible cost savings. Another advantage of a regular performance audit is that fraud and abuse may be deterred.