Welcome to the World of Public Sector Auditing!
Hello! If you've been studying the standard audit of financial statements, you might be used to looking at numbers like revenue, profit, and assets. But what happens when an organization doesn't exist to make a profit? In the public sector (like government departments, public hospitals, or schools), success isn't measured in dollars alone—it's measured by how well they meet their goals. This is where The Audit of Performance Information (also known as Pre-determined Objectives) comes in.
Don't worry if this sounds a bit "wordy" at first. Think of it this way: if a government department promises to build 50 new schools in a year, the auditor’s job is to check if they actually did it and if the way they reported that progress is honest and accurate. Let’s dive in!
1. What are Pre-determined Objectives?
In the public sector, every year, departments set goals. These are their pre-determined objectives. To track these goals, they use Performance Information (often seen as Key Performance Indicators or KPIs).
An Everyday Analogy: Imagine you set a goal to lose 5kg in three months (your objective). You track your progress by weighing yourself every week and counting your daily steps (your performance information). An auditor would come in to check if your scale is working correctly and if you actually walked the steps you claimed!
Why do we audit this?
1. Accountability: Taxpayers want to know their money is being used effectively.
2. Transparency: It prevents the government from "cherry-picking" only the good news to report.
3. Decision Making: Accurate data helps leaders decide where to spend money next year.
Quick Review: Public sector entities focus on service delivery rather than just profit. Auditing their performance info ensures they are telling the truth about their achievements.
2. The Criteria for Good Performance Information
For an auditor to check something, it needs to be "auditable." We use a famous mnemonic here that you probably know from other subjects, but it is vital for AAA: SMART.
Performance objectives should be:
S – Specific: Is the goal clear? (e.g., "Build 10 bridges" vs "Improve infrastructure")
M – Measurable: Can we count it? (e.g., "Reduce wait times by 10%")
A – Achievable: Is it realistic given the budget?
R – Relevant: Does it actually matter to the people using the service?
T – Time-bound: Is there a deadline?
Common Mistake to Avoid: Students often think auditors set these goals. No! Management sets the goals; the auditor simply evaluates if the reporting on those goals is reliable.
3. Audit Objectives: What are we actually testing?
Just like we have assertions for financial statements (like Existence or Accuracy), we have specific objectives when auditing performance information. You can remember these using the C-A-R-E approach:
1. Consistency: Is the performance info in the annual report the same as what was planned at the start of the year? If they changed the target halfway through because it was too hard, they must explain why.
2. Accuracy: Are the numbers correct? If they say they treated 1,000 patients, did they really treat 1,000, or was it 800?
3. Reliability: Can we trust the source of the data? If the data comes from a manual logbook that anyone can edit, it might not be reliable.
4. Existence (and Validity): Did the events actually happen? If they claim a new road was built, does that road exist in the real world?
Did you know? In the public sector, Completeness is also huge. If a police department reports they solved 90% of crimes but "forgot" to record half the crimes that were reported to them, the performance info is misleading!
4. The Audit Process: Step-by-Step
Auditing performance info follows a similar flow to a financial audit, but the "evidence" looks different.
Step 1: Understanding the Entity
The auditor looks at what the entity is required to do by law. Example: A Department of Health is legally required to provide healthcare, not fix roads.
Step 2: Risk Assessment
What could go wrong? Maybe the staff are under pressure to meet targets, so they might "fake" the numbers (this is a risk of management override).
Step 3: Testing Controls
The auditor checks the systems used to collect data. Example: If a school uses an electronic badge system to track student attendance, the auditor tests if that system can be easily tampered with.
Step 4: Substantive Procedures
This is the "detective work." Procedures might include:
- Inspection: Physically visiting a site to see if a building was completed.
- Recalculation: Adding up the numbers again to ensure the totals are right.
- Confirmation: Asking a third party (like a contractor) how much work they actually did.
Key Takeaway: The auditor isn't just looking at spreadsheets; they are often looking at physical evidence and operational records.
5. Reporting on Performance Information
The auditor’s conclusion on performance information is usually included in the Audit Report, but often in a separate section from the financial statements.
What the report covers:
- Whether the reported performance is useful (is it SMART?).
- Whether the reported performance is reliable (is it accurate and complete?).
- Any material misstatements (e.g., if the department claimed 90% success but the auditor found only 60%).
Important Note: Unlike a financial audit which usually gives "reasonable assurance," in some jurisdictions, auditing performance info might only provide "limited assurance" (stating that nothing came to our attention to suggest it’s wrong). Always check the specific requirements mentioned in the exam question!
Summary & Quick Tips for the Exam
1. Context is King: If the question is about a hospital, talk about patient wait times or surgery success rates. If it's about a transport department, talk about bus punctuality.
2. Look for "Gaming": Be cynical! Public sector managers might try to make their department look better than it is to get more funding next year.
3. The "So What?" Factor: When you identify a problem with performance info, explain why it matters. "If the data is inaccurate, the government may allocate funds to the wrong areas, leading to poor public services."
Key Takeaway: The audit of pre-determined objectives ensures that when the government says "We did a great job," they have the proof to back it up!