st Audit Introduction [4.1.6 CONCEPTS, The Concepts of Cost Audit can be elaborated as follows: 4.1.6.1 EFFICIENCY AUDIT, Efficiency Audit is also known as ‘performance audit’ or ‘profitability audit’, Efficiency of the organisation in achieving the objectives determined by the management in advance and ise of resources in economic manner is examined in the efficiency audit. When the objectives re: determined for an organisation, for achieving them a plan is prepared by the anagement stating which resources and to what extent should be used. The resources may be capital, materials, labour, space, machinery and equipment, etc. and if the organisation ises the resources in the predetermined quantities and achieves the objectives fully, it can be iid that the organisation has worked efficiently] Normally, the resources used are more than 1¢ quantities mentioned in the plan for achieving the objectives and this indicates that the ‘efficiency of the organisation is less than what was expected. Sometimes the quantities of the fesources allowed in the plan may be fully consumed but the objectives fulfilled are below the predetermined objectives. In this situation also, conclusion is drawn that the efficiency shown by the organisation, is less than the expected efficiency. It becomes necessary to "examine the efficiency of the organisation by making arrangement for conducting efficiency audit so that measurement of the actual efficiency attained and the variance between the ‘expected level of efficiency and the actual level of efficiency can be calculated and reported to the management for taking corrective action by it. In the absence of efficiency audit, the management may remain satisfied with the present position of working and will not become ‘aware of decreasing efficiency (increasing inefficiency) till it is too late to take any corrective action and the organisation will go into liquidation, suffering a huge loss. ‘The word ‘Efficiency’ means power to produce the result intended or adequate fitness. ‘The word ‘Audit’ refers to a systematic examination by an independent person, of financial statements, records and related operations to determine adherence to generally accepted | accounting principles, management policies and stated requirements. "(ihe term ‘Efficiency Audit’ may be defined as a systematic examination of management's efforts to accomplish goals efficiently and. effectively in order to determine | adherence to the management policies and stated requirement: | Efficiency Audit is so designed as to determine the potential danger spots, to highlight Possible opportunities, to eliminate waste or unnecessary loss or to observe the. executive [performance and evaluate the effectiveness of executive control, E 115 © scanned with OKEN ScannerIntroductio ‘According to the American Institute of Management ‘Performance and Efficiency Audi 4 Glagnostic appraisal process for analysing goals, plans, policies, and activities in even Phase: of operation to uncover unsuspected weaknesses and to develop ideas fo ‘improvement in areas that have escaped management attention. The definition primarily put emphasis on the equality of total management of ar ‘Organisation. It describes it as a preventive measure to 5 - “Bifidency Audit is nothing but to ensure a o fesources will flow into most remunerative chai pot problems before they breakout. PPlication of the basic economic principle tha nnels" It also means that, in the right manner Right thing is done ‘by the right men at the right place in the right time "e True efficiency means ~Amétiorating conditions [for the workers }-—| for the employer] |} [and finally for the nation © scanned with OKEN ScannerCost Audit Introduction Even in case of institutions working in the social or other fields, inefficiency shown in the use of resources affects the achievement of their objectives in an adverse way and their reputation and image goes down in the society. Inefficient and wasteful use of resources by these institutions is loss of national resources and to put an end to this, efficiency audit should be conducted even for such institutions. In fact, since these institutions do not work for profit, their inefficiency in working may remain unnoticed for a long period unless efficiency audit is conducted for them on regular basis. Historical Background The Administrative Reforms Commission in its Report on Public Sector Undertakings, submitted in October, 1967, observed that the role of independent’ Auditor has grown beyond that of mere regularity audit; it has extended to appraisal and to the forming of value judgements. This development explained the significance of “Efficiency-cum Propriety Audit’, or more briefly, ‘Efficiency Audit’. According to the Administrative Reforms Commission. “This was essential to meet the urges of the public interested in the results achieved from the expenditure of public funds—whether there was extravagance and waste, _and whether worthwhile results were achieved at cost". The Commission realised that “Efficiency Audit” was not implied in the existing provisions of Companies Act. Such Audit was, however. the prime concern of Comptroller »and Auditor General of India. For this the commission wanted to strengthen the staff of the Comptroller and Auditor General of India to watch the needs. The Administrative Reforms “Commission felt impressed by the French System of auditing of Public Undertakings by the ‘Commission of Verification of Accounts’. ‘ On the recommendations of Administrative Reforms Commission, an Audit Board was -set up with effect from April 1, 1969, under the supervision and control of the Comptroller -and Auditor General of India for conducting a comprehensive appraisal of the public undertakings. While explaining the scope of performance auditing, S. Ranganathan, Comptroller and Auditor General of India, said "Performance Audit i entire gamut of @ i¢ sector undertaking - decision-making pracess’, and the de: did not necessarily imply the aim of ‘profit maximisation’, The state, sector in fact, intended to achieve the maximisation of net welfare of the society which; in turn involved i) Creation of employment opportunities. ii) Removal of regional economic imbalances. Import substitution and/or export promotion. ~ 117 © scanned with OKEN Scanneree Cost Audit Introduction) Ip iv) Provision of infrastructure and creation of a self-reliant and self-generating, economy. v) Optimum utilisation of scarce national resources for production of goods and services most economically, consistent with the goal of certain socio-economic objectives laid down in the Directive Principles of State Policy. Thus, in India, the statutory audit conducted by company auditors may be termed as regularity audit, whereas the efficiency cum propriety audit is conducted by Comptroller and Auditor General of India, who submits his report to Parliament. This kind of super-audit by the Comptroller and Auditor General of India imposed by the statute corresponds more or) less to German system where a similar super-audit is conducted by the State Audit Body. Objectives| Efficiency Audit is an examination of the administrative operations and organisational arrangement of an institution using commonly accepted standards of good management for} evaluation. The basic objective of the efficiency audit is to reveal defects or irregularities noticed through the examination of the working and operations conducted by the institution, Efficiency audit is conducted to assist the management in improving the efficiency and effectiveness in the operations carried out by the organisation or the institution for which the efficiency audit is conducted. The objectives of the efficiency audit can be explained as under: i) To understand the objectives pre-determined for the organisation/institution and} measure to what extent they have been met actually. The objectives are decided by| the management in the beginning for the organisation as a whole and their| break-up departmentwise is also provided so that the head of each department and persons working in the department get clear idea about what is expected from them. While performing the efficiency audit, examination of work actually performed by each department/section is evaluated to judge the efficiency of it | OF When} “€ lox av ii) To find out the variance between planned objectives and achieved objecti the actually objectives fall short of the planned objectives, it is an indication of existence of inefficiency. The amount of variance shows whether it is a grave and} ™ serious type of inefficiency or it is a negligible one. iii) To find out the reasons due to which the variance has occurred, it is not sufficient to} of know that inefficiency or deficiency exists because unless the exact cause of it is not} an traced, no action for improvement can be taken by the management. There are} ap various causes due to which the deficiency may have arisen. 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Aayy ‘paIsem 40 pasnsiui uaaq aney ALU 10m ayy BUlop 40} wopanponuT FY 150Introduction Cost Audit Factors for examination includes: + The proper utilisation of manpower and equipment. + The adequacy of the organisational structure. + Accuracy and reliability of controls. + Compliance with policies and procedures. + Adequate protective methods. + Satisfactory methods of operation and the economic outlook. * Causes of variances etc. The ‘efficiency audit’ is conducted to determine actual and potential trouble-spots, deficiencies, bottlenecks, unsound performance, _poor-cooperation, irregularities, shortcomings, errors, failings, defalcations, excessive waste, unnecessary loss, internal friction between executives and general lack of knowledge or disregard for good organisation, Many times losses occur for long periods of time, and like lingering cronic-diseases, conditions become more serious because of lack of proper attention, without a proper system of ‘efficiency audit’. For early disclosure and correction, crippling results may occur. Experts in this field pointed out the following main purposes of efficiency audit. * To evaluate the performance of employee on his present job. * To determine what steps should be taken to improve his performance on the present job. * _ To-consider the employee's potentialities for promotion, * To organise employee's contribution. * To determine the training and development needs of employees * To decide on the increment as a reward for performance and progress * To consider the employee's suitability for different types of assignments, * To evaluate the employee’ value to the organisation compared with other employees. * To identify unsatisfactory employees for demotion or termination, * To help discover employee's aspirations, growth, potential; reconcile it wit company goals and provide supportive opportunities, + To inform employees ‘where they stand’, * To make inventories of talent within the organisation for purposes of organisationa and personnel planning. 1.20 © scanned with OKEN ScannerCost Audit _Introduction The full Scope of Efficiency cum Performance audit normally comprises: alhor finonclal stantamonts prosenk fin nota conditions and the rosults o rosources wore employed jont and economic manner? r the programme achiaves its. ‘goals and other intended aff k k i | It is not within the scope of Efficiency cum Performance Audit to state whether an F organisation or entity has reached the maximum practicable levels of efficiency and | economy. What it does is to make a judgement regarding the efficiency of existing practices. It shall, however, includes an enquiry into whether, in carrying out its responsibilities, the audited entity is giving due consideration to conserving its resources and using the minirnum _ effort to do its work. | The Training Division of the Comptroller and Auditor General of India_has published. “Efficiency Audit Monograph’ in which following Examples of uneconomical practices or | deficiencies on which auditor should be alert are given: * Procedures, whether officially prescribed or merely followed, which are ineffective or more costly than justified, * Duplication of effort by employees or between organisational units. © + Performance of work which serves little or no useful purpose. * — Insufficient or uneconomical use of equipments. + Overstaffing in relation to work to be done. + Faulty buying practices and accumulating unnecessary or excess quantities of F property, materials or supplies. | + Wasteful use of resources, : The review will also examine policies, procedures, practices and inter [ppplicble to any aspect of the activities involved, € we ah ms | « (ipraRy) x) \CGies i nd © scanned with OKEN ScannerCost Audit Introductio In addition the following are also studied, ie. whether: + Programme achievement is in accordance with expected results. + Programme costs are commensurate with benefit achieved. + Programme operations are within approved costs. There is continuing need for the programme and whether its purpose has bee) achieved. The programme is the appropriate means of achieving the goals set, for it, and The objectives of the programmes are clear enough to afford prope implementation. Indices of Efficiency] The following are some of the important indices of efficiency which with suitabl adjustments could be considered for inclusion in the Annual Reports. i) Efficiency of Labour: The ratio of many-days lost to many-days worked provides an idea of overall utilisatior of labour capacity or the percentage increase in various categories of the labour forct compared with the percentage increase in some aspects of operation. For example production or sales could roughly indicate the productivity in aggregate over a period o time. Or number of units of .working time spent in turning out a unit of output, for example man hours consumed for the manufacture of a unit of product, compared over a period o time. ii) Cost of Production: Figures of cost of production can be compared over a period of time, and with simila enterprises. Utilisation of Machinery: The percentage of output to annual average production capacity would generally indicate the extent to which the productive capacity of the enterprises is being utilised, This capacity should also be compared with the installed capacity and reasons for the difference between the two be accounted for. iv) Financial Ratios: As to fix a norm or standard for each enterprise is not an easy task, the utility of financia ratios would largely be obtained by intertime comparisons or by comparison with similat type of organisation elsewhere. The following financial ratios could be usefully given in the Annual Reports (howevet these ratios require a norm with reference to which they can be measured, otherwise the ratios in themselves do not convey much meaning). 1.22 © scanned with OKEN ScannerCost Audit Introduction ~~ Net profit ratio: Profit as percentage of sales. ~~ Net yield ratio: Profit as percentage of equality capital plus free reserves. % Coverage ratio: Paid-up capital and Reserves as percentage of fixed liabilities. +, Liquidity ratio: Current assets as percentage of current liabilities. Inventory turnover ratio: Inventories as percentage of sales. * — Expenses ratio: The ratios of important items of expenses to net sales. v) Other Indices: The efficiency may also partly be judged, say, with reference to the earnings of or savings in foreign exchange. Efforts made to develop indigenous sources of raw material and components, and the progress made in this direction. A public enterprise which providing service, the number of complaints or suggestions, received from the public and the way they are dealt with is an important criteria of efficiency. In short, irrespective of the indices, proper care is required to make an effective use of | them. The efficiency evaluation, being a highly complex one, needs both common sense and | technical sense. | [Measurement of E1 NC} The measurement of efficiency in public enterprises is a very complicated problem. The | problem is made more complicated by the entrance of value considerations through the / ‘public interest’. The public enterprises are expected to serve public interest. The term ‘public | interest’ is governed by different interpretations. The important criteria of measuring efficiency in public enterprises are: i) Criterion of profits, Adherence to time schedule and cost estimates, Quantitative measurement of efficiency.. Cost of production. Labour productivity as an index of efficiency. Comparative Data. Over-all index of industrial efficiency. Measures to Improve Effici ncy| Following are the important factors which improve efficiency of public enterprise: i) Objectives and Priorities. ii) Public Relations. iii) _ Promotion Policy. 1.23 © scanned with OKEN ScannerCost Audit Introductio iv) Training in Management. v) Marketing Arrangements. vi) Staff Welfare. vii) Optimum utilisation of plant capacity viii) Scientific Recruitment policy. ix) Deputationists. x) _ Participation of workers in decision-making, xi) "Incentive Bonus Scheme. xii) Supervisory Staff xii) Absence of Industrial Strike xiv) Recognition of meritorious works xv) Fixing of specific norms of production. xvi) Statistical quality control xvii). Monetary awards for valuable suggestions. xvill) Rewards for inventions. xix) Cost Accounting. »%) Presidential Awards. xxi) External Influences. xxl) Psychological Approach towards the staff xxiii) Minimisation of stress. xxiv) Quick maintenance and Repairs services, ow) Defined Authority, Responsibility and Accountability, xvi) Proper Division of Work. It is thus, observed, from the above analysis that the efficiency rest on a private yields and that of public enterprise by the public good it does. But, both have to equally share their social responsibilities and have to function in the interest of the society. Efficiency Audit Report| As required by the Article 151 of the Constitution of India, the reports of the Comptroller and Auditor General of India relating to the accounts of the Union are submitted to the President, who causes them to be laid before the Parliament and reports of the Comptroller and General of India relating to the accounts of a State are submitted to the Governor of a State who causes them to be laid before the Legislation of the State. 1.24 © scanned with OKEN ScannerIntroduction Eo Essential of Good Report] t f The Report should be written in good English and lucid style so that it may not be misunderstood. The Auditor should do his best to convey his thoughts with five 'C’s. Oy Correctness: Correctness means the accurate statement based on reliable and accurate information. YG = Clarity: Clarity means the unambiguity of the meaning of the information, ey = Coherence: With a definite motive and forceful purpose behind it. My = Courtesy: Courtesy means the gentle and mild use of words and phrases so as to avoid unnecessary bitterness or sharpness of remarks. “He; = Conciseness: Conciseness means clear-cut presentation of the data information. Emphasis should be placed on good presentation, sentences and paragraph structure "i and unity. Before drafting a final report, the auditor should prepare a rough outline of the “report. The report should include the purpose and scope of the study facts of major importance, matters discussed with executives and supervisors, current practices discussed or © comments of the various executives and finally the auditor's recommendations. “The following are the some of the important aspects of audit reports: i) Significance: ~The matter included in the report must be of sufficient significance to justify reporting them and to warrant the attention of those of whom the reports are directed viz. Parliament/Legislature and Government. Timeliness: s The usefulness of an audit report is related to its timeliness. This is especially true when a teport. contains unfavourable findings which require corrective action. Therefore, timeliness is very essential for effective reporting. Carrying convictions: Auditor's findings must be presented in a convincing manner, and his conclusion must follow logically from the facts presented, The data presented in the reports must be sufficient to persuade the reader of the importance of his findings, the reasonableness of his conclusions and the desirability of acting on them. 125 © scanned with OKEN ScannerCost Audit Introduction} iv) Accuracy and adequacy support: All factual information, findings and conclusions in the report must be adequate supported by enough objective evidence in files to demonstrate or prove, when it called} upon, the bases for the matters reported and their accuracy. v) Clarity and simplicity: . Report must be presented as clear as sunshine - and simplify for effective communication. The material should be properly organised with precision in stating] facts, analysing them and drawing conclusions from them. Charts, graphs, maps, pictures| figures etc. should be used wherever justified to make the reports more easily understood and therefore more useful. vi) Objectivity and perspective: Each Report should present the auditor's findings in an objective and unbiased manne; and should include sufficient information on the subject matter to provide it readers with a proper perspective. The report should invariably contain a clear statement on the| nature and scope of examination and also information about the size and nature o activities, vii) Conciseness: The reports must be no longer than necessary to communicate the information to report] Reports should not be wired down with too much detail-words, sentences, or paragraphs that do not clearly tie in with the report messages. viii) Completeness: The reports must contain sufficient information about the findings and conclusions td promote adequate understanding of the matters reported. In short, at the time of preparing the performance and efficiency of audit report of an| enterprise, the Auditor should be free from all worries, hurries and flurries. He should havel clear thinking before starting the audit and writing the report. A lucid style and good Engl! are the basis and pre-requisite of a good report. There are certain facts which should bel considered before drafting the final reports as they are of vital importance. Organisation for Efficiency Audit There should be well developed organisation for introduction of efficiency audit. The| organisation here relates to the role of the team engaged in audit work. Actually, it is a staff} function which generally brings the success for the application of efficiency audit. It is assumed that the organisation should have sufficient personnels viz. internal auditor, cost] auditor, management auditor etc. engaged in different activities. Mr, B, H_Walley.in his book] 1.26 | © scanned with OKEN ScannerCost Audit Introduction “Efficiency Audit", recommended certain breakdowns of functions. The said breakdown functions are explained by Dr. B. K. Basu in his book ‘An Insight into Auditing’ in the following manner. Functional Head Role of Efficiency Auditing 1. Auditor (Internal) 1. General Auditing System. 2. Auditor (Management) 2. Evaluate the efficiency of line and staff management evaluation of the behavioural situations, moral audit, opposition to change and planning for man power. 3, Head of the Department of Budgetory Budgetory control, analysis of budget Control. profit, setting up of expense budget, product cost and profitability. 4, Investment Appraiser 4. Fixed and working capital, utilisation, appraisal of investment and control of projects. 5. Corporate Planner 5. Forecasting (short and long term) plan evaluation, establishment of market research objectives etc. 6 Line Manager 6. Investment appraisal, profit analysis etc. ~ 7. Head, of Department of Operation | 7. Utilisation of Man and Management. Research Investigation of system design and functional efficiency. 8. Treasurer 8. Preparation of cash budget or forecast, borrowing and credit control and general utilisation of money. ~ “In short, while conducting efficiency audit, fact findings should he done minutely so as to avoid any confusion; and the glaring facts must be clearly incorporated. The final observation, presentation and transmission of the report should be carefully done and the Auditor should satisfy himself fully before submitting it. He should also discuss with the executive so that they may realise the value of the Efficiency Audit as an important instrument for the overall evaluation of the concem. The final written report should be free ~ from all blemishes and should not contain anything which is ambiguous and misleading. 1.27 © scanned with OKEN Scanner