What is Efficiency Audit? Objectives, Purpose, Scope, Report

  • Post last modified:20 April 2021
  • Reading time:9 mins read
  • Post category:Finance

Cost Audit has two important phases. The first phase is known as Efficiency Audit and the second phase is known as Propriety Audit. Let us consider information about these two phases of the Cost Audit.

Efficiency Audit

Efficiecny audit is also known as ‘Performance Audit’ and ‘Profitability Audit’. Efficiency audit may be defined as a systematic examination of management’s effort to accomplish goals efficiently and effectively in order to determine adherence to the management policies and stated requirements.

Efficiency audit is undertaken to point out actual and potential areas which create trouble in the operations and working of the company and due to which the company may not be able to achieve its pre-determined goals.

To detect such trouble areas in efficiency audit, following points are examined by the cost auditor:

  • Utilisation of the resources in the form of manpower and equipment.

  • The organisational structure of the company and its adequacy to carry out the work for achieving the set goals.

  • Adequacy and reliability of controls created for smooth functioning of various operations.

  • Implementation of policies and procedures.

  • Extent to which co-operation exists among various departments and also in the staff working at different levels.

  • Methods of operations used in the company and whether they are satisfactory or not.

  • Variances between the targets fixed and the actual performance and the causes due to which the variances have occured and the extent to which variances have been reduced due to actions taken by the management.

Efficiency audit brings to notice uneconomic use of resources, idle and wasted capacity of the machinery and equipments, improper decisions and loss suffered due to such decisions, existence of rivalry among departments and lack of cooperation which results in lower performance and inadequate staff-both in number and knowledge – in certain departments.

The cost auditor also suggests ways and means through which these deficiencies can be removed and performance of the company can be improved.

What is Efficiency Audit?

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 requirements.

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.

Performance and Efficiency Audit’ is a diagnostic appraisal process for analysing goals, plans, policies, and activities in every phase of operation to uncover unsuspected weaknesses and to develop ideas for improvement in areas that have escaped management attention.American Institute of Management

Objectives of Efficiency Audit

Objectives of the efficiency audit can be explained as under:

  • To understand the objectives pre-determined for the organization.

  • To find out the variance between planned objectives & achieved objectives.

  • To find out the reasons due to which the variance has occurred.

  • To recommend to the management the action to be taken to reduce the causes that have resulted into waste and inefficiency.

Purpose of Efficiency Audit

The basic purpose of the efficiency audit is to reveal defects or irregularities in any of the elements examined. Its aim is to assist management in achieving the most efficient and effective administration of the operations performed. The intent is to examine and appraise the methods and performance in all areas.

Scope of Efficiency Audit

Efficiency Audit does it to make a judgement regarding the efficiency of existing practices. It shall, however include an enquiry into, whether, in carrying out its responsibilities, the audited entity is giving due consideration to conserving its resources and using the minimum effort to do its work.

Efficiency Audit Report

The Report should be written in good English and lucid style so that it may not be misunderstood. The following are some of the important aspects of audit report:

  • Significance
  • Timeliness
  • Carrying Convictions
  • Accuracy & Adequacy
  • Clarity & Simplicity
  • Objectivity & Perspective
  • Conciseness
  • Completeness

Propriety Audit

Propriety audit is the second phase of the cost audit. The term propriety means ‘justness’ or ‘rightness’. When the term propriety audit is used it implies audit or verification of rightness of the expenditure incurred or rightness of the decisions taken by the management or rightness of actions and plans of management having a bearing on finances and expenditure of the company.

External or Statutory Cost Audit

External or statutory cost audit is different from internal cost audit.

Internal cost audit is a continuous cost audit conducted by the costing staff working in the company or by the cost auditor oppointed by the management or shareholders of the company.

The main objective of an internal cost audit is to see that the necessary cost accounting books and records have been maintained by the company and the cost data provided to the management for its guidance has been correctly ascertained.

The internal cost audit is not compulsory for a company but it is carried on due to the wish of the management or the shareholders of the company. In case of internal cost audit the cost audit report is not required to be submitted to the Central Government since such internal cost audit has nothing to do with the Central Government.

Statutory or External Cost audit, on the other hand, is compulsory and is ordered by the Central Government under the provisions of section 233B of the Companies Act.

Statutory cost audit is done by the cost auditor appointed by the Audit Committee or Board of Directors with prior approval obtained from the Central Government.

  • Such person is an external person and he must be a practising cost accountant holding the certificate issued by the Institute of cost and Works Accountants of India.
  • He is required to examine the cost accounting books and other records related to costs required to be maintained by the company under section 209 (i) (d) of the Companies Act.

On completion of the cost audit, the cost auditor is rquired to prepare a cost audit report and submit it to the Central Government with a copy to be sent to the management of the company.

Such cost audit report is not made available to the shareholders of the company unless the Central Government orders the company management to provide certain part of the report to the shareholders of the company.

Statutory Cost audit is undertaken on completion of the financial statements of the company and there is a time limit laid down for completion of cost audit and submission of cost audit report to the Central Government.

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