Energy Audit

Efficiency Audit, Internal Audit & Management Audit

Efficiency Audit An efficiency audit provides both policy makers and management with the auditor’s opinion on the efficiency and economy of the conduct of a particular program or activity of Council. The parameters of the audit will be determined by the nature of the program or activity being audited. The efficiency audit is quite different to the audit of the annual financial statements in that the information gathered and examined will be related only to the program or activity being audited and goes beyond relevant financial data. The primary interest in an efficiency is resource use, rather than program or activity effectiveness. It is a thorough, rigorous and independent audit of the acquisition and use of resources in a Council program or activity. The audit should provide both policy makers and management with an opinion on the efficiency and economy of the program or activity under review so as to ensure that the policy outcome sought is being achieved. In particular it will provide guidance on whether the delivery of the service is providing an outcome commensurate with the resources a Council has committed. The audit may include recommendations for future action and identify issues that may require further investigation or consideration. An efficiency and economy audit is not, and is not intended to be, a means by which the separate but complementary roles of the administration and the elected body become confused. Some of the key questions that may be explored during an efficiency and economy audit might be:  Have alternative means of service provision been considered?  Are sound and valid procurement procedures in place and being followed?  Is the Council employing the appropriate amount of resources at the appropriate time to ensure efficiency?  Are property resources being adequately maintained and protected?  Is there no (or minimal) duplication of work or unnecessary wasted effort?

 Have optimum resource levels been adequately identified?  Are internal measures of efficiency and economy valid and appropriate? Efficiency and economy audits should be undertaken by the Council’s auditor or an independent, suitably qualified person. The person identified to undertake the examination, and to produce the report, must do so without undue influence from any individual Council Member or the Chief Executive Officer or other staff of the Council. When commissioning the audit, the auditor should be advised of the program area and required to develop an understanding of the policy that drives the program and once fully understood, adopt the appropriate audit procedure. Efficiency audit refers to an examination of a program, function, operation or the management systems and procedures of an organization to assess whether the entity is achieving economy, efficiency and effectiveness in the employment of available resources. The examination is objective and systematic, generally using structured and professionally adopted methodologies. In most countries, efficiency audits of governmental activities are carried out by the external audit bodies at federal or state level. Many of these audit bodies have established guides for conducting efficiency audits which explain how efficiency audits are planned, conducted and its results reported. INTOSAI, the international association of Supreme Audit Institutions, has published generally accepted principles of efficiency auditing in its implementation guidelines. In the United States, the standard for government performance audits is the Generally Accepted Government Auditing Standards (GAGAS), often referred to as the "yellow book", maintained by the federal Government Accountability Office (GAO). Similarly, the European Court of Auditors (ECA) has developed a "efficiency audit manual" for its audits of the sound financial management of the European Commission and the programmes funded through the EU budget.

Efficiency audits may also be conducted by Internal Auditors who are employees of the entity being audited. However, some national governments require agencies, departments and branches to periodically retain outside auditors to conduct them. The scope of efficiency audits may include the detection of fraud, waste and abuse, although often these are not included in the scope. Prior to engaging in a efficiency audit, the auditor must have a scope and plan defined which will be used to guide the audit process.

Internal Audit What is internal auditing? “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Internal Auditor can make:  an objective assessment of operations and share ideas for best practices.  provide guidance for improving controls, processes and procedures, performance, and risk management. Thus, internal audit activity can play an important role and support the board and management in fulfilling an essential component of their governance mechanisms. The internal auditor furnishes analysis, appraisals, recommendations, counsel and information concerning the activities reviewed. The internal auditor can suggest ways for reducing costs, enhancing revenues, and improving profits.

A Partnership...

It is worth remembering that internal audit works in partnership with management and provides the board, the audit committee and executive management assurance that risks are held at bay and the organization’s corporate governance is strong and effective. They work in the same team and want the organisation to be and remain successful.

Purpose of Internal Auditing

It’s the responsibility of the Board to ensure that risks are managed and controlled. This task is delegated to the executive management which  Determines the risk appetite of the organisation  Establishes the risk management framework  Identifies potential threats and assesses risks  Decides on response to risks like implementation of control  Monitors and coordinates the risk management processes and the outcomes,

 Provides assurance on the effectiveness of risk management processes This assurance from the management is fundamental. There is a need for additional assurance from a different source. Internal audit can be the key source providing objective assurance that all the significant risks have been identified, risk management process is working effectively and efficiently, risks are being reported and controls are effective. As part of this work, the internal audit activity will provide advice, coaching and facilitation services to assist executive management in carrying out their responsibilities.

Scope of Internal Auditing The external auditors have to express an opinion on accuracy and fairness of financial information. The scope of internal audit is much wider than statutory/external audit. It should ideally cover all the organisation’s activities. They include:

 Financial audit –accuracy, completeness and fairness of financial statements  Operational audit- effectiveness and efficiency of operations  Safeguarding of assets  Review of projects  Management audit  Fraud detection- developing fraud exposures for every audit and detecting red flags  Review of effectiveness of internal control  Compliance with laws, regulations, policies and procedures  Preservation of ethical culture – monitor the ethical climate and report on red flags that may compromise ethics  Providing advise on reducing waste or inefficiency

Types of Internal Audit Internal Audit can be classified into following types  Financial Audit  Operational Audit  Grant Audit  Project Audit  Information System Audit  Compliance Audit  Investigative Audit  Due Diligence

Management Audit A management audit is defined as “an examination of the conditions and a diagnosis of deficiencies with recommendations for correcting them.” As per John C. Burton, “in a management audit, the auditor will see the management is getting information relevant to the decisions and actions which it must take. This will require a much more intensive analysis of information needs and the efficiency of the existing system in meeting them. The auditor will not have to decide whether management is making the right strategic and operative decisions but rather whether the management has available to it and is using the relevant information and techniques necessary to evaluate the various alternatives that exist.”

Objectives of Management Audit The following are the objectives of Management Audit  To critically analyze and evaluate management performance.  To detect and overcome existing management deficiencies and resulting operational problems.  To evaluate methods and processes used by the management to accomplish its organizational objectives.

 It helps to determine the effectiveness of the management in PODC the organizations activities.  It helps to ascertain the appropriateness of the managements decision for achieving the organizational objectiveness

Types of Management Audit The following are the type of Management Audits  Complete Management Audit  Compliance Management Audit  Program Management Audit  Functional Management Audit  Efficiency Management Audit  Propriety Audit

Complete Management Audit  Complete management audit evaluates the firm’s current activities and measures the gaps

between its existing policies and the objectives, and its actual activities.  Complete management audit is however, not designed to punish the inefficient or

reprimand people who make honest mistakes.

Compliance Management Audit

 Auditors are asked to identify the gaps between the company’s existing policies and objectives, and its actual practice. However, in this case, the auditors do not make any recommendations for improvements.  They simply present their observations to the top management. The top management consults to personnel to decide whether, what, or how corrective action should be taken.

Program Management Audit  Program management audit is similar to complete management audit and compliance management audit; the only difference is being the fact that it focuses on a specific program.  Program management audit is designed to appraise performance within a specified program and it doesn’t disturb other operations of the firm.

Functional Management Audit  Functional management measures the difference between the actual performance of an organization and its objectives, with emphasis on a particular function.

Efficiency Audit Efficiency audit is conducted to ensure that money is so utilized as to generate handsome returns.

The objectives of efficiency audit are:  To invest the capital in areas that generates optimum returns.  To plan and invest judiciously in various functions.

Propriety Audit Propriety audit is conducted to examine the effect of the management’s decisions and actions on the society and the public. While conducting the audit, the auditor examines all transactions of the company to find out whether any of the transactions has negatively affected public interests.

Organizing the Management Audit The following steps should be taken for organizing the Management Audit  Devising the statement of policy  Allocation of personnel  Staff Training Program  Time and other aspects  Frequency