17

CHAPTER 17

ECONOMY 
EFFICIENCY AND 
EFFECTIVENESS OF AUDIT

17.1 Before independence, Government audit was mostly confined to check of individual transactions against provision of funds, or rules and orders, or sanctions, or propriety of expenditure, which was quite effective and fruitful in detection of cases of improper, irregular, extravagant, wasteful or uneconomical expenditure. When the pattern of Government expenditure, its nature and dimensions underwent radical and rapid transformation in the wake of increasing Governmental outlays in developmental activities after independence, the inadequacy of the system of scrutiny of individual transactions was felt. It became essential and necessary for audit to ascertain whether the various developmental programmes and welfare activities are being executed efficiently and their operations conducted economically and they are producing the results expected of them. Scarce resources and larger demands on them called for ensuring that available resources are utilized efficiently and economically and yield results expected of them. The concept of efficiency-cum-performance audit or economy efficiency and effectiveness audit has accordingly been developed to meet the changing requirements and is applied to review the performance in terms of the goals and objectives of a project or scheme.

Meaning of the three Es 

17.2 Economy is the practical systematic management of the affairs of a project or scheme which assures minimum operating costs for carrying out functions and responsibilities. Efficiency is the accomplishment of assigned goals, production targets or other specific programme objectives in a systematic manner which contributes to minimizing operating costs without detracting from the level, quality or timing of the service to be provided by the public entity, project or enterprise. Effectiveness is the adoption of a course of action which assures achievement of the clearly defined predetermined plans, objectives or goals at the lowest reasonable costs and in a practical manner within an established or agreed time frame.

🔲 Which is included in the three “Es” of audit?

(A) Economy

(B) Exactness

(C) Eminence

(D) Enforcement

Planning the review

17.3 The selection of the project/scheme for review is done with utmost care after making a preliminary study taking into account various factors apart from the financial outlay involved. Active co-operation of the concerned departments and their proper appreciation of the task taken up by audit being an essential pre-requisite for meaningful review, a pre-review discussion is held with the departmental authorities soliciting suggestions regarding areas/aspects to be taken up for study and assistance in making available the records and data.

Processing the review

                17.4 In processing the review the following stages are involved:

(i) Preliminary study of the selected project/scheme.

(ii) Development of Audit Plan

(iii) Review Proper

 (iv) Preparing the Review Report

Preliminary study of Selected Project/Scheme

17.5 The preliminary study of the project/ scheme is aimed at having a comprehensive insight into the broad picture obtained at the time of initial selection to locate areas/ aspects requiring an in-depth examination. Acts, rules and regulations, budget and plan documents, performance budget of the department, progress reports, administrative reports, periodical appraisals, reports by the departmental officers and external agencies, if any, like working/ study groups of Planning Commission, Public Accounts Committee, Estimates Committee, Bureau of Public Enterprises reports etc. would provide the necessary background material for carrying out this study. Such a study helps in understanding the idea of the scheme, its aims and objectives, financial targets and actual expenditure, the agencies executing the schemes etc.

                17.6 While conducting review of a project, it is necessary to understand the nature of the project right from the stage it is conceived. It is therefore seen during the preliminary study:

 (i) Whether adequate surveys have been made before launching the project.

(ii) Whether proper feasibility reports were prepared.

(iii) Whether there is a detailed project report and if there are deviations, why these deviations have taken place.

(iv) Whether the specification/ performance of the various items of equipment is properly matched without leaving large idle capacity in any one of them and whether there is an effective system of materials management.

(v) What contracting systems have been laid down.

 (vi) What are the operational problems and how they are got over.

(vii) Whether the project is functioning as it should be.

Development of Audit Plan

17.7 A specific plan of audit is chalked out in advance indicating the guidelines for investigation, marking out the offices/field units to be visited and the overall strategy for collecting relevant data, and the time allotted for completing the review. Necessary format and questionnaire are also prepared for collection of important data relating to the various aspects of the scheme not only from offices or units proposed to be visited but also from other units for being made use of for consolidation while framing the review. Man-power planning carrying out the detailed review is equally given importance.

Review Proper

17.8 The approach of audit is systematic, methodical, logical and rational. The review always commences with an in-depth study of the files in the offices of the concerned administrative Department and other Heads of Department. While scrutinizing the records, it has to be seen whether:

(i) the objectives of the project/scheme/organization have been clearly defined and are in conformity with the policies and decisions of Government

(ii) the programmes have been drawn up in accordance with these objectives and are being implemented by specific and well defined procedures.

(iii) A good monitoring/management information system exists for collecting reliable data as well as progress reports on implementation of the policies and programmes and whether the data is effectively utilized to improve organization or remedy deficiencies with utmost speed.

(iv) Proper built-in control mechanisms in the prescribed system exist to have an effective control over various areas of implementation of check leakages, losses, avoidable and wasteful expenditure, etc.

(v) Specified performance indicators exist if not, the procedure followed or yardstick/norm prescribed to assess the performance of the project/scheme have to be ascertained and their validity determined.

17.9 The next stage is carrying out the studies and collecting information from the selected field units. The examination and audit scrutiny of selected samples of transactions and study should be thorough and complete without the need for a second visit to the same offices. In order to have reasonably reliable audit findings, it is necessary that sample size taken up for detailed check in audit is adequate and is fairly representative of the whole. To elicit maximum information, it is useful to discuss details of the project/scheme with the officers of the institutions visited.

17.10 The review work, thus, involves in-depth study of project programmes, organizational set up, managerial process including systems, checks and controls, research and development, personnel policies and management, material management, budget and accounts work etc. Efficiency evaluation is a complex and multifaceted problem which needs not only technical skill but also a high degree of developed and abundant common sense.

Preparing the Review Report

17.11 This is the final stage of the review. The data collected or obtained from departmental offices and unit offices are consolidated for interpretation and detailed analysis. By careful, detailed and analytical dissection of the findings of investigations made at different stages, the review report is prepared highlighting major irregularities like non-realization of social and economic objectives, non-observance of time schedule and cost estimates, over-capitalization, large over-head expenditure, over-staffing, idle personnel, work backlogs, delay in construction of projects resulting in increase in expenditure, absence of trained manpower, plants operating below rated capacity, excessive inventories, absence of sound pricing policy, unauthorized occupation of government lands, idle plant and equipment, leakage or revenue, over payments, losses due to pilferages or non-observance of proper procedures, improper, avoidable or infructuous expenditure, etc.