Efficiency Audit | Purpose | Parameters | Area of Appraisal

What is Efficiency Audit?

Efficiency audit is much broader in its scope. The scholars express two distinct views on this subject. According to one school of thought, the principal objective of efficiency audit is to ensure that resources flow into the most remunerative channels.

Efficiency Audit - Purpose, Parameters, Area of Appraisal
Efficiency Audit – Purpose, Parameters, Area of Appraisal

Its purposes are basically two fold, which are as follows:

1. That every rupee invested in capital, or in other fields gives optimum results, and

2. That the balancing of investment between different functions and the aspects is designed to give optimum results.

Thus, the efficiency audit, according to this school of thought connotes financial efficiency. According to another school of thought the term efficiency denotes executive efficiency and operational efficiency. Efficiency audit according to this school of thought is concerned with the evaluation of the following qualities of the executives:

1. Personality: This means and includes honesty, integrity, aggressiveness, initiative, judgement, leadership, and common sense.

2. Skill, Knowledge, Techniques, and Experience: These mean and include leadership qualities human relations approach, technical knowledge, and the skills.

3. Attitude: This means and includes loyalty, willingness to соoperate, self-confidence, and job satisfaction.

However, efficiency audit according to some authors covers the financial efficiency, performance efficiency, and the productivity efficiency. This view seems to be more appropriate. In this sense, it possesses some of the characteristics of the enterprise’s self-audit or management audit.

Efficiency of an enterprise cannot be evaluated by assessing one or two aspects only. A number of aspects should be properly assessed in an efficiency audit.

Purposes of Efficiency Audit

Modern managements now-а-days undertake efficiency audit with а variety of objectives in mind. The principal objectives are:

1. То diagnose the operational weaknesses by а review of the organization’s environment.

2. То see whether the resources of the business flow into constructive and profitable channels.

3. То assess how far the measures and techniques adopted are effective in attaining the goals and objectives of the firm.

4. То highlight the important fact in each of the functions or operations that are employed.

5. То evaluate and compare the optimum return on capital invested in the business operations.

б. То suggest and recommend feasible alternative treatments for improvements in а manner that the heads of the functional or operational management themselves would do if they have time for self — introspection (Examination of their own thoughts and feelings).

Parameters for Measuring Efficiency

The parameters for measuring efficiency include the following:

1. The overall rate of return on capital employed showing both efficiency of the capital turnover and efficiency of the sales.

2. Capacity utilization.

3. Utilization of natural, functional, physical, and human resources.

4. Export performance and import substitution.

5. Cash flow performance.

6. The pay back period of the entire organization (i.е., by dividing the capital employed by annual cash flow).

The audit, which seeks to review these measurement yardsticks, and evaluates the overall efficiency, may be called as efficiency audit. Thus, efficiency audit provides the means to appraise the performance, and to diagnose the weakness of the enterprise.

Areas of Appraisal under Efficiency Audit

An appraisal, under efficiency audit should cover the following areas:

1. Factors responsible for survival and prosperity of the business.

2. Bottlenecks to achieve the goals and the objectives of the organization.

3. Inefficiencies and ineffectiveness of the operations resulting m cash drainage or other kind of losses.

4. Areas of uncertainty of the business.

5. Causes for the business failures.

б. Machinery for the corporate planning and the management controls for the future profitability and growth.

The auditor should appraise the above mentioned areas, identify the defects in them, and suggest suitable recommendations to remove the deficiencies.

Guidelines for Internal Auditors

While appraising the critical areas, the internal auditor should further determine whether-

1. The area of operation or project has been managed in an economical and efficient manner in terms of appropriate utilization of manpower, plant and machinery, etc.

2. Any delay in decision-making has led to additional financial costs.

3. Inefficiency has led to non-achievement of targeted production and productivity.

4. Any operation of the managerial process has led to ineffective or delayed operation of а job or а project.