Audit and Assurance · Not-for-profit organisations

Value for Money Auditing: Economy, Efficiency and Effectiveness

Updated 11 October 2026 · Fact-checked

A value for money (VFM) audit checks whether an organisation uses its resources well, judged by the 3 Es. Economy is spending less for the right quality. Efficiency is getting the most output from inputs. Effectiveness is achieving the stated objectives. In the exam, define each E, then apply it to the scenario.

Understand Value for Money Auditing

A normal financial statement audit asks one question: are the accounts free from material misstatement? A value for money audit asks a different one: did the organisation spend its money wisely? It matters most where there is no profit figure to judge success, such as charities, schools, hospitals and government bodies.

These organisations are funded by donors or taxpayers. Those funders want to know the money achieved something useful. VFM work gives them that assurance. It is often done by internal audit, or by a public sector auditor with a wider remit. It can also be a separate assurance engagement for an external firm.

The framework is the 3 Es:

Economy: acquiring resources of the right quality at the lowest reasonable cost. Think of inputs and price.
Efficiency: the relationship between inputs and outputs. Think of getting more output for the same input, or the same output for less input.
Effectiveness: whether the outputs achieve the organisation's objectives. Think of outcomes and impact.

The Es can conflict. The cheapest supplier (economy) may supply poor quality that harms results (effectiveness). A fast process (efficiency) may serve the wrong people. Good answers show you understand this.

VFM is hard to measure because NFP objectives are often non-financial and hard to quantify. You need measurable targets, benchmarks and comparisons with past years or similar bodies. Some also add a fourth E, equity or ethics, but the three core Es are what the exam expects.

Key rules to remember

Economy: Economy = spending the minimum cost for resources of appropriate quality; Focus on inputs and price. Never ignore quality. Cheapest is not always economical.
Efficiency: Efficiency = outputs ÷ inputs; Compare with a target, prior year or similar body. Higher output per unit of input, or lower input per unit of output, is better.
Effectiveness: Effectiveness = actual results achieved compared with stated objectives; Focus on outcomes. An organisation can be efficient yet ineffective if it does the wrong thing well.
Example efficiency measure: Cost per beneficiary = total cost ÷ number of beneficiaries served; Example only. Choose measures that fit the scenario, and compare them with a benchmark.

How to solve Value for Money Auditing questions

Use this method for any VFM question, whether it asks for definitions, audit procedures or recommendations.

1Read the scenario and note the organisation's stated objectives and funders.
2Define each E in one short line, in your own words.
3Split the scenario facts into inputs (costs, purchasing), outputs (activity levels) and outcomes (objectives met).
4Match each fact to an E and say whether it suggests good or poor performance, and why.
5Suggest a measure or benchmark, for example cost per unit or target comparison.
6Give a specific procedure or recommendation for each weakness, such as competitive tendering or outcome targets.
7Mention any conflict between the Es if the scenario shows one, then conclude briefly.

Quickest way: Input, output, outcome scan

When to use it: Use when time is short, especially in a Section C part or an OT case asking you to classify a given fact.

Ask: is this about what was paid or bought? That is economy.
Ask: is this about how much was produced for the resources used? That is efficiency.
Ask: is this about whether the aim was achieved? That is effectiveness.
Write one sentence per E: definition, scenario fact, recommendation.
For OT questions, pick the option that matches the focus (input, ratio or objective), not the one that merely sounds positive.

Common mistakes in Value for Money Auditing

Treating economy as meaning cheapest.
The word suggests cost cutting, so students forget the quality condition.
Fix: Always write 'lowest cost for the appropriate quality'. Use a cheap, poor-quality purchase as your example of failed economy.
Mixing up efficiency and effectiveness.
Both sound like 'doing well', and students use them as synonyms.
Fix: Efficiency is about the ratio of outputs to inputs. Effectiveness is about meeting objectives. Ask: 'did it use resources well?' versus 'did it achieve the aim?'
Giving only definitions with no link to the scenario.
Definitions are easy to memorise, so students stop there.
Fix: For every E, quote a fact from the scenario and state whether it is a strength or weakness.
Suggesting profit-based measures for an NFP.
Students carry over commercial thinking.
Fix: Use non-financial measures such as cost per beneficiary, waiting times or the proportion of targets met.
Giving recommendations with no audit procedure or action.
Students describe the problem but do not say what to do or test.
Fix: State a specific action, such as reviewing tender records, comparing unit costs with a benchmark or checking outcomes against targets.
Ignoring that the Es can conflict.
Students treat each E as separate.
Fix: Add a sentence on trade-offs, for example that saving cost may reduce quality and so harm effectiveness.

Worked examples

Example 1

A charity runs a food bank. Its objective is to reduce food insecurity in its town. It buys food only from one supplier without comparing prices. Volunteers pack 400 parcels a week, and the charity could pack 500 with the same volunteers if the warehouse were better organised. A survey shows many recipients are outside the target area. Explain how each of the 3 Es applies and recommend one improvement for each.

Show the solution

Economy: the charity buys from one supplier with no price comparison. It cannot show it is paying the lowest cost for the quality required. Recommendation: obtain competitive quotes and review them regularly, while checking food quality.
Efficiency: 400 parcels are packed against a potential 500 with the same volunteers. Output per volunteer is 20% below what is achievable, calculated as (500 − 400) ÷ 500. Recommendation: reorganise the warehouse layout and set a target parcels-per-volunteer-hour measure.
Effectiveness: the objective is to reduce food insecurity in the town, but many recipients live outside the target area. The outputs are not reaching the intended people. Recommendation: introduce eligibility checks and track the number of target-area households served.
Conclude: the charity has weaknesses in all three Es. Fixing effectiveness matters most, because efficient parcel packing has no value if it serves the wrong people.

Answer: Economy is weak (single supplier, no price comparison). Efficiency is weak (400 packed against 500 achievable). Effectiveness is weak (parcels reach people outside the target area). Recommended actions: competitive quotes, warehouse reorganisation with output targets, and eligibility checks with outcome tracking.

Example 2

A public hospital spent ₹50,00,000 on a new scanner, ₹10,00,000 more than a comparable model offered by another approved supplier. The scanner processes 40 patients a day, and the hospital's target is 40. Waiting times for diagnosis are unchanged. Identify which E is weak and which is met, and explain.

Show the solution

Economy: the hospital paid ₹50,00,000 against ₹40,00,000 for a comparable model, which is ₹10,00,000 or 25% more (10,00,000 ÷ 40,00,000). Unless extra quality is shown to justify this, economy is weak.
Efficiency: 40 patients a day against a target of 40 means the throughput target is met, so the scanner is used as planned.
Effectiveness: the objective of a scanner purchase is presumably faster diagnosis. Waiting times are unchanged, so the objective is not achieved. Effectiveness is weak.
Note the conflict: meeting the activity target (efficiency) does not mean the aim was met (effectiveness). Recommend setting a waiting-time target and reviewing the procurement decision.

Answer: Economy is weak (₹10,00,000 or 25% above a comparable model, unless justified). Efficiency is met (40 patients a day equals the target). Effectiveness is weak (waiting times unchanged, so the objective of faster diagnosis is not achieved).

Exam tips

Define each E in one line before applying it. The marks come from the application to the scenario.
Use the scenario's own numbers where given, and compute simple comparisons such as percentage difference or cost per unit.
In OT questions, identify whether the fact concerns inputs, the input-output ratio or objectives before choosing an answer.
Write recommendations as actions an auditor or manager can take, and link each to a specific E.
Mention conflicts between the Es when the scenario gives a hint. It shows depth and often earns an extra mark.

Value for Money Auditing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value for Money Auditing: frequently asked questions

What is the difference between economy, efficiency and effectiveness?

Economy is about the cost of inputs for the right quality. Efficiency is about how much output you get from those inputs. Effectiveness is about whether the outputs achieve the organisation's objectives.

Who carries out a value for money audit?

It is often done by internal audit or by a public sector auditor with a wider remit. An external firm can also be engaged to do it as a separate assurance engagement. It is not part of a normal financial statement audit.

Why is value for money important for not-for-profit organisations?

They have no profit measure, and they are funded by donors or taxpayers who want to see the money used well. VFM work gives funders evidence of that and highlights waste.

Can an organisation be efficient but not effective?

Yes. It can produce a lot of output at low cost, yet if that output does not meet the objectives, it is ineffective. For example, a charity may deliver many parcels cheaply but to people outside its target group.