Advanced Auditing, Assurance and Professional Ethics · Overview of Audit of Public Sector Undertakings

Propriety Audit and Performance Audit in Public Sector Undertakings

Updated 5 October 2026 · Fact-checked

Propriety audit checks whether a public undertaking's decisions and spending follow sound principles of public interest, prudence and financial discipline, even if they are legal. Performance audit checks economy, efficiency and effectiveness (the 3Es). To answer, define the audit, apply the right test to the facts, and conclude.

Understand Propriety Audit and Performance Audit

A normal financial audit asks whether the accounts show a true and fair view. Audit of a public sector undertaking (PSU) goes further. A PSU uses public money, so the question also becomes: was the money used wisely and for the purpose intended?

Propriety audit looks at the quality of decisions and expenditure. A transaction can be legal and properly recorded and still be improper. It is tested against general principles: expenditure should serve the public interest, be made with the same care a prudent person would use on their own money, and not be extravagant or favour any party. It also looks at whether the authority had the power to act, and whether the spending kept within the approved purpose. Propriety is about judgment, so it is also called a test of wisdom and good faith, not just of legality.

Performance audit (also called efficiency-cum-performance audit) asks whether the undertaking achieved its objectives at reasonable cost. It is built on three Es:

Economy: acquiring resources of the right quality, at the right time, at the lowest reasonable cost.
Efficiency: getting the maximum output from the inputs used, or using the minimum inputs for a given output.
Effectiveness: the extent to which the intended objectives and results are actually achieved.

The key difference: propriety audit examines whether a decision was sound and in the public interest. Performance audit examines the results of operations against objectives, using measures such as targets, norms, benchmarks and past performance. Propriety looks at the decision and its basis. Performance looks at the outcome and the use of resources. Both go beyond the financial audit and both are used in the audit of government companies and corporations, where the CAG has the role of supplementary audit and comment.

Key rules to remember

Economy: Economy = acquiring inputs of appropriate quality at the lowest reasonable cost; Focus on inputs and cost. Example: purchases without competitive bids, excess stock bought, or idle capacity created.
Efficiency: Efficiency = output ÷ input (compared with a norm or benchmark); Focus on the link between resources used and output. Look at wastage, idle time, low capacity use and high cost per unit.
Effectiveness: Effectiveness = actual results achieved ÷ intended objectives; Focus on outcomes. A project can be efficient but not effective if it does not serve the objective.
Propriety test: Propriety = legality + public interest + prudence + financial discipline; A transaction can pass the legality test and still fail propriety. This is a framework to remember, not a statutory formula.

How to solve Propriety Audit and Performance Audit questions

Use this order for any question on propriety or performance audit of a PSU. It keeps the answer in provision-facts-conclusion form.

1Identify what the question asks: propriety, performance (3Es), or a comparison of the two.
2State the meaning in one or two lines, using your own words and the key test.
3List the principles or the 3Es that apply. Do not list all if the case fits only some.
4Pick the facts from the case and link each fact to one principle or one E. Say why it fails or passes.
5Name the evidence or measure you would use, such as norms, targets, budgets, past data or comparisons with similar units.
6Give the auditor's conclusion: what would be reported or commented on, and to whom (management, the Board, or through the CAG route for government companies).
7If asked for steps of a performance audit, give the sequence: select area, set objectives and criteria, plan, collect evidence, analyse, report and follow up.

Quickest way: Fact-to-E mapping

When to use it: Use when you have a short case and limited time, especially for 4 to 6 mark written answers.

Underline each action in the case: buying, producing, spending, delivering.
Tag each action: cost of inputs means Economy, input-to-output means Efficiency, objective met means Effectiveness.
Tag any action that was legal but unwise, extravagant or favoured someone as a propriety issue.
Write one line per tag: the fact, the principle, the conclusion.
Close with a one-line overall comment on what the auditor would report.

Common mistakes in Propriety Audit and Performance Audit

Treating propriety audit as the same as a legality or compliance check.
Both deal with rules, so they seem alike.
Fix: Say that propriety goes beyond legality. It tests wisdom, prudence and public interest in decisions that may be perfectly legal.
Mixing up economy and efficiency.
Both relate to cost and resources.
Fix: Economy is about the cost of inputs bought. Efficiency is about how well inputs are turned into output. Use input cost versus output per input as your anchor.
Ignoring effectiveness and stopping at cost and output.
Numbers feel easier to discuss than objectives.
Fix: Always ask whether the objective of the project or activity was achieved. A cheap, efficient project that misses its goal is not effective.
Writing a theory dump without applying the case facts.
Students memorise definitions and skip the link to the scenario.
Fix: Use fact, principle, conclusion for each point. Quote the case fact before naming the principle.
Saying the auditor can change management's policy decisions.
Confusion between commenting and deciding.
Fix: The auditor evaluates and reports. The auditor does not question the merits of policy set by the government or take over management decisions; the comment is on how it was carried out.
Giving performance audit steps in a random order.
Steps are learned as a list without logic.
Fix: Remember the flow: choose the area, set criteria, plan, gather evidence, analyse against criteria, report, follow up.

Worked examples

Example 1

A state-owned power distribution company bought 5,000 transformers at ₹60,000 each from a single supplier without inviting competitive quotes. Other public utilities bought the same specification at ₹52,000 through open tender in the same period. The purchase followed the company's delegation of powers. Comment from the viewpoint of propriety and economy.

Show the solution

Meaning: propriety audit tests whether a decision is sound, prudent and in the public interest, even if it is within authority. Economy means buying inputs of the right quality at the lowest reasonable cost.
Fact 1: the purchase was within the delegation of powers. So the legality test is met.
Fact 2: no competitive quotes were invited. A prudent buyer using public money would seek competition. This is a propriety concern, as it may favour one supplier.
Fact 3: the price was ₹60,000 against a comparable price of ₹52,000. Difference per unit = ₹8,000.
Excess cost = 5,000 × ₹8,000 = ₹4,00,00,000, which is ₹4 crore.
Link to economy: inputs were not acquired at the lowest reasonable cost, so economy was not achieved.

Answer: The purchase is legal but fails propriety because competitive bidding was not used and one supplier was favoured. It also fails economy: the excess cost over the comparable price is ₹4,00,00,000. The auditor should report the matter with the facts and the comparison.

Example 2

A government-owned fertiliser corporation set up a plant with a rated capacity of 4,00,000 tonnes a year to meet an assured demand. In the year, it produced 2,60,000 tonnes. The norm for similar plants is 85% of rated capacity. Raw material purchases were at market prices. Explain how a performance audit would assess efficiency and effectiveness.

Show the solution

Meaning: efficiency is the output achieved from the resources used, compared with a norm. Effectiveness is whether the objective was met.
Compute the norm output: 85% × 4,00,000 = 3,40,000 tonnes.
Compute actual capacity use: 2,60,000 ÷ 4,00,000 = 65%.
Compare: 65% is below the 85% norm. Shortfall = 3,40,000 − 2,60,000 = 80,000 tonnes.
Efficiency conclusion: the plant is under-used, so fixed costs per tonne are higher. The auditor should find causes such as breakdowns, raw material delays or poor maintenance.
Effectiveness: the plant was set up to meet assured demand. Producing less than the norm means part of that objective is not achieved. The auditor would check the unmet demand and any imports made.
Economy: raw materials bought at market prices raise no economy concern on these facts.

Answer: Capacity use was 65% against an 85% norm, a shortfall of 80,000 tonnes. This shows poor efficiency and reduced effectiveness in meeting the objective. The auditor should identify causes, quantify the loss and report. No economy issue arises on the facts given.

Exam tips

For a 'distinguish' question, write a short two-column style comparison in bullet pairs: meaning, focus, test applied, basis of evidence, nature of conclusion.
Always define the three Es in one line each before applying them. Examiners give marks for correct definitions.
Use numbers from the case to show the gap against a norm or benchmark. A calculated shortfall makes the answer stronger.
In a case MCQ, check whether the fact concerns decision quality (propriety) or results against objectives (performance) before reading the options.
Keep the reporting line in mind: for government companies, the CAG process of supplementary audit and comments applies; do not claim the statutory auditor alone reports to Parliament.

Practice questions from Overview of Audit of Public Sector Undertakings

Propriety Audit and Performance Audit in other exams

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

CS ProfessionalPerformance Audit: Concept and Approach

Propriety Audit and Performance Audit: frequently asked questions

What is propriety audit in simple words?

It checks whether a public body's decisions and spending were wise, prudent and in the public interest, not just legal. A transaction can follow the rules and still be improper if it was extravagant or favoured someone.

What are the 3Es of performance audit?

They are economy, efficiency and effectiveness. Economy is low cost of inputs, efficiency is good output from inputs, and effectiveness is achieving the intended objectives.

What is the difference between propriety audit and efficiency audit?

Propriety audit tests the soundness and public interest of decisions and expenditure. Efficiency audit, a part of performance audit, compares output with the resources used against norms and benchmarks. One looks at the decision, the other at the result.

What are the steps of a performance audit of a PSU?

Select the area, set objectives and criteria, plan the audit, collect evidence, analyse it against the criteria, report the findings and follow up on action taken. Write them in that order with a line on each.