Compliance Management, Audit and Due Diligence · Internal Audit and Performance Audit

Performance Audit: Concept and Approach Explained

Updated 11 October 2026 · Fact-checked

Performance audit is an independent examination of whether an entity's activities, programmes or functions are run with economy, efficiency and effectiveness. It does not certify financial statements. You solve questions by defining the audit, stating the 3 Es, setting criteria, collecting evidence, comparing actual results with criteria and recommending improvements.

Understand Performance Audit: Concept and Approach

A financial audit asks one question: do the financial statements give a true and fair view? A performance audit asks a different one: is the entity getting good results from the resources it uses? It looks at how an activity is run, not only at what the books say.

Performance audit rests on the 3 Es:

Economy: acquiring resources of the right quality at the lowest reasonable cost. Example: buying materials of the required quality at a fair price.
Efficiency: getting the maximum output from the inputs used, or using the least input for a given output.
Effectiveness: achieving the intended objectives and results. Example: a training programme actually improves compliance skills.

Some texts add a fourth E, equity or ethics, but the core of the topic is the three above. Keep them separate. An activity can be economical (cheap inputs) yet inefficient (waste in use) and ineffective (goal missed).

The objectives of a performance audit are to assess whether resources are used well, find waste and weak controls, check whether goals and policies are met, and recommend improvements to management. The scope is wide. It can cover a department, a project, a scheme, a process or a whole function, and financial as well as non-financial activities. This matches SA 610 (Revised), which says an internal audit function may be assigned to review the economy, efficiency and effectiveness of operating activities, including non-financial activities of an entity.

The approach is criteria-based and forward-looking. The auditor fixes the audit questions and criteria first, such as targets, benchmarks, budgets or standards. The auditor then gathers evidence, compares actual performance with the criteria, finds the causes of any gap and reports with practical recommendations. The tone is constructive. The aim is improvement, not only fault-finding.

Key rules to remember

The 3 Es: Performance audit = Economy + Efficiency + Effectiveness; Economy is about cost of inputs, efficiency is about output per unit of input, effectiveness is about achieving objectives.
Efficiency measure: Efficiency = Output ÷ Input; Compare with a target or benchmark. A higher ratio, or a lower input per unit of output, means better efficiency.
Effectiveness measure: Effectiveness = Actual result ÷ Intended result; Shows how far the stated objective was achieved. It is a rule of thumb for answers, not a prescribed standard formula.
Scope of internal audit function (SA 610 Revised): Review of operating activities = economy, efficiency and effectiveness, including non-financial activities; The standard lists this next to governance, risk management, internal control, financial information and compliance reviews.

How to solve Performance Audit: Concept and Approach questions

Use this order for any theory or case question on performance audit. It gives you provision, analysis and conclusion in a clean structure.

1Define performance audit in one or two lines: an independent review of economy, efficiency and effectiveness of an activity or programme.
2State the 3 Es with one short meaning each, and a one-line example from the facts given.
3Identify the object being audited (project, department, scheme, function) and its stated objectives.
4Set the criteria: targets, budgets, benchmarks, past performance or standards against which results will be judged.
5Describe the evidence and methods: document review, data analysis, inquiry, observation, comparison with benchmarks.
6Compare actual with criteria, point out gaps and find their causes, tagged to economy, efficiency or effectiveness.
7Conclude with specific recommendations and follow-up. If asked, add the contrast with financial audit.

Quickest way: 3 Es table in the answer

When to use it: Use it when you have little time or the question asks you to apply the 3 Es to a given case.

Write the definition in one line.
List Economy, Efficiency and Effectiveness as three bullets, each with a meaning and the matching fact from the case.
Add one line on criteria and evidence.
Close with two or three recommendations and one line stating that the audit supports management and does not give a true and fair opinion.

Common mistakes in Performance Audit: Concept and Approach

Treating performance audit as another form of financial audit.
Both use evidence and reports, so they feel the same.
Fix: State the focus clearly. Financial audit gives an opinion on financial statements. Performance audit judges how well resources are used and results achieved.
Mixing up economy and efficiency.
Both relate to cost, so students use the words loosely.
Fix: Economy is the cost of inputs. Efficiency is the relation between input and output. Use the phrase 'lowest reasonable cost' for economy and 'output per unit of input' for efficiency.
Ignoring effectiveness and judging only by cost savings.
Cost is easy to see, results are harder to measure.
Fix: Always ask whether the objective was achieved. A cheap, efficient activity that misses its goal fails the effectiveness test.
Giving a case answer without criteria.
Students jump to findings and skip the benchmark.
Fix: Say what standard, target or benchmark you compare against before you describe any shortfall.
Restricting scope to financial matters.
Audit is associated with accounts.
Fix: Mention that scope includes non-financial and operating activities, as SA 610 (Revised) recognises for internal audit.
Ending the answer with only a list of faults.
The audit is seen as fault-finding.
Fix: Finish with practical recommendations for management and a follow-up step.

Worked examples

Example 1

Explain performance audit and distinguish it from financial audit. (Model answer)

Show the solution

Meaning: performance audit is an independent examination of whether an entity's activities or programmes are carried out with economy, efficiency and effectiveness.
Focus: financial audit examines whether financial statements are free from material misstatement and give a true and fair view. Performance audit examines how well resources are used and whether objectives are met.
Criteria: financial audit uses the applicable financial reporting framework. Performance audit uses targets, benchmarks, budgets and other criteria set for the audit.
Scope: financial audit covers financial information. Performance audit covers financial and non-financial operating activities.
Output: financial audit ends in an opinion. Performance audit ends in findings and recommendations to improve results.
Orientation: financial audit looks mainly at past transactions. Performance audit looks at past results to improve future operations.

Answer: Performance audit judges economy, efficiency and effectiveness of activities and recommends improvements. Financial audit gives an opinion on the financial statements. They differ in focus, criteria, scope and output.

Example 2

Sundaram Foods Ltd runs a skill programme for its plant staff with a budget of ₹10,00,000 to train 200 staff. It spent ₹9,00,000 and trained 150 staff, and after training only 90 staff cleared the competency test against a target of 160. Assess the programme on the 3 Es. (Model answer)

Show the solution

Economy: spend was ₹9,00,000 against a budget of ₹10,00,000, so inputs cost less than planned. This suggests good economy, provided the quality of trainers and material met requirements.
Efficiency: cost per person trained = ₹9,00,000 ÷ 150 = ₹6,000. Budgeted cost per person = ₹10,00,000 ÷ 200 = ₹5,000. Cost per trainee is higher by ₹1,000, so the programme is less efficient than planned.
Effectiveness: target was 160 staff competent, actual was 90. 90 ÷ 160 = 56.25%, so about 56% of the intended result was achieved.
Effectiveness at the training level: 150 trained, 90 passed, so 90 ÷ 150 = 60% passed.
Conclusion: the saving in total spend hides higher unit cost and weak results. Recommend revisiting trainer quality, batch size, pre-assessment and follow-up, and set unit-cost and pass-rate targets.

Answer: Economy: good in total spend (₹9,00,000 vs ₹10,00,000). Efficiency: poor, ₹6,000 per trainee against ₹5,000 planned. Effectiveness: weak, 90 against 160 target, about 56.25% achieved.

Exam tips

Always write the 3 Es by name and define each in a line. Examiners look for these keywords first.
Tie each E to a fact in the case. A generic answer scores less than a case-linked one.
For 'distinguish' questions, give at least four points: focus, criteria, scope, output.
When numbers are given, compute unit cost and achievement percentage, and show the working.
Mention that the audit ends with recommendations and follow-up, since the aim is improvement.

Practice questions from Internal Audit and Performance Audit

Performance Audit: Concept and Approach in other exams

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

ACCA Strategic ProfessionalPlanning the Audit of Performance Information

Performance Audit: Concept and Approach: frequently asked questions

What are the 3 Es in performance audit?

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

How is performance audit different from financial audit?

Financial audit gives an opinion on whether financial statements are fairly presented. Performance audit reviews how well resources are used and whether goals are met, and ends in recommendations rather than an opinion.

Who can carry out a performance audit?

It can be done by an internal audit function, an external professional or a government audit body. SA 610 (Revised) notes that an internal audit function may be assigned to review economy, efficiency and effectiveness of operating activities.

Does performance audit cover non-financial activities?

Yes. Its scope extends to operating activities, programmes and processes, including non-financial ones, because it tests results and resource use, not only accounts.