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

Performance Audit Process, Reporting and Follow-up

Updated 11 October 2026 · Fact-checked

A performance audit checks whether an entity's activities are economical, efficient and effective. You plan the audit, set criteria, gather evidence, form findings, report with recommendations and then follow up on action taken. In public sector audits, the CAG follows this cycle and reports to the legislature.

Understand Performance Audit Process and Reporting

A performance audit looks beyond whether the accounts are right. It asks whether money and resources were used well. The classic test is the three Es: economy (right quality at lowest cost), efficiency (best output for the input used) and effectiveness (whether the objectives were actually achieved).

It differs from a financial audit. A financial audit gives an opinion on the financial statements. A performance audit examines a programme, project, function or activity and reports findings and recommendations. There is usually no pass or fail opinion. The scope is chosen by the auditor, and each audit is built around its own questions.

SA 610 (Revised) recognises that internal audit work can include reviewing the economy, efficiency and effectiveness of operating activities, including non-financial activities. That is the same ground a performance audit covers. In a company, the internal audit function or a management team may do it. In government and public sector undertakings, the Comptroller and Auditor General (CAG) of India does it and the reports go to Parliament or the State Legislature.

The process is a cycle. First you select the topic and plan. Then you define the audit objective, questions and criteria. You collect evidence and test it against the criteria. You draw findings, discuss them with the auditee, and issue the report. The last step is follow-up, which checks whether the recommendations were acted on. Without follow-up, the audit changes nothing.

For your exam, remember that the answer must be tied to the facts. Name the stage, state what is done, and apply it to the entity in the question.

Key rules to remember

The three Es: Economy = minimising cost of resources for the right quality; Efficiency = best output for given input; Effectiveness = extent to which objectives are achieved; Some frameworks add a fourth E, equity or ethics. Say so only if the question asks for it.
Audit cycle: Select topic → Plan → Set objectives, questions and criteria → Gather evidence → Findings → Draft report and auditee comments → Final report → Follow-up; Use this as the skeleton of any process question.
Efficiency measure: Efficiency = Output ÷ Input (compare with a benchmark or past performance); A ratio only means something against a criterion, such as a standard cost or target.
Finding structure: Finding = Criteria + Condition + Cause + Effect (+ Recommendation); Each finding in the report should show what should have been, what was, why, and the impact.
Judgment and reliance (SA 610, para 18): More judgment, higher assessed risk, weaker objectivity or lower competence → use less of the internal audit work and do more directly; Applies when an external auditor relies on internal audit. Significant judgments stay with the external auditor.

How to solve Performance Audit Process and Reporting questions

Use this order for any question on the performance audit process or report. Keep the answer tied to the entity in the facts.

1Identify the entity and the activity under audit, such as a scheme, a plant or a procurement function.
2State the objective and the audit questions, linked to economy, efficiency or effectiveness.
3Set the criteria. Name the source: law, rules, policy, targets, standards, benchmarks or good practice.
4Describe evidence gathering: documents, data analysis, inspection, interviews, surveys and sampling. Say how you will check that the evidence is sufficient and reliable.
5Compare condition with criteria and write findings with cause and effect.
6Discuss findings with management, then draft the report with objective, scope, methodology, findings, conclusions and recommendations.
7Close with follow-up: management action plan, tracking of recommendations, and reporting to the audit committee or legislature.

Quickest way: Plan–Criteria–Evidence–Report–Follow-up

When to use it: Use this when you have little time or the question asks for the steps or the contents of a report.

Write the five headings: Plan, Criteria, Evidence, Report, Follow-up.
Under each, add one line applied to the case entity.
Add the three Es next to the objective.
For public sector questions, add the CAG angle: report goes to the legislature and is examined by the Public Accounts Committee or the Committee on Public Undertakings.
End with one sentence on tracking recommendations.

Common mistakes in Performance Audit Process and Reporting

Treating a performance audit as a financial audit that gives an opinion on the accounts.
Students carry over the statutory audit pattern of opinion and report.
Fix: State that it examines economy, efficiency and effectiveness and reports findings and recommendations, not an opinion on financial statements.
Writing findings without criteria.
Students jump to what went wrong without saying what the standard was.
Fix: Always state the benchmark first. A shortfall is only a finding when measured against a criterion.
Stopping at the report and ignoring follow-up.
The report feels like the end of the audit.
Fix: Add a follow-up step: action plan, tracking of recommendations and reporting on progress.
Confusing economy, efficiency and effectiveness.
The terms sound similar.
Fix: Link each to a question: economy is cost, efficiency is output per input, effectiveness is whether the objective was met.
Saying the external auditor can hand over significant judgments to internal audit.
Students over-read the idea of using the work of internal auditors.
Fix: Under SA 610 (Revised), the external auditor makes all significant judgments, such as assessing risks of material misstatement and evaluating going concern, and uses less internal audit work as judgment and risk rise.
Giving generic recommendations such as 'improve controls'.
Students lack the habit of linking a recommendation to a cause.
Fix: Tie each recommendation to a specific cause and make it actionable, for example 'introduce a quarterly stock reconciliation'.

Worked examples

Example 1

Sundaram Pharma Ltd runs a central procurement function. The board asks for a performance audit. Explain how you would plan and carry out the audit, and what the report should contain.

Show the solution

Objective: assess whether procurement is economical and efficient. Questions: Are purchases made at competitive prices? Are orders processed within the target time?
Criteria: the company's procurement policy, approved vendor rules, target lead time, and market price benchmarks.
Evidence: sample purchase orders, vendor quotations, price comparisons, delivery records, and interviews with purchase and stores staff. Test the data for reliability.
Findings: compare actual with criteria. For example, if orders took more than the target lead time, record the condition, the cause such as multi-level approvals, and the effect such as stock-outs.
Discuss draft findings with management and record its comments.
Report contents: objective, scope, methodology, criteria, findings, conclusions and recommendations.
Follow-up: agree an action plan with dates, and report progress to the audit committee.

Answer: Plan around economy and efficiency in procurement, fix criteria from policy and benchmarks, gather and test evidence, write findings as criteria, condition, cause and effect, report with recommendations, and follow up on the action taken through the audit committee.

Example 2

An external auditor of Bharat Textiles Ltd wants to use the internal audit function's work on evaluating a significant accounting estimate and on routine stock counts. Advise on what the auditor may rely on.

Show the solution

Under SA 610 (Revised), the external auditor has sole responsibility for the audit opinion and must make all significant judgments.
Evaluating significant accounting estimates is listed as a significant judgment. The auditor should do it directly and not rely on internal audit for it.
Routine stock counts involve less judgment. The auditor may use that work after assessing the objectivity and competence of the function, and the risk involved.
Competence factors include resourcing, training policies, technical proficiency and membership of professional bodies. Objectivity depends on organisational status and policies.
The auditor should coordinate with the function on timing, nature, extent of coverage, sample sizes, documentation and review procedures, and communicate the planned use to those charged with governance.

Answer: The auditor must evaluate the significant accounting estimate directly. Routine stock count work may be used, in a limited way, if the function is objective and competent and the auditor reviews it, while coordinating with the function and informing those charged with governance.

Exam tips

Write the process as numbered stages and apply each to the facts. Generic lists lose marks.
Always mention criteria and the three Es. Examiners look for them.
For public sector questions, mention the CAG, reporting to the legislature, and follow-up on recommendations.
For SA 610 questions, state who holds the judgment: the external auditor makes all significant judgments.
End case answers with a conclusion and one practical recommendation.

Practice questions from Internal Audit and Performance Audit

Performance Audit Process and Reporting in other exams

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

Performance Audit Process and Reporting: frequently asked questions

What are the main steps in a performance audit?

Select the topic and plan, set the objective, questions and criteria, gather and test evidence, develop findings, discuss them with the auditee, issue the report and follow up on recommendations.

How is a performance audit different from a financial audit?

A financial audit gives an opinion on the financial statements. A performance audit examines economy, efficiency and effectiveness of an activity and reports findings and recommendations, usually without an opinion.

What should a performance audit report contain?

It should state the objective, scope, methodology and criteria, then the findings with cause and effect, the conclusions and the recommendations. It should also include the auditee's comments.

Why is follow-up important in a performance audit?

Follow-up checks whether management acted on the recommendations and whether the problem was fixed. Without it, the audit has no lasting effect.