The audit of performance information (pre-determined objectives) in the public sector

Welcome to the World of Public Sector Auditing!

In standard financial statement audits, the focus is largely on financial metrics: revenue, profit, assets, and liabilities. However, public sector entities (such as government departments, state hospitals, and public education bodies) do not exist to generate commercial profit. Their primary objective is the delivery of public services in accordance with mandated policy. Consequently, accountability and oversight depend on the audit of performance information (pre-determined objectives).

Pre-determined objectives are the strategic goals and performance targets set by an entity prior to the start of the reporting cycle against which actual performance is measured, managed, and reported.

1. Distinguishing the Audit of Performance Information from Performance Auditing

A crucial distinction examined in AAA is the difference between an audit of performance information (pre-determined objectives) and a performance audit (often called a Value for Money or VFM audit):

Audit of Performance Information (Pre-determined Objectives):
- Focus: Verifying the credibility, accuracy, and compliance of the performance data published by management in its annual or integrated report.
- Key Question: Has the entity reported its achievements fairly, reliably, and in line with statutory requirements against its pre-determined targets?
- Nature: Analogous to a financial statement audit, where the reported performance metrics (KPIs) are evaluated against established reporting criteria.

Performance Auditing (Value for Money / VFM):
- Focus: Evaluating management's operational conduct and programmes across the three Es:
  1. Economy: Minimising the cost of resources acquired or used, having regard to appropriate quality.
  2. Efficiency: Maximising output from a given level of input, or minimising input for a required output.
  3. Effectiveness: The extent to which operational goals and intended policy outcomes were actually achieved.
- Key Question: Did the programme deliver value for money to taxpayers?

2. The Core Criteria for Auditing Performance Information

Under public sector auditing frameworks, auditors evaluate reported performance against four specific criteria:

Criterion 1: Compliance with Reporting Requirements

- Evaluates whether the entity reported its performance information in compliance with the relevant statutory framework, government regulations, and reporting standards.
- Assesses whether the annual performance report is published in the prescribed format within statutory deadlines, covering all mandated operational divisions and programmes.

Criterion 2: Usefulness

Performance information must provide meaningful insights to stakeholders, parliament, and citizens. Usefulness is assessed across two main dimensions:
- Consistency: The performance objectives, indicators, and targets reported in the annual performance report must be consistent with those set out in the entity's strategic plan and initial budget allocation approved by the legislature. Management must not alter targets during the year to conceal underperformance.
- Relevance: Reported indicators and targets must logically relate to the core statutory mandate and public service delivery goals of the entity.

Criterion 3: Measurability

For reported performance to be auditable, the underlying objectives and indicators must be capable of objective measurement:
- Objectives and targets must be well-defined, specific, verifiable, and time-bound.
- There must be clear definitions and methodologies specifying how each indicator is calculated and recorded (e.g., precise calculation of "hospital wait time" from admission to triage).

Criterion 4: Reliability

Reported performance achievements must be supported by sufficient appropriate audit evidence:
- Validity: The reported achievements actually occurred and pertain to the reporting entity.
- Accuracy: The reported numbers, percentages, and metrics are calculated accurately without mathematical or transcription errors.
- Completeness: All actual service delivery events that took place are fully captured and reported, without selective omission or "cherry-picking" favourable results.

3. Planning and Examination Procedures

Step 1: Understanding the Mandate and Internal Controls

The auditor reviews legislation, parliamentary appropriations, and strategic planning documents to determine the entity's pre-determined objectives. The auditor then documents and tests internal controls over the collection, processing, collation, and sign-off of performance data across operational branches.

Step 2: Risk Assessment and Professional Scepticism

The auditor assesses operational and reporting risks, including the risk of management gaming or data manipulation. Public sector managers may face political pressure or funding threats if targets are missed, incentivising data falsification or target altering.

Step 3: Substantive Examination Procedures

Auditors design substantive procedures directly targeting performance data:
- Inspection of physical records and assets: Physically inspecting newly constructed facilities, infrastructure, or road repairs to verify physical existence against reported milestones.
- Recalculation and re-performance: Re-running query scripts and recalculating KPI statistics from underlying source databases (e.g., patient admission logs, school registration systems).
- External confirmation: Confirming data with third-party service providers, independent contractors, or external regulatory inspection reports.
- Analytical review: Comparing reported performance trends across periods and correlating them with financial expenditures (e.g., comparing fuel and fleet maintenance expense with reported transport mileage).

4. Reporting and the Audit Conclusion on an Integrated Report

The output of the audit of performance information depends on the statutory reporting mandate and engagement terms:

Public Sector Audit Reports:
- The auditor provides an assurance conclusion (reasonable or limited) on whether the reported performance against pre-determined objectives is useful and reliable in all material respects in accordance with the reporting criteria.
- Material findings—such as unapproved target alterations, significant omissions, or unsupported reported achievements—are formally reported as audit findings or modifications within the auditor's report.

The Audit Conclusion on an Integrated Report:
- Public sector bodies increasingly prepare integrated reports, presenting how strategy, governance, performance, and prospects create public value across various capitals (financial, human, social, and relationship).
- When providing an audit conclusion on performance information situated within an integrated report, the auditor must assess the consistency of performance information with both the historical financial statements and the overarching narrative disclosures (in accordance with principles under ISA 720 (Revised) and ISAE 3000 (Revised)).
- The auditor evaluates whether the integrated report presents a balanced and complete view of organisational value creation, ensuring negative outcomes or failed strategic targets are not disguised, omitted, or presented misleadingly.

Exam Technique Summary

1. Identify the distinction: If the requirement asks about verifying published achievements against targets, apply the performance information audit criteria. If it asks whether resources were used economically and efficiently, apply performance auditing (VFM / 3Es).
2. Structure via criteria: When evaluating performance information, frame your analysis around compliance, usefulness, measurability, and reliability.
3. Tailor substantive procedures: Specify the precise document, system, or physical inspection required in the context of the scenario (e.g., emergency service response times or student pass rates).