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Types of Audit

Propriety and Efficiency Audit

An audit is when we examine or review any process, records, departments etc. There are various types of audits other than a financial audit. Here we will be closely looking at two such special audit processes – propriety audit and efficiency audit.

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Propriety Audit

Generally, in companies and other big organizations, ownership and management are separate. This means the real owners of the business have to rely on executives to make the correct decisions and take the due course of action as per the law. This is where the concept of propriety audit is born.

Propriety audit has been described as an audit of the actions and decisions of the executives. The focus of such an audit is on the financial discipline, the authority structure, efficiency, rules and regulations and the protection of public interest.

Some of the important aspects of verification during a propriety audit are as follows

  1. Financial records and accounts are accurate and up to the mark
  2. The assets of the company are safeguarded and not misused
  3. Propriety audit will check the utilization of funds
  4. The results that are budgeted and expected are being met

One of the biggest use of propriety audit is for government companies and public organizations as such. In such organizations, there is heavy involvement of public funds and deposits.

And so public interest is a concern here. So a propriety audit will keep a check on improper expenditures, disregard for rules, wastage of public money and any such irregularities.

Efficiency Audit

efficiency audit

Efficiency is the level of productivity of an organization. Essentially, it is the ratio of productivity, i.e. the levels of inputs (raw materials) we need to achieve the desired output (finished goods).

Learn more about Internal Audit here in detail.

So efficiency indicates how well the company is using its resources. The aim is the optimum use of resources by the company. Let us understand a few important terms in relation to efficiency,

  • Input: Resources of any kind, example – human resources, finances, raw material, assets, machinery etc
  • Output: Goods and services produced by the company to meet the needs of the customers
  • Quantity: Amount of goods/services produced
  • Productivity: A ratio of goods produced to the amount of resources needed to produce them

So an efficiency audit will help the organization measure its efficiency in many ways. There is financial efficiency, technical efficiency, production efficiency etc. Two of the main objectives of an efficiency audit are to make sure that the organisation has

  • optimum utilization of the investments in the organization
  • that the organization channels the investment in their most profitable ventures

One thing to understand is that efficiency is a relative concept. So the efficiency of an organization is measured against certain industry standards, a target or the norms. After the audit, the management can then focus on improving its efficiency. The way to do it is to achieve more output from the same amount of input as before.

Solved Question for You

Q: What are the parameters of an efficiency audit?

Ans: The parameters of an efficiency audit are,

  • Return on capital
  • Optimum utilization of material, human resources, machinery etc
  • Capacity utilization
  • Liquidity position of the organization
  • Payback period
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