Financial statement audit is an independent examination of an organisation financial statement which includes income statement, statement of financial positions and statement of cashflows in order to verify if the they are free from errors, material misstatements and whether or not they are prepared in accordance with applicable accounting standards and industrial laws.
On other hand (as carried out by ISSAI 300 and 1300) performance auditing is an independent, objective and reliable examination of whether an organisation undertakings, systems, operations, programmes, activities or organisations are operating in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement. As you may be aware, the presentation of financial statement in accordance with applicable laws and the opinion of an external auditor that,” In our opinion, the financial statements present fairly, in all material respects, the financial position of an entity as at 31 December 2023, and its financial performance and its cash flows for the year then ended” does not mean the organisation is achieving its objectives: Ideally, an organisation can have all expenses approved, spent on the intended activities and report them correctly in the ledger as per budget and in accordance with International Accounting standards but still not economical, effective and efficiency. In addition, the accounting standards on audit (ISA) 520, Analytical Procedures, in conjunction with (ISA) 200, Overall Objectives of the Independent Auditor does not permit auditors to analyse the numbers in the financial statements against the wishes of stakeholders and aligned organisation objectives.
This means, a CEO can draw travel allowances for 15 days at a rate of USD500 per night and the auditor will okay the transaction even if the organisation would have saved had the CEO taken 10 days or assigned a manager who is probably on lower rate. The auditor will basically look at whether the travel payment is in accordance with entity policies, budget and whether procedure was followed to draw the allowances.
Financial statement auditors are not mandated to question why the CEO travelled for 15 days or why the CEO did not assign the manager where cost could have reduced. Performance audit on other hand looks at why did the director travel? did the matter require only the Chief Executive Officer to travel? was the matter not going to be solved if a manager travelled and for ten (10) days? what was the problem before and after. This confirms that the inclusion of performance audit to the scope of financial statement audits to steer efficiency and effectiveness in the operations of NGOs in Zambia The financial audit is critical but it has a lot of weakness which is well acknowledged IAS 240 “Auditor’s responsibility and Objectives,” the standard acknowledges that there are inherent limitations in an audit, as the overall objective of the statutory audit is not to detect fraud but to make an opinion on whether the financial statements.
In addition, financial audit does not marry the financial statements with the qualitative information in order to marry how the numbers in the financial statements contributed to the achievement of specific objectives of an organisation. Therefore, financial audit alone cannot provide a holistic check and balance. Incorporating financial audit with performance audit will consolidate each other because performance audit addresses the inherent limitation of financial statement audits by evaluating the organisation’s efficiency, economy and effectiveness.
In fact, performance audit takes stock of other non-financial matters such as employee empowerment, organisation teamwork, risk appetite, management information.
By Winfred M silumbwe MBA fin, ZiCAGrad, PGdip, CFIP, CFIA
