Value for Money Audits (VFM)

For most companies, auditing includes the process of auditors examining their financial statements. During this process, auditors gather evidence related to several areas. Firstly, it consists of evidence on whether the financial statements present a true and fair view of its operations. Similarly, it consists of ensuring these statements comply with the applicable financial reporting framework.

However, the above definition of auditing only applies to external audits. Similarly, this definition is usually only applicable to specific organizations. For organizations that handle public funds, the same process may not apply. In these cases, these organizations may have to undergo a value for money (VFM) audit.

VFM audits are applicable for organizations that manage public funds. These audits look at three aspects of how organizations manage these funds. These entail the 3Es of VFM audits, which include economy, efficiency, and effectiveness. Before considering what value for money audits are, it is crucial to look at the 3Es of value for money audits.

What are the three Es of Value for Money Audits?

As mentioned, value for money audits is about considering whether an organization has achieved economy, efficiency, and effectiveness in using public funds. Therefore, these are all critical aspects of VFM audits. A brief explanation of what each of the three Es means is as below.

Economy

The economy component of value for money audits looks at how organizations minimize output costs for a specific activity level. Therefore, it looks at the input levels in relation to output levels in monetary terms. However, it also considers whether the quality achieved for the given price is appropriate. The economy factor in VFM audits investigates the acquisition of resources in appropriate quantity and quality at minimum cost.

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The economy component measures what goes into providing a service. Therefore, it uses inputs-unit costs as an economy measure. It considers the life costs such as direct and indirect acquiring costs, running and disposing of assets, etc. Usually, organizations have procurement policies and procedures which they use for this purpose. Therefore, auditors will verify whether these policies are appropriate for the use of public funds.

When examining the economy aspect of an engagement, auditors will consider whether acquisitions follow an organization’s procurement policies. Like other audits, auditors can use sampling to achieve it. For that, they can apply various audit procedures, including reviewing financial information.

Efficiency

The efficiency component of value for money audits considers the productivity achieved by the organization. For that, it reflects the ratios between the actual inputs vs the planned inputs for the companies. In other words, it looks at resources actually used by the organization in relation to the resources planned for the project.

The efficiency factor examines the relationship between inputs and outputs. For any given project, the efficiency will be maximum when the outputs for any given set of inputs are high. Similarly, it will also be high will the input for any given set of outputs is minimum. For most projects, measuring efficiency is only possible at the end.

Effectiveness

The effectiveness component for VFM audits looks at the extent to which organizations have achieved their objectiveness. Usually, auditors consider the ratio between the actual output vs the expected output for the given project. In short, effectiveness establish the extent to which any activity achieves its intended results.

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Like the economy, effectiveness looks at both qualitative and quantitative measures. It considers both measures of fluctuation in outcomes that show whether the project effectively achieves its objectives. As with other audits, auditors will need to investigate any financial information to establish a project’s effectiveness.

What is Value for Money Audit?

Value for money audits examines whether an organization has obtained economy, efficiency, and effectiveness in using public funds. Value for money, in general, refers to an explicit commitment to ensure an organization achieves the best results possible obtained for the funds utilized. Other names used for this type of audits include comprehensive, operation, extended scope, management, or performance auditing.

With VFM audits, auditors investigate whether an organization has made proper arrangements to achieve economy, efficiency, and effectiveness. It also helps identify any performance gaps by comparing input resources with the expected and actual outcomes. Based on these investigations, auditors provide recommendations to the management.

What are the Problems with Value for Money Audits?

There are several limitations of value for money audits, which relate to how public sector organizations operate. Firstly, these audits place insufficient emphasis on accounting and stewardship in public organizations. Similarly, there are several inconsistencies in public sector objectives. This issue can come as a result of political and economic instability in a jurisdiction.

The information required to conduct VFM audits may also be challenging to obtain. In some cases, auditors may need to use their professional judgment, which can limit the audit. Similarly, other issues that apply to other audits also apply to value for money audits. These may include the use of sampling or materiality, which can be limiting.

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Conclusion

Value for money audits investigates whether organizations have achieved economy, efficiency, and effectiveness in using public funds. As mentioned, these three components are critical to the audit. However, there are several limitations of value for money audits, which are above.

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