Efficiency and Propriety Audit | Auditing

Efficiency is the ratio of a system’s outputs to inputs, and is strictly a limiting example of an idea of productivity in that an efficient system is one in which this ratio is optimal. Two categories of efficiency should be noted: Economic efficiency, which arises when the cost of inputs is minimized for a given level and mix of inputs and technical efficiency arises when the output is maximized for a given volume and mix of inputs.

Effectiveness denotes accomplishment of objectives and efficiency denotes fulfillment of objective with minimum sacrifice of available scarce resources. Efficiency Audit is the audit which ensures that every rupee invested yields optimum results.


The main objective of Efficiency Audit is to ensure that:

(i) There is most optimum utilization of investment, and

(ii) That investment is canalized in most profitable lines.

Efficiency Audit indicates towards appraisal or scrutiny of actual performance with reference to expected efficient standards.

The parameters based on which Efficiency Audit is conducted are:

(a) Return on capital,


(b) Capacity utilization,

(c) Optimum utilization of men, machines and materials,

(d) Export performance and import substitution,

(e) Liquidity position, and 


(f) Payback period.

Propriety Audit:

The Propriety Audit refers to verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct. E.L. Kohler defines the term Propriety as “that which meets the tests of public interest, commonly accepted custom and standards of conduct, and particularly as applied to professional performance, requirements of law, government regulations and professional codes”.

It is an examination of actions and decisions to find out whether they are in public interest and meet the standards of proper conduct. The Propriety Audit is concerned with examining that there is no leakage of revenue or wastage of funds by mistake or fraud.


It is concerned with ascertaining appropriateness from legal, financial or economic point of view. The use of public money in PSEs, requires proper utilization. Each PSE will have to follow clearly laid down rules, procedures and authorizations while spending the funds.

The approval of expenditures is governed by the principle of ‘propriety’ which requires to answer the following questions:

(1) Whether the proposed expenditure is justified.

(2) Whether the alternative ways exist in minimization of cost.

(3) Impact of the expenditure on the overall business.

(4) Whether the expenditure is properly authorized as per the internal procedures laid down.

(5) Whether the expenditure is incorporated in the budget approved by Board of Directors.

(6) Whether the expenditure to be incurred in exceptional cases, proper authorization and financial concurrence is obtained from the competent authority.

The government spending in India is subject to the standards of propriety as follows:

(a) The expenditure should not be prima facie more than what the occasion demands and that every officer exercises the same degree of vigilance as in respect of his own money.

(b) No authority in the exercise of its powers of sanctioning expenditure should pass an order which will directly or indirectly accrue to its own advantage.

(c) The funds should not be utilized for the benefit of a particular person or group of persons.

(d) Apart from the agreed remuneration or reward there should not be left open any other avenue to indirectly benefit the management personnel, employees and others; and

(e) Allowances and other payments, other than those covered in the agreed remuneration should not be allowed to be a source of profit for the recipient (e.g., daily allowance for outstation work).


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