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Practice Guide to Auditing Efficiency

Calculating Ratios, Using Benchmarks and Quantifying Cost Savings

During examination, auditors will need to consider how the costs of inputs and outputs have been calculated and whether they have been calculated in a consistent manner over the complete period under audit. It may be necessary to determine whether all direct costs (labour, equipment, materials, etc.) and indirect costs (administration, utilities, maintenance, etc.) have been included and whether data on indirect costs will be required to complete audit procedures (subject matter experts or cost accountants may be able to provide valuable advice on this question).

Once auditors are in possession of good data on inputs, outputs and outcomes (see Figure 1 for examples), they will be able to calculate efficiency ratios:

Efficiency Ratios

Calculating these ratios is one of the two elements necessary to assess efficiency. A second element consists of comparing to a benchmark or a baseline figure. Benchmarks may represent best practices or a level of efficiency achieved in other organizations, whereas baselines usually represent a previous level of performance achieved by an organization (subject matter experts may know good sources of benchmarks). Equipped with current ratio data and reliable benchmarks or baselines, auditors can determine whether an entity, program or process is efficient compared to best practices, other organizations, or whether efficiency has improved over time. The table below provides some illustrations of ratios and their uses.

Examples of ratio calculation and their purpose


Purpose of calculation

Number of transactions processed per labour hour (or per 1 FTE day, month or year)

Number of licenses or permits issued per day in one department or one regional office

  • To have an understanding of processing efficiency in terms of outputs.
  • Calculation could be done for different staff or different groups, to enable comparisons.
  • Calculation could be done for different times during day or for different days to identify changes or trends in efficiency.
  • Could be used to compare results achieved by the same staff/group/organization at different points in the past or to compare the entity’s results with the results achieved by similar organizations.
  • Could also be used to compare results against a good practice benchmark.

Number of inspections conducted per $100000 spent on an enforcement program

Administration costs in relation to total program costs (as a percentage)

  • To provide information on the extent to which activities are conducted efficiently with regard to costs.
  • Comparisons within or between organizations or against a benchmark.

Office space per employee

  • To provide information on the extent to which space is used efficiently.
  • Comparisons within or between organizations or against a benchmark.

Number of successful return to work outcomes for one physiotherapist for a specific period of time

  • To have an understanding of a public service’s efficiency performance in terms of outcomes.
  • Could also be measured at the aggregate level (i.e. for all physiotherapists in an organization).
  • Comparisons within or between organizations or against a benchmark.

This exercise may pose important challenges to auditors. For example, the ratio data and the benchmarks or baselines need to be calculated using similar variables, otherwise they won’t be easily comparable. Also, if current ratios include a time component (i.e. inputs per hour, per day, etc.), then the benchmarks or baselines will need to have been based on similar time units. In cases where the calculations were not made in a similar manner, auditors will likely need to make adjustments to either the auditee’s data or the benchmarks/baselines in order to ensure comparability.

Comparability of data may also be problematic when the only benchmarks available come from the private sector. Since private sector organizations have different objectives than public sector ones, it may not be fair or appropriate to use a private sector benchmark to assess the efficiency of a public entity or public service.

GOOD PRACTICE: When auditors decide to adopt private sector benchmarks to assess the efficiency of a public sector organization, they should document their rationale for doing so. They should also obtain the opinion of a subject matter expert on the appropriateness of the selected benchmarks. A subject matter expert can also suggests adjustments that could improve the benchmarks’ suitability. 

In situations where auditors have access to good information on input costs, output costs, reliable benchmarks, and detailed process maps, they may attempt to identify system inefficiencies and quantify the estimated savings that could be made by enhancing the systems and improving their efficiency. Quantifying potential cost savings is a very effective way of demonstrating the significance of an efficiency issue and of providing a rationale for taking corrective actions. However, quantification of cost savings must be based on reliable data and sound assumptions.

GOOD PRACTICE: Where possible, audit procedures can include estimating the potential cost and time savings that could result from correcting identified inefficiencies. Auditors can quantify estimated cost savings when they collectively possess the require expertise to do so and are confident that their data is reliable and their assumptions are sound. They should also have their calculations and assumptions validated by a subject matter expert. Finally, auditors should be transparent in their report about the assumptions they made in estimating cost savings.