First-principles calculations were carried out to examine the catalytic activity of Pd and Pd-Au alloy surfaces for CO oxidation. The influences of surface-ligand effect and lattice strain effect on activity were demonstrated. The catalytic efficiency of Pd-Au bimetallic systems depends largely on the surface composition of Pd and Au. The addition of Au significantly improves the activity of a Pd-Au bimetallic slab with an Au-rich surface due to the dominant Au-induced ligand effect on both O and CO chemisorption. Among the various cases considered, the system with Au on the surface of the Pd(16)Au(4) slab exhibits the lowest energy barrier of 0.21 eV, which is decreased by 0.66 eV compared to that of the pure Pd(111) surface. It is predicted that the [Pd](Au) core/shell nanoparticle catalyst should have a higher activity for CO oxidation as it combines the advantages of the ligand effect of Au and the strain effect of Pd.