Different Types of Audits That Help Businesses
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Companies perform various audits to help ensure the accuracy of their records or to gain an in-depth understanding of their policies and procedures. The information from an audit can be used to improve internal controls, improve finances, expose possible fraud, and help stakeholders make vital decisions. Understanding more about the types of audits can help you provide value to a company and assist them in achieving its goals. In this article, we explore why different audits are essential and review the different audit types to help you learn more about the topic.
Why are the different types of audits essential?
There are many types of audits and they are essential to help examine management accounts and reports, financial statements, operational reports, accounting records, revenue reports, and expense reports. During most audits, a Chartered Professional Accountant (CPA) works to present the company's records accurately and complies with specific standards to get reasonable assurance about the company's financial and operational efficiency. The audit team shows their findings to the company's stakeholders using an audit report. Occasionally, the audit team submits these reports to external stakeholders, such as creditors, government departments, banks, or the public.
There are many types of classifications and assurance levels of audits, with various scopes, aims, procedures, and purposes. For instance, some audits have administrative purposes, such as auditing risk, documents, performance, or following up on corrective actions. The following are the common types of audits that an organization can perform:
An internal audit assesses the internal processes, controls, legal compliance, and protection of business assets. It's a helpful tool for companies to evaluate risk and identify actionable steps to improve performance. Individuals within a company perform an internal audit. While they're not independent of the company, they're independent of the activities they're auditing. These individuals send their reports to the management, audit committee, or board of directors.
Third parties, such as a CPA firm, perform an external audit on a company. When the audit is complete, the firm gives a report to shareholders and any stakeholders outside of the company. An external audit can vary in purpose. For example, the firm can audit the usage of federal funds or financial statements. The primary benefit of an external audit is the objectivity and independence of the audit team. This gives all shareholders and external stakeholders confidence in the audit report.
A forensic accountant typically performs a forensic audit because they have the skills in investigation and accounting. Forensic accounting is an in-depth undertaking of financial analysis in response to a specific subject matter. Court or conflict resolutions among shareholders usually use the findings of these audits as evidence. A forensic audit provides details on various areas, such as crime investigation, fraud investigation, disputes among shareholders, and insurance claims.
Statutory audits are an audit of financial statements for a type of entity that the law or local authority requires. For example, all banking sectors require an audit of their financial statements by a qualified audit firm with authorization from the central bank. Typically, an external firm performs the statutory audit and issues the audit report, but the entity submits the information to the government.
An operational audit assesses risks and evaluates the internal controls of operational systems for functions, units, and departments. The objectives of an operational audit include determining whether the company's operations are functioning effectively and efficiently and following management's objectives. This audit evaluates the use of company resources available to determine if they meet the management's goals and objectives. Areas of an operational audit include asset management and security, organizational structure, productivity, and staffing.
The primary aim of a financial audit is to help ensure the company's financial activity reflects accurately in the correct financial reports according to applicable regulations. Financial audits assess, evaluate, and make suggestions to the company's management regarding financial and accounting reporting of activities and transactions. Areas that financial audits focus on include authorizations and approvals, duties, reconciliations, and reviews.
A performance audit covers various assessments. Organizations might require or request a performance audit to evaluate multiple objectives, such as internal controls, program results and effectiveness, prospective analysis, and compliance with certain requirements. These objectives aren't mutually exclusive. For example, the auditor may evaluate internal controls and also program effectiveness. Companies can benefit from performance audits because management, and those in charge of oversight and governance, can improve program operations and performance, facilitate decision-making, reduce costs, and contribute to public accountability.
Employee benefit plan audit
An employee benefit plan (EBP) audit analyzes and evaluates a benefit plan's financial statements. These audits highlight potential improvement opportunities within the company's efficiencies, operations, controls, and how they comply with certain regulations. Only independent public accountants have the qualifications to perform an EBP audit.
Single audits are the equivalent of a report card. These inform federal agencies if there are any problems with how a grantee uses federal funds. This can be highly complex because auditors perform a single audit according to specific guidelines. The auditor performing the single audit also reviews the entire organization's internal and compliance controls, not just a particular program or division. A single audit is a requirement when a non-federal entity spends more than $750,000 of federal grants during a fiscal year.
The government's tax department or tax authority performs tax audits when the government agency or the schedule of the government's tax department sets finds non-compliance. The company doesn't perform a tax audit on its financial records. Instead, the government's tax authorities decide to perform the audit after discovering any discrepancies. The organization files its taxes timely and adequately according to the tax laws. To help minimize any penalties from a tax audit, the organization can follow the requirements set by tax laws and work with a tax consulting firm to get advice.
Information technology audit
Information technology audits, or IT audit, assess and check an organization's information security structure, the reliability of its security system, and the integrity of the system, so the system's output is reliable. Sometimes a financial audit requires an IT audit because technology now has a significant role in managing an organization's financial reports and records of complex accounting.
Compliance audits determine whether an entity is complying with the government's standards, rules, and requirements. The government sets the conditions and hires auditors to evaluate an organization's compliance with them. These audits determine whether the company complies with local regulations, laws, provisions, and rules of grant agreements or various contracts. The government commonly uses compliance audits to regulate educational institutions or industries.
An internal auditor normally performs a special audit when an issue occurs within an organization, such as fraud. For example, if fraud happens in an organization's payroll department, and someone raises the topic to the audit committee or board of directors, the CEO can also request a special audit. When the internal auditor completes the audit, the team prepares a report and submits it to the board of directors or audit committee.
A payroll audit reviews the processes and reports of an organization's payroll department. These audits can help improve compliance, find errors, and protect the organization from fraud. Internal auditors or third-party auditors, such as a CPA, perform payroll audits. The auditor reviews the organization's payroll records and determines if they're timely, accurate, and complete. If the auditor finds any errors, they then look to identify any procedural gaps that can cause inaccuracies. Finding vulnerabilities allows the organization to make corrections and maintain or improve compliance.
Value for money audit
Value for money audits refers to audits that assess and evaluate three primary factors. These factors are efficiency, economy, and effectiveness. The auditor considers and assesses whether the resources organizations buy are at the lowest cost and acceptable quality, with a good conversion ratio. They also look at whether the organization can achieve its goals when using these resources. An auditor may also review the organization's purchasing system to assess and evaluate whether it's helping them purchase services or materials at the lowest cost.
Integrated audits combine an area's financial or control audit with an IT assessment of the infrastructure and systems that support the unit. Integrated audits assess how effective the coordination is between the organization's information systems and business activities to support its goals and objectives. These audits also happen when the organization operates in various countries, and multiple audit firms audit their financial statements.
Investigative audits assess a specific individual or area when there's a suspicion of fraudulent or inappropriate activity. Investigations can include internal theft, conflicts of interest, and improper governmental activities. The intent of the audit is to find and fix control breaches and collect evidence in case there's a crime.
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