Breaking down the 7 different types of business audits
An audit is an appraisal of a company that gives the shareholders confidence on the financial statements and ensures that it is in compliance with the accounting standards such as GDPR, GAAP or IFRS. Audits are essential for all companies because it enables them to monitor their financial and operational goals. The process is split into four main parts, the audit performance and execution phase followed by the preparation and planning stages. There are different types of audits that are required by the company as part of the scrutiny process. These include:
1. Internal audit
As the name suggests, this audit is performed to determine the integrity of the internal activities such as those carried out by both internal and external shareholders of the company. The main purpose of this audit is to make sure that the internal functions of the organisation are in compliance with the accounting standards.
The scope of the internal audit is decided by the audit committee and the board of directors. If there is no assigned audit committee, the board of directors will conduct an internal audit and report the findings to the owner. The activities covered by the internal audit includes a review of the operations and controls, fraud investigations and a compliance review. The final report of the internal audit contains a list of the findings along with feedback and any recommendations based on these information that could help the organisation make improvements to their operations.
2. External audit
While an internal audit includes a review of the operational controls by employees within the company, the external audit involves employing an external firm to perform the audit. This person needs to be a qualified CA/CPA. Many large multinational companies do external audits as there is less bias involved when it comes to scrutinizing the financial statements and controls of the company.
The companies that perform external audits follow international accounting standards and adopt a strict professional code. It is essential that this firm works independently of the organisation being audited to ensure that there is no conflict of interest. Many large external audit companies such as EY and Deloitte offer a variety of services such as internal audits, an audit of financial statements, tax consulting and advisory services.
3. Forensic audit
Forensic accounting is a specialty that deals with the engagement that results from disputes in court. The term ‘forensic’ means ‘can be used in court’. A forensic accountant needs to possess skills in both investigation and accounting as they need to provide an investigative report of the findings that will be presented in court as evidence.
Since the forensic accounting report acts as proof in court, this accountant who performs the audit needs to be skilled in forensic accounting. A forensic audit can happen for a number of reasons; it can be a case of fraud, crime, insurance claims or it can even be to resolve a dispute between the shareholders in a company. There is a lot of planning and execution when it comes to forensic auditing and the ethical guidelines need to be followed diligently. This type of auditing is not very common as it involves very large costs. Hence, forensic auditing is only used when it is mandatory to have one.
4. Statutory audit
Statutory audit is an audit that is mandated by a public authority such as the Reserve Bank of India or the Income Tax Compliance Act. This audit is performed by a Chartered Accountant and ensures that the financial statements provided to the regulatory authorities are accurate and fair. Companies listed on the stock-exchange are required to perform a statutory audit by the stock-exchange authority.
This statutory audit is mandatory for banks and is conducted at the end of each year for the previous financial year. The audit includes three main elements: cash-verification procedure, tax-related issues and verification of loans.
Statutory accounting differs from financial auditing because financial auditing refers to an audit of all the financial statements of the firm, even those that are not required by public authorities but a statutory audit is only performed if it is required by law. An external team firm will perform the audit and issue an audit report which will include information about the value of the assets, the total number of employees and the annual turnover.
5. Financial audit
In order to assess the accuracy and integrity of an organisation’s annual financial statements, a financial audit is required by all companies. It is considered one of the most important audits a company needs to perform. This audit is conducted by an external firm to avoid any information bias.
Financial audits are required to assess the financial stability of the organisation, especially a publicly listed company. It ensures that the financial statements reported to the public authorities are accurate and that the external shareholders of the company are protected. Many companies perform a financial audit once a year but some may require a quarterly financial audit as well. The audit needs to be performed in accordance with the local GAAP.
6. Operational audit
The operational audit covers three main areas. The process audit ensures that all the processes and procedures are within their limits and conditions. The system audit makes sure that there is a proper workflow process in place and each department fulfills the development and execution of duties in accordance with the accounting standards. Lastly, the production audit which focuses on the final product or service offered by the company and makes sure it is functional and its specifications meet the requirements of the customer. Operational audits are conducted by an internal team of employees.
7. Payroll audit
A payroll audit is an analysis of your payroll to ensure that your payroll account is accurate. This audit looks at a variety of factors such as the rate of pay, the amount of wages, the amount of tax and other employee information. This audit is usually conducted by an internal team and is done to ensure that there are no external audits in the future. It also makes sure that there is no error in the payroll accounts and that the payroll processes remain compliant.
These are the 7 main audits done by companies.. An audit helps a company ensure that it follows a set protocol and is in compliance with the accounting principles such as GAAP or IFRS. For any entity, it is essential that the financial statements produced are accurate and free from bias. An audit helps verify that all the information is correct and the shareholders are protected. Audit reports also provides recommendations that a company can use to increase productivity and improve their operations for the better.