16 Types Of Audits (And Why Companies Conduct Them)
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An audit provides credibility to the policies, procedures and finances of a company. This provides the shareholders with confidence that the accounts of a company are true and fair. To maintain a good business reputation, it is essential to understand audits and how businesses conduct them. In this article, we explain what audits are and describe 16 types of audits in detail.
What are audits?
An audit is a detailed examination or inspection of an existing system, report or entity, such as the financial records of a company. There are several types of audits that companies can conduct, either internally or by an outside organisation. Auditors examine and report on a company's department, process, policy or function. Firms conduct some audits to identify inefficiencies and make recommendations for improvement, while they conduct others to check for non-compliance or wrongdoing. These companies may share the results of audits with company owners or government agencies, depending on the type of audit.
Types of audits companies conduct
Here are the 16 types of audits that businesses usually conduct:
1. Internal audit
A team conducts an internal audit within the organisation to determine whether the organisation is functioning as per the regulations. Internal audits are a good way to check a company's financial goals. The main reasons for conducting internal audits include proposing improvements, examining operations and monitoring the effectiveness of rules. In case of any external audits, the auditors may request to review the internal auditors' findings, too. A potential drawback of internal audits is that a person within the company evaluates them so they can be more lenient and cover up the faults.
2. External audit
A third party usually conducts an external audit. These third parties can include independent certified public accountant (CPA) firms, the Indian Revenue Services (IRS), accountants and tax agencies. The company selects the external auditor such that they are not related to the company or its business operations. Just like internal audits, external audits are also used to determine the accuracy of accounting records. The company conducts external audits periodically, which can be quarterly, half-yearly or annually, and the shareholders also review the reports in meetings.
3. IRS tax audit
Agents of the IRS conduct tax audits for the company. They verify the information the company filed on the tax returns and confirm whether the company reported all the tax liabilities correctly. These agents require access to a company's tax payments and financial records.
4. Financial audit
Like tax auditors, financial auditors also verify an organisation's financial status. The difference is that financial auditors verify all the financials of the company, along with the taxes. They work to verify the records of expenses, income, revenue, assets and investments. They collect and record all the information and create an audit report for the stakeholders.
5. Operational audit
Operational audits are similar to internal audits. Companies usually conduct these audits internally, but in some cases, companies might hire agents to conduct them externally. The main aim of these audits is to improve business operations by spotting areas of inefficiency. Operational audits analyse the goals, procedures, outcomes of functions, policies and culture of the company. For these audits, companies may hire an agent from a CPA, certified managed accountants (CMA) or managed advisory service (MAS) specialist.
6. Information system audit
Information system audits help to evaluate the IT risks to a company and understand the systems of an organisation. Most technology firms use information systems technologies to ensure data security, protect systems from hacking attacks, evaluate technologies in use and recommend improvements to the systems. These reports assure the stakeholders that the structure is up to date, meets its objectives and that it is secure. The company may approach certified information systems auditors (CISA) for these audits.
7. Payroll audit
Companies usually conduct payroll audits periodically, maybe three times a year. Payroll audits reveal tax withholding, the fairness of employee payments in terms of hours and wages and employee information. Businesses usually have the resources within their company to perform these audits, but may also hire external agents from a CPA firm to conduct them. Auditors work to discover vulnerabilities and make suggestions on how to fix them, while also identifying the gaps that led to them.
8. Pay audit
Pay audits may be a part of payroll audits, but organisations may conduct them exclusively to identify pay discrepancies among the employees in a company. By conducting pay audits, companies ensure that they pay the employees fairly based on the business's industry and location and not unfairly because of race, religion, age and gender. While conducting a pay audit, auditors also compare the pay to competitors' pay to know if the pay is comparable and if the company remains competitive in recruiting employees.
9. Forensic audit
Forensic audits are highly technical audits that are often conducted as part of a criminal or civil investigation. Forensic auditors apply both accounting knowledge and investigative procedures. They may use the results of these audits as evidence in legal proceedings or to resolve disagreements between corporations or company shareholders.
10. Single audit
Single audits are highly complex report cards. Companies typically perform them under the generally accepted auditing standards (GAAS) and the generally accepted government auditing standards (GAGAS). A single audit becomes important to conduct if a company has spent more than a certain amount of money. These audits evaluate not only a part of the company but the entire company's compliance and control. They typically apply to non-federal government agencies and non-profit organisations.
11. Employee benefit plan
An employee benefit plan audit examines the financial statements of the company's benefit plan for the employees. This type of audit can identify areas for improvement in plan efficiencies, operations, controls and how well the plan complies with specific regulations. Generally, independent public accountants perform audits of employee benefit plans.
12. Integrated audit
Integrated audits primarily assess how an organisation monitors and controls its financial accounting and reporting and are required for certain companies. Auditors adhere to strict guidelines developed by the Public Company Accounting Oversight Board (PCAOB). They work to identify and evaluate how a company oversees its transactions, operations and financial processes.
13. Statutory audit
Statutory audits verify whether the company complies with government regulations for banks, investment firms, public companies and insurance companies. These are like external audits but to verify the accuracy of specific financial reports, including bank statements, investment earnings and the number of clients. To increase public trust, many companies make these reports transparent by releasing their findings.
14. Value for money audit
Non-profit organisations often implement value for money audits to assess resource management and operations. For example, an auditor may discover a home-building charity that is overpaying for supplies. The auditor can make recommendations for the company to research alternate suppliers, helping them redistribute funds to other divisions of the charity. These audits specifically study:
Economy: Auditors review how companies acquire and distribute resources.
Effectiveness: Value for money audits evaluate how effective organisations are at using their resources to meet their overall financial and operational goals.
Efficiency: Auditors analyse the efficiency of a company's processes and systems.
15. Agreed-upon procedures
During agreed-upon procedures (AUP) audits, the parties requesting the audit and the party or parties conducting the audit agree to certain terms. Often, AUP audits are used to evaluate a specific process or procedure, and the company only shares the results between the parties named in the agreement. For example, an organisation's executive may decide to audit how the product development division uses its resources. Companies may also use AUP audits to learn more about a company they want to merge with or acquire. In AUP audit reports, auditors share objective information rather than recommendations or opinions.
16. Special audit
Special audits are typically internal audits that focus on a narrow function or process within a company. Owners, shareholders or upper-level management may authorise special audits. A special audit is the result of a specific allegation of fraud or misconduct. These audits may investigate areas such as:
Please note that none of the companies, institutions or organisations mentioned in this article is associated with Indeed.
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