What Is A Compliance Audit? (With Definition And Benefits)

Updated 30 September 2022

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The purpose of a compliance audit is to review how well an organisation follows regulatory guidelines. A compliance audit report evaluates compliance preparations, security policies, user access controls and risk management procedures. If you are considering becoming an independent auditor or assisting an organisation with an upcoming audit, you may find it useful to learn more about compliance audits. In this article, we answer the question, "What is a compliance audit?" describe its purpose and share the steps to prepare for a compliance audit.

What Is A Compliance Audit?

The answer to, 'What is a compliance audit?' is that it is a review that companies undergo to assess whether they meet the regulatory requirements for their industry and geographic region. The audit evaluates the compliance procedure, security policy, user access control, risk management process and policies, procedures and processes of an organisation. The government uses these audits to enforce rules at both a state and a central level.

Purpose Of A Compliance Audit

Here are the reasons for performing a compliance audit:

Assessing the effectiveness of an organisation's compliance program and reporting any non-compliance to management and the government or tax authorities
Ensuring a company follows the rules and regulations of government agencies and its own internal policies
Enhancing the efficiency of the organisation in a business environment
Maintaining stakeholder trust
Complying with other laws, such as environmental laws and consumer safety laws
Maintaining standard operating procedures throughout the organisation
Assuring compliance with statutory regulations
Reducing the legal risk of a company
Gaining the trust of the public
Ensuring transparency in reporting
Preventing the company from incurring future costs

Why Is A Compliance Audit Important?

The primary purpose of conducting a compliance audit is to determine whether a company is conducting business appropriately. If the audit findings show that the company policies or processes are ineffective, an auditor may report their findings to the company's leadership team or to the government agency. Performing a compliance audit can also benefit organisations and their employees in the following ways:

Finding opportunities for improvement: A compliance audit may reveal outdated systems or processes. In such cases, auditors may offer suggestions on how to implement more effective ones.
Enhancing safety measures: There are many regulations protecting employees, consumers and the environment. Organisations can use compliance audits to assess whether they are meeting these requirements and ensure safe working conditions by following these guidelines.
Managing legal risks: Companies can reduce legal risks by conducting routine compliance audits to ensure they are complying with all government regulations. This can help them avoid fines and penalties in the future and ensure they remain compliant.

How Does A Compliance Audit Work?

Here are some steps that a compliance auditor takes after an organisation requests an audit:

Conduct a document review

Compliance auditors review relevant records and documents to ensure compliance. Using a compliance audit checklist, they examine all necessary materials. During this step, compliance auditors may review paper documents or electronic files.

Obtain information by conducting interviews

Compliance auditors conduct formal interviews to gain a better understanding of how organisations operate. During this phase of the audit, they may interview managers, directors, company leaders and employees for evidence. A compliance auditor may work alone or with other auditors in a team, depending on the size of the organisation they are auditing.

Analyse processes

Compliance auditors may also conduct physical site visits at each location of the organisation. If an auditor is reviewing safety procedures or assessing environmental impacts, this allows them to inspect infrastructure and workspaces. An auditor may shadow several employees to ensure they follow proper protocols and procedures.

Prepare a compliance report

After gathering all the relevant information, the compliance auditor develops a compliance report. Using this report, they share their findings and make recommendations for future improvement. This can reduce risks and improve efficiency for the organisation. The auditor may also share their compliance report with the relevant government agencies.

Methods Of Conducting A Compliance Audit

The common methods of conducting a compliance audit are:

Combining compliance audits with financial statement audits

Regulations and laws are important in both compliance auditing and financial statement auditing. There are a variety of laws and regulations that apply depending on the audit objectives. The objective of a compliance audit is to obtain sufficient and appropriate evidence regarding compliance with specific criteria identified by appropriate authorities. Rules and regulations that directly affect financial statements are relevant to financial statements audits, while compliance audits may be subject to any law or regulation related to the subject matter.

Combining compliance audits with performance audits

Compliance auditing is a part of performance audit as an aspect of the economy. It is possible that noncompliance is a cause, an explanation or a consequence of the state of the activities being audited. A combined audit of this kind requires auditors to use their professional judgment to choose between performance and compliance as the primary focus of the audit.

Conducting compliance audits separately

Auditors can conduct compliance audits separately from financial statement audits and performance audits. They can conduct compliance audits ad hoc or on a regular basis. This ensures that audits pertaining to different subject matters are distinct and well-defined.

Who Can Perform A Compliance Audit?

The internal auditors of a company usually conduct a compliance audit, but external auditors can also provide services. An organisation can hire an external firm to provide these services if its internal audit department does not possess the necessary resources or skills. In large corporations, compliance officers enforce compliance with procedures, policies, regulations and laws for each unit, department or division. Compliance officers also perform compliance audits.

Auditors provide the compliance audit report to the chief executive officer (CEO), chief financial officer (CFO) and department or division responsible for compliance. They also communicate the same to the board of directors and the audit committee.

How To Prepare For A Compliance Audit

You can improve audit results regardless of the industry or location you work in by following some basic steps. Follow these steps to prepare for a compliance audit:

1. Prepare the necessary documents

The first step is to document the processes within an organisation. Describe the practices that employees follow to ensure compliance with government regulations. Ask the third-party auditor if they want to review any particular documents, such as financial statements or personnel files. This can help you ensure you have all the required documents. Prepare the documents that the organisation has to share with the auditor in advance.

2. Review your internal processes

You can identify any areas of improvement by internally reviewing the organisation's processes and systems. Determine the key areas on which compliance auditors typically focus. For example, if the organisation is involved in cyber security, an auditor may review the IT systems to ensure that they comply with industry-standard requirements. Understanding what compliance auditors look for can help you focus on the most important areas of the business for review.

3. Audit the process

The organisation can prove compliance with government regulations by developing a clear audit trail. Record the company's primary processes in an organised manner, either manually or electronically. Keeping track of the security policies, hiring procedures and tax information may be part of this process.

4. Provide training to team members

Prepare the team for the upcoming compliance audit by reviewing key procedures and policies. Providing the team with this information can help them understand what steps they take to comply with important government regulations. Make sure your onboarding materials reflect government regulations and consider providing employees with a review course to reinforce important procedures.

5. Review the updated regulations

Stay up-to-date on industry regulations by subscribing to industry newsletters. Attending networking events and conferences can also help you stay updated with changes in the industry. By conducting routine reviews of the organisation's policies and processes, you can ensure that you remain compliant in the future.