What are the various types of audits?
- Internal audits
- Audits by third parties
- Audits of income statement
- Audits of effectiveness
- Audits of business
- Audits of employee benefit plans
- Audits of a single citizen
- Audits of compliance
- Audits of data systems
- Audits on payroll
- Audits of evidence at the scene
What exactly is an audit?
An audit is a type of research. Financial statements, management accounts and reports, accounting records, operational reports, revenue reports, and expense reports may all be examined by auditors. A certified public accountant (CPA) is used in various sorts of audits to provide “reasonable confidence” that the records are presented fairly and accurately and meet specific requirements.
In the form of an audit report, the audit team presents their findings to the company’s shareholders and other internal stakeholders. External stakeholders, such as banks, creditors, the general public, or the government, may get audit reports.
It’s a prevalent assumption that audits are harmful. This isn’t the case. Audits might be time-consuming, but they can be beneficial to organisations! They can make use of Findings from audits will be used to strengthen finances and internal controls, uncover fraud risks, and assist stakeholders in making better decisions.
We’ll go through 11 distinct sorts of audits, who does them, and some common real-world instances in this post.
Various sorts of audits
Internal audits are number one.
Internal audits examine internal controls, processes, legal compliance, and asset security. For firms, the internal audit process can be a useful tool for assessing risk and determining concrete strategies to enhance performance.
Individuals within the organisation conduct internal audits. These individuals should be independent of the actions they’re auditing, even if they aren’t independent of the organisation. Management, the board of directors, or the audit committee of the organisation receive reports. Although an internal audit might be advantageous to your organisation, it cannot substitute an audit conducted in compliance with generally accepted auditing standards (GAAS).
If your company is subjected to both an external and internal audit, the external audit team will keep in touch with your internal audit team throughout the process. Internal audit committees should be prepared to communicate data obtained through audit procedures with external auditors.
2. Audits by third parties
A service provider, besides an unbiased CPA firm, undertakes external audits. A report is issued to shareholders and stakeholders outside the firm once the audit is completed. While the scope of external audits varies (financial statements, usage), The key benefit is the audit team’s independence and objectivity (of government funding, etc.). Owners and key parties will have more faith in the assessment process and report as a consequence of this.A company that makes automotive parts, for example, is a publicly traded company. Publicly traded enterprises and organisations that sell their stock to the general public are required to have their financial statements audited by an external auditor.
Then, discover the various sorts of audits that can be conducted internally, externally, or both.
3. Audits of financial statements
Company’s financial reviews are performed by independent auditors to assess whether a company’s financial statements follow applicable financial statements.Auditors are expected to complete three tasks:
- Identify and evaluate the risks of material misrepresentation, whether by fraud or error.
- Obtain adequate audit evidence to determine whether there are any material misstatements.
- Form an opinion on the financial statements or rule out the possibility of forming one.
These audits are “usually suitable and often required” when seeking significant amounts of funding or outside investors, as well as when selling a corporation, according to the AICPA. Other firms, investors, stakeholders, and others may find the report useful in making educated decisions regarding the organisation.
For instance, if a small firm has a bank loan or line of credit, the bank may demand that the business undergo a financial statement audit.
4. Audits of Performance
Performance audits include a wide range of evaluations. A performance audit may be requested or required by an organisation to assess any of the following goals:
- Effectiveness and outcomes of the programme
- Internal checks and balances
- Certain prerequisites must be met.
- Analyses prospective
Those aims need not be mutually opposed.If an auditor is reviewing the effectiveness of a programme, he may also need to examine internal controls. Performance audits are important because they can assist management and those in charge of governance and oversight in improving programme performance and operations, lowering costs, making decision-making easier, and contributing to public accountability.
Government entities are frequently subjected to performance audits since they receive federal funding and must demonstrate that the monies are being used properly. Non-governmental performance audits, on the other hand, are quite widespread.
When performing government performance audits, auditors must adhere to generally accepted government accounting standards (GAGAS) – sometimes known as the Yellow Book. Performance audits conducted under GAGAS, according to the AICPA, can provide the highest levels of assurance because the auditor chooses the scope based on these requirements.
The following are some examples of performance audits:
- Assuring that citizens receive government services and benefits based on their eligibility
- Conclusions on existing and future developments, as well as their possible impact on the business
- Analyzing a program’s or activity’s cost-effectiveness in terms of the benefits it provides and the outcomes it achieves
5. Audits of Operational Procedures
Operational audits look at how an organization’s activities relate to its goals. An auditor will examine operational effectiveness, efficiency, and productivity by analysing processes, procedures, and systems. An operational audit has several advantages, including identifying areas for improvement and providing recommendations.
Many businesses undertake internal operational audits. Companies, on the other hand, may hire an outside expert. Working with a CPA can assist an organisation since they have specialised knowledge, training, and expertise in conducting audits. Management advisory service (MAS) specialists or Certified Management Accountants (CMA) are also available at some accounting firms.
Example: A company’s human resources department may be audited by an auditor. The auditor will look into the department’s procedures and how well it manages its resources. A complete summary of the findings should be included in the final report. Review the department and look for ways to improve it.
6.Audits of Employee Benefit Plans
An employee benefit plan (EBP) audit examines and evaluates the financial accounts of your benefit plan. This type of audit might reveal areas where the plan’s operations, efficiencies, controls, and compliance with certain rules could be improved. Only independent public accountants are qualified to conduct audits of employee benefit plans.
Example: If your organisation has more than 100 eligible participants in a benefit plan (including 401(k), 403(b), or employee stock ownership plan), a defined benefit pension plan, or a health plan, you may need an audit.
To find out which plans are subject to audit obligations.
7. One-time audits
Report cards are single audits. If there are issues with grantees’ use of federal monies, they notify federal agencies. Single audits are extremely difficult to execute since auditors must adhere to GAAS and GAGAS. Furthermore, the auditor must examine the compliance and internal controls of the entire company, not just a specific division or programme.
When a non-federal entity spends $750,000 or more in federal awards (direct or indirect awards) in a fiscal year, a single audit is needed (Single Audit Fundamental Series Part 1: What is a Single Audit? page 17).
States and municipal governments, charitable organisations, indigenous American tribes, and institutes of higher education are examples of non-federal entities. If a company receives or is a subrecipient of grants, contracts, or loans, endowments, insurance, and so forth, a single audit may be necessary once a year.
8.Audits of Compliance
When an entity is audited to see if it complies with a government’s regulations, standards, and requirements, it is referred to as a compliance audit. The government establishes the requirements and appoints an auditor to assess the entity’s adherence to them.
This sort of audit looks at whether the entity is following local laws, regulations, rules, and contract or grant agreement conditions. Compliance audits are frequently undertaken in conjunction with financial audits, according to the AICPA (Compliance Audits, page 2,463).
A compliance audit, for example, can verify whether a mill is following the Environmental Protection Agency’s (EPA) waste disposal rules. The Environmental Protection Agency (EPA) would send an internal auditor or hire an audit firm to analyse the business and report their findings.
9.Audits of Information Systems
Information system audits look at how well a company’s information technology (IT) infrastructure is managed. An audit will assess whether the systems are properly securing assets, ensuring data integrity, and running. This form of audit can assist businesses in identifying opportunities and risks, aligning assessment with strategy, and improving company practises. Businesses can have these audits done on their own or as part of a financial statement or internal audit.
This sort of audit is performed by Certified Information Systems Auditors (CISA). Interviews with business users and personnel, documentation analysis, and software controls checks are all part of the audit process.
IT systems are intricate. The majority of information system audits are tailored to the organization’s specific requirements. IT procedures, specific sectors of the business, or data privacy may be the focus of audits.
10.Audits of Payroll
Payroll audits look at how payroll is processed and what reports are generated. An audit can aid in the detection of errors, the improvement of compliance, and the prevention of fraud in the workplace. Payroll audits can be performed by an internal auditor or a third-party auditor (such as a CPA).
Your company’s payroll records will be examined by the auditor to see if they are accurate, timely, and complete. If errors are discovered, the auditor will search for holes in procedures that resulted in or could result in inaccuracies. You’ll be able to make corrections and maintain or improve compliance if you find any problems.
Annual or semiannual payroll audits are suggested for most businesses. Payroll audits on a regular basis can help your organisation stay in compliance and strengthen its financial controls.
11.Audits of forensic evidence
A forensic audit looks into a company’s financial records to see if there is any evidence of illicit financial conduct. The auditor, who is a forensic accountant, will hunt for evidence that could be utilised in court or to settle shareholder disputes.
If employees suspect fraud, theft, or inaccuracies (both positive and negative) in account balances, a forensic audit may be required.
Company A, for example, signs a deal with Company B. Company B, on the other hand, is unable to conduct business since its licence has been suspended due to late tax payments. The CFO of Company A was aware of this, but proceeded with the transaction since the CFO received direct pay from Company B. If this form of fraud occurs, forensic audits can detect it and offer evidence.