Among the primary purposes of auditing for an enterprise is to ensure it adheres to rules and observes its strategic objectives related to finance and internal operations. Auditing also checks financial accounting, and regular audits help ensure the accuracy of your business records. This article presents a thorough examination of the meaning of audit, its types, and role in ensuring the streamlining of accounting methods.
Meaning of Audit
An audit involves examining current records, accounts, or the overall business. Enterprises and individuals engage an auditor to inspect cash flow reports, operational documents, accounts, and the statement of financial performance. The auditing procedure helps businesses identify shortcomings in business operations and finances and offers proposals to rectify the situation. Overall, the principal objective generally remains to conduct audits for irregularities or breaches of any regulations by the firms.
Various Types of Audits
There are various kinds of audits – almost 10 – 12 types that firms can decide to execute based on their business records to evaluate the overall financial health of the enterprise. They are explained as follows:
1. Internal Audit
As the name suggests, this type of audit relates to a company’s internal affairs. It is conducted to determine whether the organization adheres to the prescribed norms and complies with internal compliance standards. In this type of audit, the owners retain an auditor to audit the enterprise.
This internal auditing procedure is viewed as a method of briefing and informing board members and investors about the company’s financial resources, and assisting in reviewing and confirming its economic plans.
Conducting an internal audit within your firm allows you to review risk mitigation and policies, as well as evaluate the organization’s operational system.
2. External Audit
Some firms may require external audits based on rules and regulations set by their shareholders. Examples of external audits include tax audits, compliance audits that verify legal and regulatory compliance, and financial audits that examine the credibility and accuracy of financial statements.
The external audit report needs to be presented to the shareholders at the annual general meeting and the board of directors’ meetings.
A third party or external party can carry out this type of audit to assure shareholders of the credibility of the financial records and provide an impartial account of the company’s financial standing. You can perform half-yearly, quarterly, or yearly audits.
3. Financial Audit
A financial audit involves verifying the books of accounts to determine whether the business is reporting actual financial data or concealing certain information from its shareholders or investors. Like tax auditors, financial auditors also verify a company’s financial condition. A financial auditor confirms every aspect of an organization’s finances, including taxes, income, financial records, assets, earnings, and revenue. They compile, register, and record all the information to make an audit report for the stakeholders and shareholders.
4. IRS (Internal Revenue Service) Tax Audit
IRS tax audits come into play when the accuracy of the data on the tax return needs to be evaluated. According to tax laws, the IRS audit examines an individual’s or an enterprise’s financial data to verify the legitimacy of the income and tax deductions.
In this audit category, auditors identify discrepancies in the company’s tax liabilities or arrears and certify that the business does not owe any tax or has made an overpayment. IRS audits are carried out informally by the auditors through an in-person interview or email.
5. Statutory Audits
The company performs this Statutory Audit to determine whether the association follows all the government policies and rules. During the external auditing process, the external auditor confirms these regulations.
This auditing method is similar to external audits. Still, it is used to validate the veracity of specific financial statements, including bank statements, total customer count, and gains generated from investments.
Many firms share their findings to ensure the transparency of such reports, strengthening public support and building confidence among stakeholders.
6. Information System Audit
This auditing system helps to assess the cyber risks and dangers associated with your IT systems and database, such as malicious attacks, physical threats, damage to servers, and compromise of your business details. These reports convince interested parties and stakeholders that the company’s data structure is secure, up to date, and in line with its objectives. Business owners and entrepreneurs employ information system audits to identify problems associated with software development, information processing and computer systems.
The organization may seek the services of a certified information systems auditor (CISA) for its information system audit.
7. Performance Audit
Performance audits encompass different types of assessments. An organization may solicit a performance audit to assess some of the given objectives:
- Program efficacy and outcomes
- Internal or operational controls
- Conformity with specific requirements
- Future-oriented analysis
- Reviewing the process and system of an organization through operational audits to enhance business operations.
8. Payroll Audit
Companies generally perform periodical payroll audits almost thrice a year to guarantee the accuracy of their payroll processes. While surveying payroll audits, you can detect withholding tax returns and ensure fairness in the remuneration of employees regarding working hours and wages. Auditors help to fix the loopholes and detect the gaps leading to its creation to make the payroll process compliant and error-free.
9. Compliance Audits
Compliance audits primarily investigate the business policies and procedures of a special department within the enterprise. The purpose is to inspect whether the organization observes the regulatory or internal guidelines. These types of audits are largely prevalent in educational establishments or controlled and compliance-oriented industries.
10. Operational Audits
Operational audits are similar to internal audits and function internally. However, in certain instances, firms may hire external agents to supervise them. The primary purpose of such an audit is to streamline business processes and operations by locating areas where things are not running smoothly. Operational audits examine the objectives, methods, and specific effects arising from the execution of a function. To conduct these audits, organizations may engage the services of a CPA, a certified management accountant (CMA), or a managed advisory service (MAS) expert.
11. Forensic Audits
These are advanced audits that operate within the sphere of criminal or civil inquiry. A forensic accountant or an auditor will examine evidence that has utility in court proceedings or for resolving conflicts among corporations, investors, or shareholders.
A firm takes recourse to a forensic audit if someone perceives fraudulent activity, theft, or inconsistencies in what is recorded and what should be in an account balance.
12. Employee Benefit Plan
An employee benefit plan audit scrutinizes the financial statements of the benefit plan that a company sets up for its employees. Such an auditing method can identify areas for improvement in operational effectiveness and ensure conformity to strict guidelines. Typically, independent public accountants perform the auditing tasks related to employee benefit plans.
Role of the Different Audit Types
Different kinds of audits follow different sets of rules, accuracy, standards, and quality control requirements. The judging parameters for the working procedures of audited entities in financial, performance, and compliance audits can be different, as the audit processes are distinctly designed. The objectives to be achieved determine the types of audits opted for. Generally, audits are conducted to verify the accuracy of financial statements or ensure conformity with regulations to achieve the planned goals.
Wrapping Up
You must conduct audits frequently to understand various business facets, stay organized, and remove inaccurate information to improve the outcome of your business. Understanding the different types of auditing processes will help you choose the proper audit to meet your business needs. Although an audit proceeding can be a protracted process, on the whole, it contributes to resource optimization for businesses, discloses fraud, and helps investors make informed business decisions.
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