What is Audit and What Are the Types of Audits?

As a business owner, apart from keeping an account of your financial transactions, some other aspects need to be kept in check for efficient business proceedings. The process of keeping it in check is known as auditing. Conducting regular audits is necessary for your business as it helps ensure your business recordings' accuracy.

In this article, we will give you a detailed analysis of audits and their types to ensure effective accounting processes.

What is Audit?

An audit is a type of investigation of existing reports, statements or business as a whole. Individuals and companies hire an auditor to examine the financial reports of an entity, accounting statements, management reports, expense and revenue reports and operational accounts. 

In most cases, a CPA or Certified Public Accountant is engaged in the auditing process. They obtain 'reasonable assurance' of records being accurate and fair and comply with set standards. The auditing process also helps firms to identify certain inefficiencies in their business processes and finances and make recommendations to improve the situation. However, the main focus mostly remains to check any wrongdoings or non-compliance of firms. 

Importance of Audits

Audits are important for a business as they provide a sense of credibility to the financial statements and reports of the firm. It also gives stakeholders confidence that financial accounts are fair and true to what is produced. 

Moreover, an audit is an important process that helps in enhancing the financial health and internal systems of a business. As the process can identify any inaccuracy or wrongdoings in accounts, rectifying them for efficient business becomes easy.

Different Types of Audits

There are several types of audits that a business can choose to implement to assess the overall health of the company. They are discussed as follows:

• Internal Audit

This type of audit takes place within the company, where owners take the initiative to get the firm audited by an auditor. The internal auditing process is considered a way to update company board members and shareholders about the finances. It also helps to check and align with the firm's financial goals. 

If you conduct an internal audit in your firm, the results can help assess risk management processes and policies, along with analysing the operational process of the company.

• External Audit

The external audit process is compulsory for certain organisations according to the requirements and rules set by its shareholders. The report of the external audit is shown to all shareholders during the company's annual general meeting and Board of Directors meeting.

Certain independent professionals conduct external audits based on the qualifications stated in the rules. Such audits can be commenced half-yearly, quarterly or annually, and results can be used to bring enhancement in business proceedings.

• Performance Audits

This audit is performed within an organisation for various reasons. The main objectives that a firm focuses on when requesting a performance audit are to evaluate internal controls of the company analyse business perspectives, assess different effectiveness and results of the program and conduct operational audits.

In this case, auditors assess the processes and systems of the business to measure its productivity and efficiency towards business goals.

• Compliance Audits

Compliance audits mainly examine the processes and policies of a business or a specific department in the firm. The aim is to check whether the business is compliant with regulatory or internal standards. Such audits are mostly conducted within educational institutions or regulated industries.

• Operational Audits

This auditing process is very similar to an internal audit. Organisations conduct this audit internally, but in some cases, agents are hired externally to complete this procedure. The main aim here is to enhance organisational operations and spot any inefficiencies. Moreover, operational audits analyse the policies, processes, goals and outcomes of functions.

• Statutory Audits

A company conducts statutory audits to check whether it complies with all the policies and regulations stated by the Government. An external auditor verifies these regulations while conducting an external business audit. 

The auditing process results demonstrate different results in the financial report, including bank statements, earnings on investment and total clients. This auditing enhances the trust and transparency among business stakeholders and the public, making it efficient as time passes.

• IRS Tax Audits

This is a type of tax audit that analyses the accuracy of tax returns filed by the business. Here, the auditors look for irregularities in the tax liabilities of the company and make sure the business does not underpay or overpay their taxes. IRS audits are generally conducted randomly by the auditors and are done via in-person interviews or mail.

• Payroll Audit

Payroll auditing systems focus on identifying different errors and improving business compliance to protect it from different frauds. Such audits are either conducted by internal auditors or any third-party auditor hired by the firm. 

• Information System Audit

Such an auditing system helps evaluate different IT risks of a business and understand the systems followed. Different technology-oriented firms use IT audit systems to ensure the security of their data, analyse technology uses, protect systems from hackers and recommend improvement points to the system. Moreover, the reports from this audit guarantee stakeholders that company objectives are met, and business structure stays updated.

• Forensic Audit

Here, the financial records of a business are examined to identify any illegal financial activities. The auditor or a forensic accountant looks for evidence that could be provided in the court and brings resolution to conflicts among stakeholders. It is important to note that forensic audits must be conducted if an individual suspects theft, inaccuracies or fraud in financial balances. 

Conclusion

Now that you have understood the different types of auditing processes, it will be clear as to which audit to commence as per your business needs. There is a common misconception among people that auditing is a negative thing. But this is not true. The proceedings are time-consuming, but overall, they help businesses improve their finances, expose frauds and help shareholders make accurate business decisions.

Frequently Asked Questions

What are the types of audits?

The different types of audits are - integral and external audits, operational audits, statutory, performance, compliance audits and many more.

How many types of audits are there?

There are approximately 10 to 12 types of audits that companies can consider to implement as per their requirements.

What is the most common type of audit?

The most common types of audits are - internal audit, external audit, tax audit, statutory audit and compliance audit. These auditing types are directly linked to business finances and detecting fraud in the firm.

What are the different types of audits in pharma?

Within the pharmaceutical industry, the common types of audits are internal audits, external audits and unannounced audits.

What are audits for in healthcare?

The auditing process in the healthcare sector is to assess, improve and analyse the patient care process and the overall internal workings of the organisations. Moreover, such audits also make sure that all parties associated with healthcare services are accurately and fairly paid during the insurance claim process.