What is Auditing?
Auditing is an investigation, inspection, or examination activities that perform by the professional and independent person or accounting firm on the financial and accounting information of an entity or organization and then report to the related stakeholders whether that financial information is correctly prepared in accordance with the accounting standards, frameworks, or law.
The well-known auditors are the big four audit firms.
Beside the financial auditor, there are many types of auditors and we will be discussed and explained detail blow.
1) Internal Audit
Internal audit is conducted to assess the company risk management system, appraise the effectiveness of internal controls and corporate governance.
A team or department mainly conducts internal Audits to add value to the business and improve entity operations. Internal Audit is conducted internally and mostly part of the organization structure. There is no set period for conducting an internal audit, it may take place on a daily, weekly, monthly, or annual basis.
The audit committee usually determines the internal audit scope and the audit committee’s internal audit department report. If there is no internal audit department, then the Internal audit department report to owners or senior management.
2) Desk Audit
Desk Audit is conducted by the employer to obtain information on the employee’s job descriptions, workload, efficient execution of responsibilities, and asses remuneration packages.
A Desk audit is an opportunity for the employees to express their duties and responsibilities and communicate other matters to the investigator or desk audit team for more effectiveness in his job performance.
A Desk audit is performed by preparing a detailed questionnaire regarding employee details, job descriptions, section structure, and other information. This questionnaire is filled by the concerned section/department employee and relevant information is provided.
3) Forensic Audit
A Forensic Audit is the scrutiny and evaluation of a company’s financial record to obtain proof or evidence to present in the court of law.
Forensic Audit is mainly conducted by large firms having expertise in accounting, auditing, and rule regulations. Scope of Forensic Audit is to investigate fraud, embezzlement, or other financial crimes, gather evidence, and present in proceedings of courts.
The forensic Audit is similar to traditional financial audit planning, gathering evidence, and writing a report with an additional activity presenting evidence in court proceedings.
4) Financial Audit
Financial Audit refers to a primarily financial statement audit. A financial audit is conducted as the statutory or non-statutory requirement to obtain reasonable assurance that financial statements are prepared accurately and fairly and under international financial reporting standards.
The Financial Audit is conducted by independent auditors having a professional certification in accounting and auditing like CPA, CA, or ACCA and is performed according to international auditing standards or in compliance with local laws.
Financial Audit is conducted after a specific period, mostly annually, at the end of the accounting period of the entity/organization.
A financial statement audit is conducted to assure different stakeholder management, bank, security exchange, regulation, or other stakeholders.
5) Tax Audit
A tax audit is conducted by the Government Tax Department or Tax Authority to investigate non-compliance with tax law. A Tax audit is performed due to non-compliance found by the government tax department’s tax authority or schedule set.
Entities or persons file tax returns to the tax department annually; this is the return filler’s responsibility to present accurate and fair information.
The tax authority can select any entity for audit purposes and evaluate its tax returns in-depth to determine whether it is prepared according to tax law and regulation. If any irregularity is found during the Audit’s conduct, tax authorities can charge penalties according to set precedents.
6) Information Technology Audit (IT Audit)
An information technology audit evaluates and examines organizational technology infrastructure, application, procedures, network, and data use. Audits assess if the controls to protect information technology assets ensure the integrity and are aligned with organizational goals and objectives.
The Primary objectives of IT Audit include: –
- Determine ineptitudes in IT systems.
- Identify the risks to company information assets and suggest a method to moderate these risks.
- Evaluate all the information systems to secure company data.
- Ensure that procedure complies with specific law, policies, and standards.
7) Value for Money Audit
In a Value for money audit, the auditor will assess whether the use of resources and funds is at the economy, Efficiency, and effectiveness against the company’s set objectives, vision, purpose, and mission statement.
- Economic: This checks that inputs are procured at the lowest possible rates so by decreasing the overall costs, the auditor will check and cross verify that all information used in the process is procured at the lowest possible market rates.
- Efficiency: Getting the most from input or getting a lot for the efforts; Efficiency requires reducing the number of unnecessary resources used to produce a given output, including personal time and energy.
- Effectiveness: Getting the expected results from the outputs or doing the right things.
8) Statutory Audit
The auditing required by law or local authority about particular financial statements for a specific type of entity is called a statutory audit.
The typical examples of statutory auditing are that authorized/registered audit firms must audit all banks’ financial statements.
The statutory Audit is conducted only after approval by higher authorities and for submission to official sources in compliance with rules and regulations.
9) External Audit
External Audit is conducted by an independent team of auditors outside the organization’s department or a section, as the name suggests. The external Audit is mainly performed by internationally recognized firms like EY, KPMG.
It is mainly performed to obtain a certificate in an audit report on company annual accounts, which is required by different stakeholders like investors, lenders, bankers, customers, and regulators. Auditors give the following Opinion on statements after performing all audit procedures.
- Unqualified Opinion: – this is expressed when auditors obtain sufficient and appropriate audit evidence that financial statements or not materially misstate and accounts give an accurate and fair view.
- Qualified Opinion: – Except for the effects of any material misstatement the accounts give an accurate and fair view.
- Adverse Opinion: – These accounts do not give an accurate and fair view
- Disclaimer: – We are not able to express an opinion
10) Environmental Audit
An environmental audit is an independent assessment performed to ensure that a business entity or organization complies with environmental policies and set procedures/standards.
An environmental audit is a management tool for measuring the effects of certain activities on the environment by evaluating entity facilities waste generation and waste management practices and assessing facility compliance with environmental laws and regulation at local, state, and federal levels.
By performing proper environmental Audit, it helps us decrease ecological pollution and not just fulfill our social responsibility but also reduce our legal liability by complying with the environmental rules and regulations.
11) Compliance Audit
A Compliance Audit is an independent appraisal and assessment to ensure that the company conforms with external laws, rules, and regulations or internal guidelines such as corporate by-laws, controls, and policies set by management.
Compliance Audit also whether an organization is complying or fulfilling the provision of any contract/agreement, such as when an entity accepts funding from the Government or any other institutions.
Compliance is essential for many reasons. Aside from signifying levels of professional standards, like the ISO 9000, ISO 14000, and other guidelines, non-compliance with regulatory guidelines may bring sanctions and penalties.
12) Operational Audit
An operational audit is a detailed evaluation of business operating activities both day to day and on a broader scale.
Other audits look at a single section or department of the company. Still, the operation audit evaluates the company from every aspect and every company’s department by covering the entire organization. The internal team can conduct an operational audit, but an external audit is considered more effective.
Three primary outcomes of conducting an operational audit
- Maximize Efficiency: By doing an effective functional audit, an organization can quickly maximize operational Efficiency by curtailing the wastages and unfounded activities and increasing the input-output ratio.
- Understand Risks: – Every business faces many risks, but without a detailed operational audit, these risks remain unidentified, like environmental risk, cyber threats, health and safety issues.
- Buttressing internal controls: Operational Audit assesses an entity’s internal rules profoundly and identifies the system’s weaknesses. By this practice, we can quickly strengthen our internal control from many risks.
13) Agreed upon Procedure
An agreed-upon procedure engagement before the start of professional engagement accountant and client/company management agrees on all procedures and activities he will perform on subject matter for finding report.
The most common AUP Engagement conducted are Payroll compliance testing, the accuracy of cost allocation studies, Employee gratuity Plan, welfare plan, and medical claim test for third parties.
As an independent auditor conducts AUP Engagement, so its finding report is considered more authenticated and unbiased. Also, the input of external professionals is obtained through this report.
14) Special Audit
A special Audit is a tightly defined audit that only looks at a specific area section or organization activity issue. The Audit is mainly ordered or initiated by government organizations/agencies to probe a particular matter in the organization. Organizations can also create these kinds of Audit interlay too. An example of a special audit is
- Cost Audit
- Sales audit
- Compensation audit
- Royalty audit
15) Sale Audit
Sale audit is a comprehensive, systematic, periodic evaluation and elucidation of the business environment, objectives, strategies to determine the area of the problem and opportunities and recommend the plan of action to improve the sales performance.
The sales audit team mainly comprises the marketing and sales department as both departments are vital for generating sales. Four main steps in Sale Audit are.
- Human Resource: – Sale auditors mostly start audits from the hiring procedures of sales and marketing employees. The complete record is thoroughly checked, including selection criteria, salary package, incentive calculation, previous experience, and academic education.
- Market Audit: – Market condition is evaluated by the audit team to check whether the sales team’s target is according to competitors’ norms and industry growth rate.
- Customer Service Appraisal: – The retention of customers solely depends on the service to clients, so the auditor performs checks on them by obtaining customers’ feedback.
- Sale technique: – Auditor check the complete sale cycle in-depth to identify any weakness in the system.
A Construction Audit is conducted to ensure the construction project is executed according to concluded contract terms. As a construction project is completed by many participants and firms so construction audit ensures that the project is completed by achieving set objectives and standards.
Construction Audit just not scrutinizes the financial aspects of the project but also checks the safety, structure layout, construction quality, and value for money in the construction process.