What is Auditing and its Types?
Auditing is the process of assessing and ascertaining financial, operational, and strategic goals and processes in organizations to determine whether they are in compliance with the stated principles, in addition to them being in conformity with organizational and more importantly, regulatory requirements.
The objectives of auditing as mentioned above, conformance with regulatory norms and rules and regulations is indeed one of the drivers behind auditing and historically and traditionally, has been the main reason why organizations get their financial statements, operational process, and strategic imperatives audited.
Types of Auditing
- Internal Audits
Internal audits refer to the audits done by employees and stakeholders within the organizations with a view to evaluate and assess whether the organization is following the internal processes, norms, rules, and regulations in addition to determining whether it is in compliance with the regulatory norms.
Internal audits are sometimes the first checkpoints for organizations to determine whether their books of accounts, operational processes, and IT infrastructure and security protocols are in order with both the internal objectives, strategic imperatives, and external regulatory requirements.
- External Audits
External audits are done by independent and third-party agencies and companies that are specially tasked with assessing and evaluating an organization’s compliance with the regulatory norms.
Some organizations also hire external auditors to “hold a mirror to themselves” in the sense that any deficiencies and irregularities can be found that are otherwise not “visible” to the senior leadership and management during the course of conducting the everyday operational business.
Moreover, external audits are also mandatory due to regulatory and compliance reasons as well as due to the shareholder requirements which mandate that external audits need to be done annually, quarterly, and half-yearly to be presented in the Annual General Meetings, and meetings of the Board of Directors.
- Financial Audits
Financial audits are the most common form of audits for various reasons including the fact that businesses exist to make money and return profits and generate wealth for their shareholders. This means that investors and other stakeholders must know whether the businesses are being run properly so that their capital is safe and generating the stated returns.
Moreover, financial audits are also the most common forms of audits since any discrepancies in the books of accounts reflect the mismanagement of the companies in addition to finance affecting almost all operational and strategic areas of the companies and their businesses.
- Strategic, Operational, and IT Audits
There are other types of audits such as operational, strategic, and IT audits that have become popular in recent years mainly due to the increasing complexity of organizational processes as well as the IT infrastructure and the fast-paced external marketplace which needs an evaluation of whether the organizations are aligning their internal processes and strategies with that of the external strategic drivers and imperatives.
In addition, IT audits are being sought to assess and evaluate the readiness of the organizations’ IT infrastructure and systems and IT processes to meet the stated goals and objectives in addition to being able to withstand IT risks and security breaches. Indeed, with the increase in the nature, type, and variety of IT risks as well as the increasing complexity of the IT infrastructure, IT audits have now become as commonplace as financial and operational audits because both internal and external stakeholders need to know whether the organization’s IT infrastructure is up to the mark and whether it is capable of meeting the stated goals and objectives.
- Government audits
Government audits are performed to ensure that financial statements have been prepared accurately to not misrepresent the amount of taxable income of a company. Audit selections are made to ensure that companies are not misrepresenting their taxable income. Misstating taxable income, whether intentional or not, is considered tax fraud. The IRS and CRA now use statistical formulas and machine learning to find taxpayers at high risk of committing tax fraud.
- Performing a government audit may result in a conclusion that there is
- No change in the tax return
- A change that is accepted by the taxpayer
- A change that is not accepted by the taxpayer