Performance Audits vs Compliance and Conformance Audits
Other methods, such as a desk or document review audit, may be employedindependently or in support of the three general types of audits.Some audits are named according to their purpose or scope. The scope of adepartment or function audit is a particular department or function. Thepurpose of a management audit relates to management interests, such asassessment of area performance or efficiency.An audit may also be classified as internal or external, depending on theinterrelationships among participants. Internal audits are performed byemployees of your organization. External audits are performed by an outsideagent. Internal audits are often referred to as first-party audits, whileexternal audits can be either second-party or third-party. * A first-party audit is performed within an organization to measure its strengths and weaknesses against its own procedures or methods and/or against external standards adopted by (voluntary) or imposed on (mandatory) the organization. A first-party audit is an internal audit conducted by auditors who are employed by the organization being audited but who have no vested interest in the audit results of the area being audited. * A second-party audit is an external audit performed on a supplier by a customer or by a contracted organization on behalf of a customer. A contract is in place, and the goods or services are being, or will be, delivered. Second-party audits are subject to the rules of contract law, as they are providing contractual direction from the customer to the supplier. Second-party audits tend to be more formal than first-party audits because audit results could influence the customer’s purchasing decisions. * A third-party audit is performed by an audit organization independent of the customer-supplier relationship and is free of any conflict of interest. Independence of the audit organization is a key component of a third-party audit. Third-party audits may result in certification, registration, recognition, an award, license approval, a citation, a fine, or a penalty issued by the third-party organization or an interested party.
Performance Audits vs. Compliance and Conformance Audits
Value-added assessments, management audits, added value auditing, andcontinual improvement assessment are terms used to describe an audit purposebeyond compliance and conformance. The purpose of these audits relates toorganization performance. Audits that determine compliance and conformance arenot focused on good or poor performance, yet. Performance is an importantconcern for most organizations.A key difference between compliance audits, conformance audits, andimprovement audits is the collection of evidence related to organizationperformance versus evidence to verify conformance or compliance to a standardor procedure. An organization may conform to its procedures for taking orders,but if every order is subsequently changed two or three times, management mayhave cause for concern and want to rectify the inefficiency.
Internal audits take place within your business. As the business owner, youinitiate the audit while someone else in your business conducts it.Businesses that have shareholders or board members may use internal audits asa way to update them on their business’s finances. And, internal audits are agood way to check in on financial goals.Although there are many reasons you may conduct an internal audit, some commonreasons include to: * Propose improvements * Monitor effectiveness * Make sure your business is compliant with laws and regulations * Review and verify financial information * Evaluate risk management policies and procedures * Examine operation processes
When your business is audited, external auditors usually give you an auditreport. Audit reports include details of the audit process and what was found.And, the report includes whether your financial records are accurate, missinginformation, or inaccurate.
IRS tax audit
IRS tax audits are used to assess the accuracy of your company’s filed taxreturns. Auditors look for discrepancies in your business’s tax liabilities tomake sure your company did not overpay or underpay taxes. And, tax auditorsreview possible errors on your small business tax return.Auditors usually conduct IRS audits randomly. IRS audits can be conducted viamail or through in-person interviews.
A financial audit is one of the most common types of audit. Most types offinancial audits are external.During a financial audit, the auditor analyzes the fairness and accuracy of abusiness’s financial statements.Auditors review transactions, procedures, and balances to conduct a financialaudit. After the audit, the third party usually releases an audit opinion about yourbusiness to lenders, creditors, and investors.
Operational audits are similar to internal audits. An operational auditanalyzes your company’s goals, planning processes, procedures, and operationresults.Generally, operational audits are conducted internally. However, anoperational audit can be external.The goal of an operational audit is to fully evaluate your business’soperations and determine ways to improve them.
A compliance audit examines your business’s policies and procedures to see ifthey comply with internal or external standards.Compliance audits can help determine whether or not your business is compliantwith paying workers’ compensation or shareholder distributions. And, they canhelp determine if your business is compliant with IRS regulations.
Information system audit
Information systems audits mostly impact software and IT companies. Businessowners use information system audits to detect issues relating to softwaredevelopment, data processing, and computer systems.This type of audit ensures the system provides accurate information to usersand makes sure unauthorized parties do not have access to private data.Also, IT and non-software businesses should regularly conduct minicybersecurity audits to ensure their systems are secure from fraud andhackers.
Importance of audits
You must conduct audits regularly to understand different aspects of yourbusiness. And, audits can help catch issues early on before they snowball intobig mistakes. If you don’t conduct audits, you may find yourself reviewinginaccurate information, which can impact your business later.Before you kick the idea of audits to the curb, think about how they canbenefit your small business. Audits can help you: * Find financial problems * Catch errors * Boost your business’s bottom line * Stay organized * Make better business decisionsNeed a way to simplify your audit processes? Patriot’s online accountingsoftware makes it easy to track your income and expenses to help you organizerecords. What are you waiting for? Try it for free today!This is not intended as legal advice; for more information, please click here.compliance auditA compliance audit is a comprehensive review of an organization’s adherence toregulatory guidelines. Audit reports evaluate the strength and thoroughness ofcompliance preparations, security policies, user access controls and riskmanagement procedures over the course of a compliance audit.What precisely is examined in a compliance audit varies depending on whetheran organization is a public or private company, what types of data it handles,and if it transmits or stores sensitive financial data.For instance, a Sarbanes-Oxley Act compliance audit would have to prove thatany electronic communication is backed up and secured with a reasonabledisaster recovery infrastructure. Healthcare providers that store or transmite-health records, including personal health information, are subject to HealthInsurance Portability and Accountability Act laws and regulations. Andfinancial services companies that transmit credit card data are subject toPayment Card Industry Data Security Standard requirements.In each case, organizations must be able to demonstrate compliance byproducing an audit trail, often generated with data from event log managementsoftware, as well as internal and external audits.
Internal vs. compliance audit
Internal audits are carried out by employees of a company to gauge overallrisks to compliance and security and to determine whether the company isfollowing internal guidelines. Internal audits occur throughout the fiscalyear and reports can be used by management teams to identify areas thatrequire improvement. Internal audits measure company objectives against outputand strategic risks.External audits are formal compliance audits that are carried out byindependent third parties and follow a specific format that is determinedbased on the compliance regulation being assessed. External audit reportsmeasure if an organization is complying with state, federal or corporateregulations, rules and standards.An auditor’s report is used by regulators to assess possible fines fornoncompliance, or by the C-suite to prove regulatory compliance. An externalcompliance auditor may use internal audits to further evaluate compliance andregulatory risk management efforts.Business continuity and GRC programs
Compliance audit procedures
External audits begin with a meeting between company representatives andcompliance auditors to outline compliance checklists, guidelines and the scopeof the audit. The auditor conducts reviews of employee performance, studiesinternal controls, assesses documents and checks for compliance in individualdepartments.Compliance auditors will generally ask members of the C-suite and ITadministrators a series of pointed questions that may include what users wereadded and when, who has left the company, whether user IDs have been revoked,and which IT administrators have access to critical systems.IT administrators can prepare for compliance audits using event log managersand robust change management software to track and document authentication andcontrols in their IT systems. The growing category of governance, risk andcompliance (GRC) software can enable CIOs to quickly show auditors that anorganization is compliant, helping it to avoid costly fines or sanctions.Auditors then review business compliance processes as a whole and create afinal audit report. Compliance auditors provide details to company leadersabout the organization’s level of compliance adherence, any violations andsuggestions for improvement. The audit report is eventually releasedpublically.