WHAT ARE THE DIFFERENT TYPES OF AUDITS AND THE LEVEL OF ASSURANCE?

Different countries follow different business practices. As a result, auditing processes and accounting standards vary from country to country, with each country having its own laws and business practices. Although different types of audits serve different purposes, auditing is mandatory for every business worldwide. Procedures for each audit vary depending on the agreement between the organization’s management and the organization conducting the audit. There are different types of audits, but one of the key features of an audit is to check and confirm that the business accounts of the organization have been prepared per the accounting principles prescribed by law.

The three main types of audits are external, internal, and the Internal Revenue Service (IRS). The audit reports provide each organization with a detailed balance sheet, income statement, and cash flow statement. Most organizations do audits in two ways. Their internal auditors do one, and external auditors do the other.

WHAT ARE THE TYPES OF AUDITS? DIFFERENT TYPES OF AUDITS PERFORMED BY ORGANIZATIONS

EXTERNAL AUDIT

A company can do this audit quarterly, semi-annually, or even annually. A qualified and practicing accountant will take care of it. Board members are usually recommended, and that person is appointed accordingly. The Companies Act provides special formats for such audits to which the person(s) must comply. It is conducted impartially to understand whether the organization maintains accurate and authentic accounting records. Financial lenders can always request an external audit because their money is at stake.

INTERNAL AUDIT

The internal team of an organization that conducts an internal audit. This type of audit helps understand whether the organization’s internal services are operating according to the organization’s standards. It also clarifies whether operations are in sync with all industry regulatory guidelines. In addition, such an audit helps management understand the anomalies in the processes and the remedial procedures to be implemented to increase efficiency. It also detects fraudulent activity, such as misuse of funds by employees or management.

IRS TAX AUDIT

An IRS tax audit involves examining an organization’s accounts and the accounts of individuals. This is done to understand better the accuracy of the information displayed in the respective accounts. There are three types of IRS audits. Including:

• CORRESPONDENCE – This is done through correspondence and shows that your business owes money to the government. 
• FIELD – An IRS agent visits your property, and reviews all required records and returns.
• OFFICE – IRS staff members question and interrogate you about specific details regarding your tax return. 

FINANCIAL AUDIT

It is one of the most common audits performed by almost any organization, large or small. Qualified outsiders conduct them. All financial audits focus on the financial backers of an organization. Financial institutions and other lenders finance businesses. These entities always want to determine if the organization uses its borrowed money for the right purpose. This type of audit is performed on all the accounting books maintained by the organization. Financial audits reveal the truth about the exact methods to keep accounts or if certain frauds are followed. Such details help open the eyes of investors as well as shareholders. Lenders and other investors may make future investment decisions based on the findings of this audit.

OPERATIONAL AUDIT

An organization’s internal or external auditing team can perform a performance audit. This type of audit is very good at detecting areas of inefficiency. They are conducted to analyze in detail the various activities of an organization. This includes validating current assets, investments, ongoing costs, and account verification. The results help the organization understand which areas can operate with less cost. In addition, this audit allows management to understand how best to streamline its various processes to benefit from existing and unnecessary costs.

COMPLIANCE ASSESSMENT

A compliance audit is done to determine if an organization complies with the national and central laws of the country. It also reveals whether the organization complies with external and internal regulations. These audits helped maintain safe working conditions for employees, so they were subject to minimum-risk working conditions. This type of audit also helps to understand whether an organization is following all the rules regarding workers’ compensation and payment to shareholders.

AUDITING INFORMATION SYSTEMS

This audit focused on software and information technology (IT) organizations. This type of audit helps organizations understand whether they are implementing best practices to keep their entire data or organization safe. This audit can detect whether an organization is vulnerable. The details of such an audit help organizations better protect their servers and provide a good analysis of the technology used in the data processing. The organization gets an overview of the new equipment and software needed to keep everything running smoothly.

PAYROLL VERIFICATION

This audit plays an important role in every organization as it can detect unfair practices in employee wages and salaries. For example, some organizations tend to implement poor methods of paying employees based on age, gender, race, and even religion. This check ensures that such practices are eliminated and all employees are paid according to their skills and qualifications. 

WHAT ARE THE THREE LEVELS OF ASSURANCE?

Most accountants accept a company with three levels of assurance services:

Auditing
Comment
Synthetic

Their primary goal is to verify the authenticity of the financial statements presented to them. They are essential to assuring investors that no anomalies have been detected in the reports and that the organization and its departments are free of fraudulent activity.

HOW DOES ACCOUNTING SOFTWARE HELP A BUSINESS PREPARE FOR AN AUDIT?

Every business works to expand and grow, which involves more financial data. Accounting software is an effective tool to help these businesses scale up realistically. Some of the key benefits of using accounting software are listed below:

MAKE INVOICING AND INVOICING EASY

Paper invoices have become unnecessary. They are tedious and time-consuming. Accounting software supports the invoicing process consistently and makes the entire invoicing process quick and super simple. In addition, you can automate payment reminders with an accounting app and keep track of pending payments.

DIGITAL PAYMENT

Physical prompts and payment collection are demanding tasks. If you integrate your accounting procedures with digital payment gateways, you can rest assured that your customers will pay on time. If you engage in transactions abroad, digital payments also make accepting different currencies easier.

BANK RECONCILIATION

The accounting software helps you access all your bank statements after connecting your bank accounts. This keeps all your transactions organized and ready for inspection whenever needed.

EXPENSE TRACKING

You can keep track of all your expenses with accounting software. The software can present all the receipts, clarifying all the cash flows. In addition, this software allows you to create various tax summary reports in an organized way and access relevant reports whenever you need them.

EFFICIENT INVENTORY MANAGEMENT

Accounting software helps maintain auditing product availability and auditing demand for new inventory, track movements, and determine replenishment levels. This ensures that you always have enough inventory to meet the timely needs of various customers. You can also access special reports on specific inventory. The software is very effective in registering inventory management items, uploading appropriate images for different items, creating specific batches, and tracking inventory movement based on costs—details such as serial numbers.

CONCLUSION

The details in this article give you a deeper understanding of what an audit is and how it plays an important role in determining how an organization operates. Follow Khatabook for the latest updates, news blogs, and articles on micro, small, and medium enterprises (MSMEs), business advice, income tax, GST, salary, and accounting.