3 primary types of audits performed by CPAs are; (1) financial audit, (2) operational audit, and (3) compliance audit. The latter two services are often called audit activities, even though they are most similar to assurance and attestation services.
Let’s try to understand the 3 types of audit are;
- Financial Audit.
- Operational Audit.
- Compliance Audit.
1. Financial Audit
Financial audit, also known as external audit and the statutory audit, involves the examination of the truth and fairness of the financial statements of an entity by an external auditor who is independent of the organization by a reporting framework such as the IFRS.
Company law in most jurisdictions requires an external audit on an annual basis for companies above a certain size.
2. Operational Audit
The operational audit also referred to as internal audit, is a voluntary appraisal activity undertaken by an organization to assure the effectiveness of internal controls, risk management, and governance to facilitate the achievement of organizational objectives.
Unlike an external audit, whose scope is primarily restricted to matters that concern the financial statements, the scope of work of an internal audit is very broad. It can encompass any matters which can affect the achievement of organizational objectives.
3. Compliance Audit
In many countries, companies are required to conduct specific audit engagements other than the statutory audit to comply with the requirements of particular laws and regulations.
Other Types of Audit
In addition to the primary types of audits discussed above, there are some other types of audits, which are discussed below:
The forensic audit involves the use of auditing and investigative skills to situations that may involve legal implications. Forensic audits may be required in the following instances:
- Fraud investigations involving misappropriation of funds, money laundering, tax evasion, and insider trading.
- Quantification of loss in case of insurance claims.
- Determination of the profit share of business partners in case of a dispute.
- Determination of claims of professional negligence relating to the accountancy profession.
Public Sector Audit
Public sector audit involves the scrutiny of the financial affairs of the state-owned enterprises to assess whether they have been operated in the way which is in the best interest of the public.
Whether standard procedures have been followed to comply with the requirements in place to promote transparency and good governance (e.g., public sector procurement rules).
Public sector audit, therefore, goes a step further than the financial audit of private organizations, which primarily focuses on the reliability of financial statements.
Tax audits are conducted to assess the accuracy of the tax returns filed by a company and are therefore used to determine the amount of any over or under assessment of tax liability towards the tax authorities.
Information System Audit
An information system audit involves the assessment of the controls relevant to the IT infrastructure within an organization. Information system audits may be performed as part of the internal control assessment during the internal or external audit.
Environmental and Social Audit
Environmental and Social Audits involve the assessment of environmental and social footprints that an organization leaves as a consequence of its economic activities.
The need for environmental auditing is increasing due to a higher number of companies providing environment and sustainability reports in their annual report describing the impact of their business activities on the environment and society and the initiatives taken by them to reduce any adverse consequences.
Value-For-Money (VFM) Audit
A value-for-money audit involves the assessment of the efficiency, effectiveness, and economy of an organization’s use of resources.
Value-for-money audits are increasingly relevant to sectors that do not have profit as their main objectives, such as the public sector and charities. They are usually performed as part of an internal audit or public sector audit.
A management audit is an independent appraisal activity for the review of the control of managerial functions to ensure compliance with the organizational objectives, policies and procedures, and management methods and purposes.