What is Audit | 3 Different Types of Audit

What is Audit: The term audit refers to the inspection, evaluation, and examination of financial statements of the business or organization to analyze the accuracy and transparency of the financial statements concerning the finance spent as depicted by the financial statement. Financial Audit of every business whether big or small is very important to keep the transparency of the finances of the business and to check whether the finance and budget of the organization are invested at the right place and for the growth of the organization. The audit can be performed monthly, quarterly, bi-annually, or yearly depending upon the requirements and the resources of the organization.

Many organizations have their internal audit departments for conducting their organization audit, some hire external auditors to conduct an audit for them. Also, the government regulators like HMRC in the UK conduct an audit and tax investigation on a company or individual when they find some wrongdoing. A chartered accountant with audit qualification (AQ) from ICAEW or ACCA conducts a financial audit of the organization. In this way, we have three types of audit namely

  1. Internal Audit
  2. External Audit
  3. Government Regulatory Body

Internal Audit

Internal Audit is the audit performed by the company in-house employed auditors to carry out the audit of the company, and the report of the audit performed is presented to the higher management and board of directors to make any changes in the operations of the audit department or to the managerial changes in the audit department for achieving transparency and high performance in the audit department of the organization. The purpose of the internal audit is to achieve accurate financial records of the organization promptly in compliance with the laws and regulations of the audit.

Sometimes organizations also hire audit consultants outside of the company to conduct an audit of the company as per the standards set by the organization, such auditors do not follow their standards rather they follow the standards given by the organization. Conducting an internal audit help organization in identifying flaws in their financial and control procedure before it’s by an external auditor.

Having an internal auditor is very beneficial and crucial for the organization as it is cost-effective and gives them an internal financial audit report of the organization whenever required by the higher management and the board of directors and other stakeholders to look for shortcomings and deficiency in the procedures of the financial reporting, controlling and auditing of the organization.

External Audit

An external Audit is an audit performed by outside parties. External auditors perform an audit as per their own set of standards different from that of the company internal audit standards thus help in removing any biases in reviewing the financial health of the organization. External auditors’ financial audit reports help financial statement users with confidence that there is no misleading information in the financial statements and information provided is complete and accurate. Such financial reports by an external auditor help in better and more informed decision-making by the stakeholders concerning the plan of the organization.

When the audit is performed by the external auditor it is performed in a different environment, independent of the organization’s internal environment, laws and regulation, and on the items that are audit i.e company finances, internal control, and systems. These audit reports are accurate and honest that help the organization grow financially without disturbing the internal environment and work relationship within the company.

Government Regulatory Bodies

Every country has its regulatory bodies conducting audits and tax investigation against companies and individuals to verify the accuracy of taxpayers’ returns and other financial transactions. When a regulatory body conducts an audit against a person or company it gives a negative connotation that the person or company is found guilty of wrongdoing concerning tax matters. If someone is called by the regulatory body for an audit it is not necessary that the person or company has done some fraud in tax paying. Sometimes an audit is conducted to match the statistical data in the system with the actual taxpayer’s returns or other financial transactions.

There are many reasons that the person or company is called by the regulatory body for tax investigation or financial audit, such as a person dealing with another person or company whose tax records have some error when done an audit of their tax records.

So in this article, we have shortly covered the topic of audit and its types, hope you may like and found it informative. If you are looking for assistance for your company auditing you may contact accotax for more information.

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