What are the 3 types of audits?

TYPES OF AUDITS AND AUDITORS (STUDY OBJECTIVE 2)

An audit is a type of assurance service that involves accumulating and analyzing support for information provided by others. The main purpose of the audit is to assure users of financial information about the accuracy and completeness of the information. To carry out an audit, accountants collect and evaluate proof of procedures, transactions, and/or account balances and compare the information with established criteria. The three primary types of audits include compliance audits, operational audits, and financial statement audits. Although all audits involve an investigation of supporting information, each type of audit has a different purpose. Compliance audits determine whether the company has complied with regulations and policies established by contractual agreements, governmental agencies, company management, or other high authority. Operational audits assess operating policies and procedures for efficiency and effectiveness. Financial statement audits determine whether the company has prepared and presented its financial statements fairly, and in accordance with established financial accounting criteria.

Audits are typically conducted by accountants who have knowledge of the established criteria. For example, financial statement audits are performed by certified public accountants (CPAs) who have extensive knowledge of generally accepted accounting principles (GAAP) in the United States and/or International Financial Reporting ...

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 similar to assurance and attestation services.

Beyond the 3 main audit types, many other audit types are found based on the audit task.

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.

Operational Audit

The operational audit, also referred to as an 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 concerning financial statements, an internal audit’s scope of work is very broad. It can encompass any matters which can affect the achievement of organizational objectives.

Compliance Audit

In many countries, companies must conduct specific audit engagements other than the statutory audit to comply with particular laws and regulations requirements.

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:

Forensic Audit

Forensic audit involves using auditing and investigative skills in situations involving legal implications. Forensic audits may be required in the following instances (tasks of Forensic auditor):

• Fraud investigations involve 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

A public sector audit involves the scrutiny of the financial affairs of the state-owned enterprises to assess whether they have been operated in a way that is in the public’s best interest.

Whether standard procedures have been followed to comply with the requirements to promote transparency and good governance (e.g., public sector procurement rules).

A public sector audit goes a step further than the financial audit of private organizations, which primarily focuses on the reliability of financial statements.

Tax Audit

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 environmental and sustainability reports in their annual report describing the impact of their business activities on the environment and society and their initiatives to reduce any adverse consequences.

Value-For-Money (VFM) Audit

A value-for-money audit assesses 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.

Management Audit

A management audit is an independent appraisal activity to review the control of managerial functions to ensure compliance with the organizational objectives, policies and procedures, and management methods and purposes.

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