Overview of Compliance Audits

A compliance audit is evaluated for compliance with applicable laws, rules and regulations, and other orders and directives issued by the responsible authority. By its very nature, this audit encouragesaccountability, good governance, and openness are key when it comes to disclosing errors, locating flaws, and determining appropriateness. The Indian Audit & Accounts Department has a history of performing audits primarily focused on determining compliance, such as transaction-based, regularity-based, propriety-based, theme-based, and Chief Controlling Officer-based. These make up the majority of the Department's audit activities. Thus, they must be organised and carried out properly.

The concepts, methodology, and procedures for controlling compliance audits within the Department are laid forth in CAG's Regulations on Audit and Accounts, 2007, which acknowledged compliance audit as a unique stream of audit. Using a top-down, risk-based, and department-centric strategy, these recommendations reorient the planning process to instil procedural rigour in audit execution. Additionally, these recommendations make the reporting and follow-up procedures clear.

What is Compliance Audit?

An impartial assessment of an organisation’s compliance with internal standards, such as corporate bylaws, controls, policies and procedures, and external laws, rules, and regulations, is known as a compliance audit. Compliance audits may also ascertain if a company abides by a contract, such as when a company takes money from the government or another source. Although most people are aware of financial audits, such as those conducted on publicly traded firms under the Sarbanes-Oxley Act (SOX) or on individual or company tax returns by the Internal Revenue Service (IRS), compliance audits go beyond financial analysis.Audits may also examine quality control procedures, HR law compliance, IT and other security risks, and other matters. GRC stands for governance, risk, and compliance and is a three-legged structure.

What is the need for Compliance Audits?

Compliance is crucial for a variety of reasons. Non-compliance with regulatory requirements may result in sanctions and penalties in addition to denoting levels of professional standards, such as the ISO 9000, ISO 14000, and other standards. The Federal Sentencing Guidelines Act outlines the penalties for breaking federal regulations, such as Sarbanes-Oxley. It applies fines based on a formula that computes the most recent offences and establishes whether the organisation employs a compliance officer who informs the organisation of regulatory requirements.

In addition to being responsible for operations, boards of directors frequently want to examine audit reports. Proof of a compliance programis crucial to demonstrate that the organisation has controls and other procedures to uncover flaws and even criminal activities if a regulatory body conducts an investigation.

Depending on the circumstances, the audit may be carried out by an employee. He may be an internal auditor,  a third-party auditor, a certified public accountant, or a government auditor. In many cases, auditors, such as attorneys, may turn to outside experts for help.

Audits offer suggestions on enhancing processes or taking remedial action to stop flaws or non-conformities in the future. In order to compare the proportion of processes that are compliant and non-compliant, audits evaluate efficacy. Organisations can maintain compliance with federal requirements by conducting audits. Additionally, audits pinpoint organisational areas where non-compliance is dangerous, and they communicate these assessments to management and the relevant regulatory body as needed.

Objectives of Compliance Audit

A compliance audit will evaluate an organisation’s compliance with laws, standards, internal policies, and codes of conduct. An audit may also include reviewing how well an organisation’s internal controls function. Several departments may use various audit types. For instance, the accounting department might use internal, compliance, and operational audits. Additionally, other levels of government may call for audits, including:

• Internal Audit

Internal audits and compliance audits, which frequently involve members of an internal audit team, may be confused by some people, although they each represent a different methodology. An organisation’s internal controls, including its rules, procedures, and standards, are upheld by internal audits.

• Compliance Audit

In contrast to internal audits, compliance audits concentrate on the outside world, ensuring that the company complies with regulations or standards of conduct. Internal and compliance audit activities should ideally employ the same vocabulary (and even software) to provide complete and uniform evaluations.

• Operations Audit

Operational audits evaluate the efficacy and efficiency of different departments and operations to determine whether those teams adequately achieve the organisation’s goals and objectives.

The procedure of Compliance Audit

A meeting between corporate representatives and compliance auditors to discuss compliance checklists, rules, and the audit's scope is the first step in an external audit. The auditor monitors employee performance, investigates internal controls, evaluates paperwork, and verifies compliance in various areas.

The C-suite and IT administrators will often be subjected to a series of probing inquiries by compliance auditors, such as what users were added, when, who has left the organisation if user IDs have been revoked, and which IT administrators have access to vital systems.

Tracking and necessary papering authentication and controls in their IT systems, event log managers, and comprehensive change management software may help IT administrators prepare for compliance audits. With the aid of the expanding category of governance, risk, and compliance (GRC) software, CIOs may easily demonstrate to auditors that a company complies, saving it from excessive fines or penalties.

Auditors then produce the final audit report after they have examined all corporate compliance processes. The degree of compliance adherence inside the organisation, any breaches, and recommendations for improvement are all provided in detail to business executives by compliance auditors. Eventually, the audit report is made available to the public.

Types of Compliance Audits

Compliance audits often examine technical, financial, operational, and cybersecurity risks. The following are some of the most well-known compliance audits:

• HIPAA (Health Insurance Portability and Accountability Act)

HIPAA governs personal information privacy and security. HIPAA also places limits on insurance providers, health maintenance organisations, and employer-sponsored group health plans. It also offers protection to those who change employment, work for themselves, or have a history of medical issues.

• PCI-DSS

The Payment Card Industry Data Security Standard (PCI DSS) outlines security procedures to keep payment card data secure to safeguard cardholders' private information and improve the security of credit, debit, and other such transactions.

• SOC 2

SOC 2 audits are used to evaluate the cybersecurity of service providers, including companies that store data, handle payroll, offer legal counsel, and other entities that could offer services to businesses. They are based on the Trust Services Criteria created by the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board.

The goal of the SOC 2 is to evaluate an organisation's information systems in terms of security, accessibility, processing integrity, confidentiality, and privacy.

• Sarbanes-Oxley Act (SOX)

The Sarbanes-Oxley Act (SOX), a response to many accounting scandals in the early 2000s, was approved by Congress in 2002 with support from both parties. Its objectives were to improve public openness and auditing. Large publicly listed corporations are required by law to undergo yearly external audits of their internal controls over financial reporting.

Who can Perform Compliance Audits?

Internal audits may be carried out by corporate personnel, such as an internal auditor, to determine the overall risks to compliance management and security. Additionally, they can check to see if the business is adhering to internal controls and regulations, including corporate policies, processes, and bylaws.

The reports produced by these internal audits, conducted throughout the fiscal year, can be used by company management to spot flaws in their regulatory compliance procedures and identify areas that need improvement or correction.

On the other hand, external audits are official compliance audits carried out by independent businesses. The compliance programs that are being evaluated determine the exact formats that these audits must follow. Depending on the audit's scope, external audit reports determine if a company conforms to national, state, or corporate requirements. Auditors of compliance are frequently certified public accountants.

Regulators frequently evaluate potential fines for non-compliance using an auditor's report. Executives use the papers to demonstrate that their companies are following the law.

A compliance audit's findings may also assist organisations in lowering risk and avoiding any federal penalties or legal issues related to non-compliance.

How are Internal Audits different from Compliance Audits?

Employees of a corporation conduct internal audits to assess overall compliance and security concerns and to ascertain if the organisation is adhering to internal policies. Management teams can use the findings from internal audits conducted during the fiscal year to pinpoint areas that need to be improved. Internal audits compare organisational goals to production and tactical risks.

Formal compliance audits, known as external audits, are conducted by impartial third parties and adhere to a predetermined framework depending on the evaluated compliance requirement. Reports from external audits determine if an organisation is abiding by company, state, and federal laws and regulations.

The C-suite may use an audit report to demonstrate regulatory compliance, or regulators may use it to determine potential fines for non-compliance. An external compliance auditor may use internal audits to further assess compliance and regulatory risk management initiatives.

General Principles for Compliance Audits

• Auditors must have the required expertise

The audit team should have the knowledge, abilities, and experience required to finish the audit effectively. This comprises familiarity with the appropriate standards and authorities, knowledge of the activities of the auditable entity, knowledge of the audit type being conducted, and the ability and experience to use professional judgement.Through continuous professional development, auditors should be able to retain their professional competence.

In cases where it becomes difficult to provide the specialist methodologies, procedures, or skills needed for an audit, external experts may be used without being included in the audit's actual execution. In such engagement with outside experts, the confidentiality of the precise information/records made available by the auditable institution should be protected.The competence, competencies, and objectivity of experts should be assessed by auditors, who should also judge if the work of the experts is sufficient for the audit's objectives.

• Auditor accountability for the audit's overall quality is necessary.

The auditor is in charge of organising the audit and must always follow quality assurance guidelines. These steps ought to be taken to confirm that the audit conforms with all relevant standards and give confidence that the audit report, conclusion, or opinion is suitable for the specific situation.

• Throughout the auditing process, auditors should take audit risk into account.

It is essential to control or lower the audit risk to a manageable level while conducting audits. Audit risk refers to the possibility that the audit report, or the auditor's conclusion, may not be suitable given the audit's unique facts and circumstances. The auditor should consider the reporting style and the subject matter, such as whether it is quantitative or qualitative, in connection to the three audit risk dimensions of inherent risk, control risk, and detection risk. These audit risk dimensions ' relative importance varies depending on the topic matter and the type of assurance to be given.

• All along the auditing process, auditors should communicate clearly.

Communication occurs at every stage of the audit process, including the preparation stage, the audit itself, and the reporting phase. The appropriate level of management or those responsible for governance should be informed of any substantial issues discovered during the audit as well as instances of material non-compliance.

• The auditors should decide the audit scope.

In terms of the subject matter's compliance with the criteria, the audit scope clearly describes the emphasis, extent, and limitations of the audit. The materiality, risk, and legal requirements all impact an audit's scope, which defines which authorities and subsets will be examined.

• Auditors should determine the topic, the relevant authorities, and the appropriate standards.

One of the initial phases in a compliance audit is determining the topic, authorities, and criteria. The topic matter might be wide or specialised, as was mentioned in Chapter 1. Identifying the subject and evaluating it using appropriate standards should be feasible. It should be designed to make it possible to acquire enough pertinent audit evidence to support the audit finding. To evaluate the audit evidence and generate audit findings and conclusions, the auditor should use appropriate authorities and criteria. When necessary, the intended users and others should have access to the authorities and criteria.

• Auditors should understand the auditable entity.

All executive levels may be included in compliance audits, along with different administrative levels, entity kinds, and entity combinations. As a result, the auditor should be knowledgeable about the auditable entity's activities, structure, and methods for ensuring compliance. The auditor will use this information to evaluate non-compliance risk and determine materiality.

Why Enterslice?

• Our compliance specialists assess adherence to various compliance standards by drawing on their extensive internal and external accounting and auditing backgrounds. We provide suggestions for industry-specific corrective action programs to achieve and maintain compliance when we find instances of non-compliance.
• Our practical expertise has taught us how to carefully guide your organisation through complicated regulatory standards that are exclusive to your industry.
• We interpret the frequently complex and dynamic laws, rules, and regulations that apply to your sector.
• Examine your organisation's policies, practises, and business processes to determine compliance with standards and spot any gaps.
• Enterslice offers appropriate mitigation measures to lessen the organisation’s dissatisfaction and expensive non-compliance costs.
• When instances of non-compliance are found, we identify and comprehend the pertinent internal and external requirements, compliance test, share our findings and suggestions for improvement, and help management with their obligation to recognise issues and take corrective action.
• To keep your company compliant with applicable external standards, industry duties, and internal directions, we help customers ensure timely and correct compliance.