Internal Audit

Different Types of Audit Services

An audit is a form of examination, inspection, and review. An audit is performed by auditors who are generally Chartered Accountants (CAs) hired by businesses to examine financial statements, manage accounts and submit reports on accounting, operations, revenue, and expense. Businesses also engage Certified Public Accountants (CPAs) who provide an opinion in their professional capacity on the fairness, accuracy of records, and compliance with certain standards. The work of the auditor is to report their findings to the stakeholders and key managerial personnel in the form of an audit report. Sometimes the audit report is also presented to external stakeholders like banks, creditors, or the government. The audit services may be time-consuming but the findings are beneficial for the business for improving finances and internal controls, exposing risks, and helping stakeholders make informed decisions.

What are the types of Audit Services provided by Auditors?

Following are the different types of Audit Services provided by Auditors:

1. Internal Audits
   In this type of Audit, the internal controls, processes, legal compliance, and protection of assets are assessed. Internal Audit Service helps the business to evaluate risk and identify ways to improve performance. Internal Audit services are performed by individuals who are the employees of the organization and are not working independently of the organization but they should be independent of the activities of the organization while auditing. Internal Audit Reports are sent to the management, Board of Directors, or the audit committee of the organization.
   Internal Audit services can be beneficial for business operations however, audits performed as per the Generally Accepted Accounting Standards (GAAS) are more authentic. When the external audit services are performed, throughout the process the external audit team stays in the loop with the internal audit team to understand their audit procedures.
2. External Audits
   External Audit services are generally performed by third-party independent auditors. These third-party independent auditors can be a CPA firm, the Indian Revenue Services (IRS), accountants, or tax departments. Just like internal auditors their task is also to report the accuracy and fairness of accounting records however, this audit service is more reliable as they are done by independent auditors. The audit report prepared by the external auditors is provided to the shareholders and stakeholders outside the organizations. The benefit of an external audit is that it is independent and therefore unbiased. It gives the shareholders and stakeholders outside the organization more confidence in the audit process and report.
3. Financial Statement Audits
   Financial statement audit services are provided by independent auditors who determine whether the organization’s financial statements^[1] align with the financial reporting standards applicable to the organization. This audit service is generally required when the organization is seeking a high level of financing or outside investors or when the organization is planning to sell the business. The auditor’s task under this type of audit is divided into three things:
   • To identify and assess risks of material misstatement due to fraud or error.
   • To obtain sufficient evidence if any material misstatements exist.
   • To form an opinion on the financial statements of the organization.
4. Operational Audit
   Operational Audit Services generally review specific objectives of an organization’s activities. It is generally performed by internal auditors however, independent auditors like CPAs, management advisory service specialists, and Certified Management Accountants (CMA) can also offer their expertise in this type of audit service. In this type of audit, the auditors analyze various processes, procedures, and systems and evaluate operational effectiveness, efficiency, and productivity. The benefit of this type of audit is that it discovers new opportunities for improvement and development.
5. Information Systems Audits
   An Information Systems Audit service is performed to evaluate management controls in an organization’s IT structure. Usually, IT systems are complex so the focus is on IT processes and specific areas of business or data privacy. In addition to this, most information systems audits are also customized as per the needs of the organization. This Audit determines whether the systems are safeguarding assets, maintaining data integrity, and operating effectively or not. It can be performed either independently or during an internal audit or financial statements audit. A Certified Information Systems Auditor (CISA) is a qualified person to perform this type of audit. In this type of audit, interviews are conducted with business users and staff, and documentation analysis and software control checks are also done. The benefit of this type of audit is that it helps identify risks as well as opportunities, aligns assessment results with strategies, and improves business procedures.
6. Compliance Audits
   This is one of the important types of Audit Services. A compliance Audit is performed to inspect if all compliance requirements are fulfilled as per the government’s rules, standards, and requirements. The government sets these requirements further, it also hires auditors to examine the organization’s compliance with them. This type of audit also ensures that all local laws, regulations, rules, and other provisions of the agreement are fulfilled. This audit is generally conducted in conjunction with the financial audit. 
7. Performance Audits
   Performance Audit Services cover a variety of assessments. Performance Audit requires evaluation of objectives such as program effectiveness and results, internal controls, compliance with some requirements, and prospective analysis. These objectives are mutually inclusive. Performing one objective leads to the performance of other objectives as well. The benefit of this type of audit is that it helps management and those in charge of governance and oversight to improve program performance and operations. It reduces costs and facilitates decision-making and public accountability.
   Generally Accepted Government Accounting Standards (GAGAS) also known as Yellow Book is used to perform this type of audit. The AICPA considers that performance audits conducted under GAGAS provide the highest level of assurance. Performance audit is mainly conducted by governmental agencies to provide a record of the use of federal funding received by it. Performance Audit includes the following:
   • It ensures that the government services and benefits have been delivered to the citizens as per their eligibility.
   • It provides conclusions on current and projected trends and their potential impact on the business.
   • It analyzes the cost-effectiveness of a program or activity based on the benefits provided and the results achieved.
8. Employee Benefit Plan Audits
   In this type of audit, the examination and evaluation of financial statements maintained for Employee Benefit Plans are done. It determines opportunities for improvement within plan operations, the efficiency of the plan, and whether it complies with the regulations or not. This Audit ensures that workers are paid fairly as per the industry standards and location. It also ensures that no disparity due to race, religion, caste, or gender arises. Independent public accountants are qualified to perform this type of audit service.
9. Payroll Audits
   Under Payroll Audit Service, an auditor evaluates the organization’s payroll records and determines their accuracy, completeness, and whether they are discharged timely. It aims to remove any procedural gaps, inaccuracies, or errors. Different payroll factors like pay rates, wages, tax holdings, and employee information are examined while conducting a payroll audit. The benefit of this type of audit is that it helps correct vulnerabilities and improves compliance. Usually annual or semi-annual payroll audits are conducted however regular payroll audit helps maintain compliance and financial controls.
10. Forensic Audits
    Under Forensic Audit an organization’s financial records are examined to identify any illegal finance activity. The auditor under this type of audit is a forensic accountant who looks for evidence that can be used before the court or for conflict resolution among shareholders. Forensic audit detects any fraud, theft, or inaccuracies in account balances.

Conclusion

Audit reports are like report cards. For every type of audit, a separate report is prepared. Every business organization must perform regular audits to understand various aspects of its business and how well it is performing. It helps review its operations and remove mistakes that impact the future performance of the business.

Also Read: Internal Audits: What it is, Different types, and the 5CS