4 Different Types of Audits Explained

When one thinks of audits, the first thoughts that come to mind are often tax season and the IRS; this is understandable considering that we’re seeing more and more IRS audits every year. Companies with assets of more than $250 million will see their audit rates triple between 2019 and 2026, from 8.8% to 22.6%.

However, these corporations, as well as much smaller businesses and government agencies, know that there isn’t just one type of audit. There are many types of audits, from performance audits to sustainability audits, that go beyond measuring revenue and taxes.

Earning a Bachelor of Science in Business Administration (BSBA) in Accounting prepares auditors for the different types of audits. With this degree, students learn to apply the principles of finance, analytics and strategic management to help companies reach their intended goals.

Performance Audits

Performance audits are assessments of an entity’s operations to measure the effectiveness of a specific program or function and to see if they’re working toward their intended goals. Through a performance audit, an entity learns if changes are needed to achieve its goals.

Who Uses Performance Audits?

In most cases, a performance audit is conducted on government agencies to help determine their use of federal funding. The U.S. Government Accountability Office (GAO) sets the standards for these audits.

Requirements of a Performance Audit

Performance audits have three sets of standards: general, field and reporting. General standards ensure that the auditor making the assessment is independent, is capable and adheres to strict quality control. Field standards define the objectives, purpose and manner in which the audit will be conducted. Reporting standards determine how the findings of the audit will be communicated.

Benefits of Performance Audits

Performance audits help entities, primarily government agencies, find opportunities to improve their processes and reach their goals more efficiently. These audits are crucial for establishing government accountability and transparency.

Compliance Audits

Compliance audits are a type of audit that determines how well an entity is adhering to regulatory frameworks and requirements. Independent or third-party auditors complete these audits, which typically offer areas of improvement in how the entity can better stick to a regulatory framework.

Who Uses Compliance Audits?

Because entities must adhere to different types of regulations, many types of compliance audits exist. Who uses each compliance audit depends on their industry and the regulations that govern them. For example, the IRS compliance audit is one of the most commonly known types of audits. Businesses that pay taxes in the United States must undergo this type of audit.

Requirements of a Compliance Audit

A compliance audit comprises five key steps. The first step is research, in which the auditor confirms the scope of the audit, prepares an audit checklist and schedules a time to begin the audit.

Second, the auditor must review the policies and procedures in the regulatory requirements to which the business must adhere. Then, the auditor begins to conduct interviews, while the fourth step has the auditor shadow employees, review interviews and go over documentation to begin to form an assessment.

The fifth step is the completion of the report, in which the auditor determines the level of compliance and offers improvements to raise that level.

Benefits of Compliance Audits

As outside parties complete the compliance audits, they offer businesses and organizations an objective look at how well they’re meeting regulatory requirements. These requirements are in place for the protection of both the organization and those it serves, so these audits must be done to ensure that the organization is operating to the best of its ability and is keeping both itself and its customers safe.

Information Technology Audits

An information technology (IT) audit is a type of audit that evaluates an organization’s IT, operations and controls to determine whether IT measures protect corporate assets, secure internal and external data and are aligned with the organization’s overall goals. While it looks at the physical security controls, it also measures the effectiveness of business and financial controls that are involved with IT systems.

Who Uses Information Technology Audits?

More and more organizations are using more complex IT systems and are holding on to more data, so they can all benefit from an IT audit. These audits play a vital role in cybersecurity and data maintenance and governance.

Requirements of an Information Technology Audit

An IT audit looks at controls in several areas, including access control, physical access security, risk management and disaster recovery. These audits start with a first-party, second-party or third-party auditor securing approval and funding. Then, they create a framework for the audit, followed by interviews and an examination of the evidence. The auditor then compiles and presents the report, setting a time frame for the organization to address areas that were determined to be insufficient.

Benefits of Information Technology Audits

Consider a survey by Vercara that found that 66% of consumers wouldn’t trust a company after a data breach. An IT audit helps companies recognize their insufficient measures before they become a potential cybersecurity incident, ensuring that their customers don’t lose trust in them due to cybersecurity issues.

Sustainability Audits

A sustainability audit, also known as an environmental, social and governance (ESG) audit, is a type of audit that determines how a company or an organization is reaching its business sustainability goals and the UN’s Sustainable Development Goals. It’s also called a triple bottom line (TBL) assessment, with the TBL referring to the business’s social (people), environmental (planet) and economic (profit) performance.

Who Uses Sustainability Audits?

Any company can benefit from sustainability audits. However, these audits become more necessary if the business is seeking sustainability certification. For example, a company seeking Leadership in Energy and Environmental Design (LEED) certification — the most widely recognized green building rating system — would need to undergo a sustainability audit.

Requirements of a Sustainability Audit

Typically, a sustainability audit looks at three categories: investment practices, operations and customer practices. Examining investment practices tells the auditor where the business is allocating its funds and whether it’s working with and supporting organizations with green records.

The operations category measures energy use and evaluates compliance with environmental regulations. The final category, customer practices, tells the auditor whether the business’s customer engagement practices are sustainable.

Benefits of Sustainability Audits

Consider the value ESG brings to an organization. According to a study by McKinsey & Co. and NIQ, products making ESG claims averaged 28% growth over a period of five years, compared with 20% for products without such claims.

However, businesses need to be able to back up their claims. A sustainability audit helps ensure that a company is on track to meet its target goals. It also allows the business to be more transparent with its audience and allows the public to keep the business accountable.

Prepare for All Types of Audits With a BSBA in Accounting

Audits do a great deal for organizations. They can tell them if they’re on track to reach their goals; provide areas of improvement; and keep them accountable, transparent and trustworthy. With App State Online’s BSBA in Accounting, students graduate with all the skills they need to complete all types of audits.

From this program, accredited by the Association to Advance Collegiate Schools of Business (AACSB), students can develop skills in financial statement analysis, tax regulation compliance, budget management, risk assessment and other areas that help companies better measure their success and reach their goals.

Prepare for your new career with App State Online.

Recommended Readings

Sustainable Practices That Support the Global Supply Chain

Five Tips for Effective Career Management

The Role of a Business Development Representative

Sources:

AuditBoard, “Compliance Audit: Definition, Types, and What to Expect”

Auditors of Public Accounts, Audit Types

CBS News, “IRS Says Its Number of Audits Is About to Surge. Here’s Who the Agency Is Targeting”

ESG The Report, “What Is a Sustainability Audit?”

GDPR.eu, “What Is GDPR, the EU’s New Data Protection Law?”

Harvard Business Review, “How Greenwashing Affects the Bottom Line”