- Auditing
- 2021-01-24
- Mr. Wasim Firoz
What Are The Three Types of Major Audits?
Being a prominent auditing firm in Dubai. Today, We are writing about these three types of an audit because those business owners who don’t have any kind of information about the audit. They think the only internal and external audits are three in accounting. To increase the knowledge about the audits among the business owners. We are going to look at the three major audits that are essential for organization, company, and small business as well. We will discuss the three types of audits and also differentiate each of them.
- The first type of audit is an operational audit.
- The second is compliance
- The third is financial.
Operational Audit
What is an operational audit? So when we say the audit is operational, basically we're evaluating what we're evaluating the efficiency and effectiveness of any part of the company. any part of the organization like what? We could be looking at their production. Suppose a company is producing the cups. so we want to know if they're producing cops efficiently and effectively, what does efficiently and effectively mean?
In general terms, we said efficiently and effectively means operating at the lowest cost and without sacrificing, sacrificing quality. So are you really efficient doing what you're supposed to do with the least amount of resources? So this could be an operational audit now. Now, bear in mind, we said all the things the production department, this is not accounting, we're not really auditing the accounting information.
for example, look at the payroll and audit your payroll department and see how well they are running the payroll department. Now, bear in mind, and an operational audit is very subjective. Why? Because there are no established criteria. What is established criteria like generally accepted accounting principles? It is an established criteria. The Internal Revenue Code is an established criteria. It means that something that you can compare your results to in an operational audit.
It's very subjective. There are no established criteria to establish the criteria. Basically, the auditor and the client they meet together and they say this is the criteria that we're going to be looking at when we perform the audit. So an example of an operational audit could be that you are evaluating the payroll system, the computerized payroll system for efficiency and effectiveness. So what is the information that you are auditing? What is the information that you are auditing?
Maybe the number of records process, the cost of the department, and the number of errors. You're looking at those three things and you want to know how many records are we processing? What is the cost of the payroll department and how many errors are we making per person? What are the established criteria? Company standards for efficiency and effectiveness in the payroll department so the company determines we can tolerate.
Let’s take the example, five errors this is the criteria. Now, when we have more than five errors, we're not doing well. We have to do something about it. Or we could say we can tolerate 10 errors per year. Criteria could be established by the company. What evidence do you use when you're conducting an operation audit? If it's payroll, what you do is you look at the errors report. You would look at the payroll record and you would look at the payroll processing cost, how much it's costing us to process the payroll because this is part of the information that we are getting. So this is considered an operational audit. This is an operational audit.
Compliance Audit
Sorting. Procedures and rules, are they compliant in certain procedures, rules? Regulations, are they following certain procedures, rules, and regulations that are set by an outside or higher authority? What could be some examples of compliance audit? Well, are you complying with the minimum? Wages, so we need to make sure that your company is complying with the minimum wages. Now, what do I do? We will audit your payroll. This is not an operation or this is an audit to find out if you are following a rule that said by the federal and the state government, which is the minimum wage law, what could be another compliance audit and other compliance audits would be are you complying with your loan agreement?
You borrowed money from the bank and there is an agreement between you and the bank. Are you complying with that agreement? For example, the agreement could be you cannot pay more than 30 percent of your income in dividends. Are you complying with that? For example, you cannot sell your account receivable. Are you complying with that? so those are compliance audits now telling the truth. Also, when I was in practice, I did a lot of compliance audit because we used to audit a lot of school district in the area where I used to work.
they received money from the state government. They receive tax money. Therefore, the government wants to make sure that the school district is spending the money wisely. What they do, that they receive a lot of money from outside parties, government, state government, local government, or even private donors. And what they do, the deed, the party that's given money to the non-profit, they want to make sure that they are complying with what they are claiming,
for example, one, the IRS audit. It's basically a compliance audit. Are you really following the IRS rules? So this is what a compliance audit is. So another example would be determining whether a bank requirement for long continuation has been met.
Financial Statement Audit
Here we collect enough evidence, sufficient evidence to do what? To render an opinion about the financial statement, If the financial statements are in compliance with criteria. The criteria are either gap or IFRS. It doesn't have to be a gap or IFRS. The criteria could be any criteria.
The financial audit shows the financial health of the business. It is very important to find the errors based on the criteria. During creating a report auditory have to accept the accounting principal (GAAP) according to their country. The main purpose of the financial audit report is to determine the financial health and how the business is running. Also, perform the main role in decision making.
With examine the company, record the established criteria as the loan agreement provisions. based on the loan agreement, determine that are we violating any rules. What's the available evidence, financial statements, and calculation by auditors.
