Business,  Finances

Why is Auditing Necessary? 5 Types of Auditing to Consider

In 2021, every company has to ensure compliance with the Generally Accepted Accounting Principles (GAAP). It refers to a set of accounting procedures, principles, and standards issued by the Financial Accounting Standards Board (FASB). Under the compulsions set by GAAP, finance managers have to present financial statements, value assets, and record revenue as per given standards. After this, accountants have to prepare compliance reports to prove that the organization is adhering to GAAP. That is where auditing comes into play. It is a process of conducting a financial inspection of various books of accounts.

Accountants and auditors critically recheck every entry against the transaction to ensure there aren’t errors in the calculation. These audits also extend to physical checking of inventory to make sure the company hasn’t under-or-overvalued stock. After all, many companies adjust inventory levels to manipulate profits and financial performance.

In simple words, auditing proves the credibility of financial statements and gives confidence to shareholders that the accounts are true and fair. If you want to learn more about auditing, have a look below.

Here are five different types of auditing that companies can consider for improving compliance.

1.       Internal Audits

Many companies conduct internal audits to gain deeper insights into their internal controls. They try to identify flaws, weak spots, and compliance issues before a third-party auditor highlights them. In addition to avoiding reputational risk, they can overcome discrepancies and ensure effective financial management. Some of the common reasons behind conducting an internal audit include monitoring the effectiveness of the business process, identifying the gaps, verifying financial details, evaluating policies and procedures related to risk management, etc.

Do you know how to conduct internal audits? Mainly, accountants handle these tasks, but you can always learn the ropes if you wish to perform an audit.

Presently, several education institutions offer advanced education programs that enable professionals to develop additional skills. If the field interests you, you can always opt for an online masters in accounting for non accounting majors and understand the accounting dynamics. You will learn to deploy financial metrics for assessing a company’s performance. The degree will further equip you to perform audits on supply chain management, taxes, and other essential business operations.

2.       Financial Audits

Financial audits examine balance sheets, cash flows, and business transactions. The auditors conduct several tests and audit procedures to ensure the company hasn’t manipulated records. They also compare different sets of financial information to measure consistency. After all, analyzing historical data is the best way to detect inaccurate and fraudulent reporting. Through financial audits, the auditors can identify whether business expenses are genuine or accountants have added additional costs to reduce taxable income.

Moreover, the financial auditors are responsible for analyzing the company’s debt management. They oversee if the firm is making repayments on time. Simultaneously, they ensure that the managers aren’t overcharging interest expenses to save money on taxes. Investors, creditors, and lenders rely on the results of the financial audit before making any decision. It assures them that the company’s records are correct, encouraging them to do business with the company.

3.       Compliance Audits

Besides the accounting standards, organizations have to comply with state and federal regulations. These relate to Internal Revenue Service (IRS) regulations where every business has to fulfill its tax obligations. Likewise, regulations also include health insurance and occupational safety to ensure employees have healthy working conditions. For complying with these guidelines, companies implement compliance programs, and auditors review them.

The internal and external auditors review all the procedures and policies to assess the organization’s level of compliance. They look at the regulations concerning the payment of workers’ compensation to close doors for exploitation. Similarly, they thoroughly check shareholders’ distribution to make sure they receive a fair dividend every year. However, this audit isn’t mandatory for every business. It is mostly for regulated industries and educational institutes.

4.       External Audits

The accounting and regulatory bodies require a ‘third party opinion’ about the business performance. Hence, you will have to hire auditing firms to perform an external audit. They will analyze the financial statements to determine if they are accurate and correctly presented. The external auditors will also check for compliance to ensure the organization isn’t breaking any laws. In case of any missing information or regulatory issues, they will highlight it to the shareholders.

As the external auditor doesn’t have any connection with the business, it makes room for objectivity. He/she would have an unbiased verdict of the company’s performance, helping business owners win investors’ confidence. Moreover, the auditing firms follow separate standard procedures that have no association with the company getting audited, further improving credibility.

5.       Operational Audits

Many business owners have a perception that internal and operational audits are the same. In reality, operational audits focus on the entire organization instead of looking into money-related matters. The operational auditors analyze the company’s goals, objectives, procedures, and operating results. It helps in identifying weaknesses, allowing companies to improve performance. The auditor will highlight departments with the highest expenditures while pointing out ways to lower expenses.

Likewise, they will oversee supplier contracts and logistics to find inefficiencies in the operations. For instance, if it takes five working days to process and deliver the order, the auditor will find solutions to speed up the process. However, you don’t have to hire an external auditor for operational audits since internal auditors can easily get the job done.

Wrapping Up

The role of auditing is exceptionally crucial in the business world. Sometimes, organizations miss out on essential regulations unknowingly, while at times, they intentionally manipulate records for personal gains. Since keeping a check-in balance remains essential, the regulatory bodies ask companies for external audits. The auditors prepare reports, list potential non-compliance issues, and send them to the shareholders. In addition to ensuring accountability, it determines if the business is credible or not.

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