Understanding the Different Types of Audits and Their Benefits

WHAT IS AN AUDIT?

Audit is a Review and examination of Business – the key processes that go into it, the Operations, Books of accounts, it’s regulatory environment – to evaluate its performance, effectiveness, efficiency and report the same.

Audit is concerned with Examination of Business and the various facets of it to improve and communicate the same to concerned people

TYPES OF AUDITS

There are different types of Audit currently going on in the modern Business world, some Common and done by every type of business and some specific – applicable depending on nature of business, some required by the regulators, some done voluntary

In this post, we go through some of popular types of audit prevalent in Indian economic environment, their applicability, their purpose, benefits out it.

Audit can be classified into following broad categories:

1. Financial Audit
2. Process Audit
3. Con-current Audit

FINANCIAL AUDIT

Financial Audit, as the name suggests is concerned with Auditing of Financials or Financial Statements. Under this type of Audit, Financial Statements or Books of Accounts are examined to verify whether the ledger balances reflect True and fair view of Events occurring in the business. The numbers in Books are crunched to ensure correctness, reliability, credibility.

Under this type of audit, Books are audited to ensure whether they are as per Applicable Accounting Standards, generally accepted accounting principles, Legal and regulatory requirements.

This type of audit may be mandatory, Example, Financial Statements of Companies are required to be audited yearly once as per Companies Act, or might be taken up voluntary out of initiative, example, by a partnership firm

Following are the things done under this type of audit:

1. Ensure all transactions accounted in Books of Accounts are correct (in terms of Value, accounting principles, etc.)
2. No entries for an Event affecting the business are omitted to be accounted
3. All transactions have adequate Supporting evidencing it
4. Financial statements are properly classified and presented as per Accountings standards
5. All applicable Statutory compliances are complied with (GST, Income Tax, EPF, ESI, Professional Tax, Companies Act)

Financial Audit are not necessarily to be taken up Yearly once as required in Statutory Audit as per Companies Act, can also be taken in Monthly, Quarterly intervals. Also, these are relevant and can be applied to all types of Businesses.

Benefits of Financial Audit:

1. If Financial Audits are carried out monthly/ quarterly – It helps in Timely Identification of Errors in Books, Non compliances – making Books ready for preparing Financial Statements, Avoidance of legal consequences like penalty, interest, etc.
2. Assurance to the Owners/ Shareholders/ Partners about the Business
3. Ready and accurate reporting of Debtors Creditors balances, Profit/ Loss for the period, other important matters to the management, thereby enabling quick decision making and Steps to further improve the business position.

PROCESS AUDIT

Process Audit is concerned with the audit of Key Processes of the organization. These helps entity to examine the effectiveness and Efficiency of processes and make improvements on them.

It is applicable to all Process of the organization – Manufacturing, Procurement to Payment, Sales to Receipt, Financing, Accounting, Human resources, Customer relationship management, etc.

This type of audit is generally relevant to larger organization with diverse processes. Smaller entities have processes embedded into a single or few units. Also, process audits can be carried out on regular intervals by Parties external/ internal to Organization (OR) can be embedded into controls of the entity

Following is usually done in Process Audit:

1. Ensure all the processes as per Organizational policy are complied with and events occurring in the entity are as per the Process
2. Comparing the Process compliance with Standards and identifying Deviations
3. Analyzing Deviations for reasons
4. Coming up with solutions to avoid/ eliminate such causes of deviations
5. Reporting the above to Owners

Benefits of Process Audit:

1. Helps in identification of Bottlenecks in Process and correction of same
2. Key Processes are examined like Manufacturing, P2P, HR – helps in avoidance of Resource leakages due to errors, inefficiencies
3. Redundant process can be eliminated and New and modern processes can be brought in that is best suitable as per Current Business environment
4. Effective and Efficient process is Key to Survival and growth of Business, thus process audit stimulates growth

CON-CURRENT AUDIT

The term con-current means doing it at the same time it happens. Thus con-current audit means conducting Audit as and when it happens. This involves Audit of the events occurring in business In regular intervals (generally daily, weekly, monthly in some cases). It can involve Audit facets of both Finance and Process

Under Finance Concurrent audit, It is ensured that transactions accounted in Books of accounts are Correct and accurate and are as per correct accounting framework on a daily (Weekly, monthly in some cases) basis, no omission happens. Also, Statutory compliances are verified on regular intervals. 

Under Process concurrent audit, it is ensured that All process flows are complied with the Organizational Process policy on a daily basis. Deviations are reported and appropriately treated for, as to avoid same in future

Following is usually done in Con-current audit

1. Daily vouching and verification of Transactions – Whether complies with Accounting framework, Statutory requirements
2. Running Daily reconciliations to ensure correctness and accuracy
3. Daily reporting of any deviations
4. Coming up with solutions for the same to avoid/ reduction in future

Benefits of Con-current Audit:

1. Daily Reporting of Debtors, creditors balances, Profit/Losses helps in regular follow-up with Debtors, keeping Price rise by suppliers in check, analyzing losses as and when they happen to make improvements
2. If events are audited as and when they happen, errors can be rectified immediately, also, helps in reducing chances of committing similar errors in future
3. Con-current audit acts as a backbone and support system to Accounts and Finance department of an entity

CONCLUSION:

It is important for an entity to identify and study what are types of Audit best suitable for Nature of business, Economic and legal environment so that best auditing practices can be applied and it leads to Growth and Success of Business

Author: Sambhav R Shah