Introduction to Audit
The expression ‘audit’ generally refers to the financial statement of a company’s expenses. It is an essential aspect that every corporate entity must take into consideration. An audit is the examination or checking of account books to make sure that all departments are following the procedures and responsibilities that are allotted to them. There are various types of audits conducted in banks, companies, or other organizations. Concerning other types of audit in India, a management audit is a new concept borrowed from the USA. The sole aim of this audit is to help the company in profit maximization by focusing on the improvement of efficiency.
Types of Audit in India
There are generally two types of audits in India.
Statutory Audits
Internal Audits
Statutory audits are prepared to inform the Indian government regarding the condition of the finances of the concerned company. Such audit reports are prepared by independent auditors (to ensure fairness and accuracy) in the manner that is prescribed by the government.
Types of Statutory Audits that are common in India are given as follows.
Tax Audit
Company Audit
An internal audit is performed by the employees of the concerned company on behalf of internal management to analyze the efficiency of the company and its finances. Indian Companies Act governs the public and private companies and audits of banking companies and provides provision for an internal auditing system.
Except for external audits and internal audits, the following types of audits are also prevalently used.
Bank Audit
Insurance Audit
Government Audit
Management Audit
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What is a Bank Audit?
A bank audit is a regular activity that is performed to inspect the financial activities of institutions to make sure that they are following the rules and regulations as prescribed by the statutes. An accounting expert, who is also known as a bank auditor, is appointed for the audit of banking companies. Bank audits can be either internal audits or external audits.
The emphasis on the audit of a banking company is based on compliance. The object of a bank audit is to find out if the financial activities of the institution are fair, legal, and complete. The main aim of the bank audit is to conduct an independent inspection of the bank’s performance, controls, and information systems. Various examinations are carried out on the systems, the findings are generated as well and auditors suggest some possible reformative actions that the bank should take.
Types of Bank Audits
There are many types of bank audits. Some of them are as follows.
Risk-based internal audit
Concurrent audit
Statutory audit and tax audit
Credit audit
Stock audit
Snap audit
Forensic audit
RBI Inspection System audit
Foreign exchange
The bank audit unveils the infringements of rules or regulations governing financial institutions and failures in compliance with the institution’s policies. Bank auditors look for the main set of issues so that they can come up with profiting suggestions. Their discoveries are documented and noted on file by the bank.
Risk-based internal audit is a type of bank audit that recognizes risks, such as:
Finance risk
Expenses risk
Functioning risk
Consistency risk
Strategic risk
Goodwill risk
Credit risk
IT and cyber risk
Government Audit
There is the same provision for government auditing as there is for the audit of banking companies, organizations, and institutions. The central government and state government both are audited respectively.
The Comptroller and Auditor General of India (CAG) is the authority to keep a keen eye on the following. The Comptroller and Auditor General of India make sure that financial transactions done by the central and state government are implemented accurately and with the proper authorization. The main emphasis is given to the expenses done by governments.
Insurance Audit
Sec 12 of the Insurance Act, 1938 provides that the financial statements of an insurer have to be audited annually by an auditor. The audit of insurance companies is to be done by an independent auditor, whose duty is to inspect the policies, liabilities, risk evaluation, and several other financial records of the company. It is one of the most important types of audits in India.
The audit of insurance companies is conducted to make sure that proper insurance rates and premiums are being given. Despite that, the insurance auditor must keep a check on quality control between insurance companies and customers.
Solved Example
Q1. Name some essential points involved in an Insurance Audit?
Answer: The following are the essential points in the audit of insurance companies.
Verification of premium
Verification of claims
Verification of commission
Verification of operating expenses.
Hence, it is clear that there are various types of audits in India such as insurance audits, government audits, bank audits, etc.
Did You Know?
Statutory audits are performed in India for each fiscal year which is from April 1 to March 31, not as per the calendar year.
Management audits have been introduced recently and it is a new concept in India. The idea of a management audit has originated in the USA.
IRS Tax Audit
IRS tax audit is an external audit that helps to find out if the tax returns filed by your business are correct or not. It is performed by a person who is not connected to your business in any way. It helps to determine if the tax payments made by you are accurate or not. IRS tax audits can be done in three different ways. It can be done digitally, on your company premises, or over the phone.
Financial Audit
IT is the most common type of audit. Every business must conduct a financial audit as it helps to ensure that the information given in the financial statements is correct. Auditors verify the financial details of business related to revenue, assets, and expenses. Financial audits are useful for shareholders and investors who can make a decision on the final outcome of a financial audit report.
Operational Audit
Operational audits are done to know the effectiveness of the operating systems of a business. This audit is done by an internal team but some businesses also opt for an external team of auditors. It helps to uncover ineffectiveness and wastage in a business. It also helps to determine the use of resources to meet business goals and identify how improvement can be made in the business operations.
Compliance Audit
A compliance audit is an audit conducted by educational institutions and industries where regulation is required. It helps to determine if the business is complying with internal and external regulations or not. It can be done for different departments. Compliance audit helps to reveal if the business is complying with the regulations such as proper working conditions or not.
Information System Audit
An information system audit is done to know if your business is using the best security practices so that an external entity such as a hacker may not get access to your business data. It includes checking if the best practices are being used by your business to make sure the proper functioning of the IT systems in the business. It also helps in determining the data processes and accuracy of data from these systems.
FAQs on Types of Audits: Other Forms Explained
1. What are the two primary classifications of audits conducted within an organisation?
Audits are broadly classified into two main types:
- Internal Audit: Performed by the company's own employees or a hired firm on behalf of the management. Its main goal is to review internal controls, operational efficiency, and risk management processes to help improve the business.
- External Audit: Conducted by an independent, third-party auditor. The most common type is a statutory audit, which is legally required to verify that the company's financial statements present a true and fair view, ensuring compliance with laws and regulations.
2. How does a financial audit differ from an operational audit?
A financial audit focuses on verifying the accuracy and fairness of an organisation's financial statements and records. Its primary goal is to provide assurance to stakeholders like investors and lenders. In contrast, an operational audit examines the efficiency and effectiveness of a company's operating procedures and activities. It aims to identify areas of waste, inefficiency, and opportunities for process improvement, rather than just financial accuracy.
3. What is the specific purpose of a compliance audit?
A compliance audit is an independent assessment to determine whether an organisation is adhering to specific laws, regulations, internal policies, and contractual obligations. For example, it might check if a factory is following environmental laws, a bank is complying with RBI guidelines, or a department is following internal HR policies. Its main purpose is to ensure legal and procedural adherence and avoid penalties.
4. Why is a management audit considered more of a forward-looking process?
A management audit is considered forward-looking because its primary focus is not on past financial errors but on the future performance and efficiency of the management team. It evaluates the quality of decisions made by managers, assesses the organisational structure, and provides recommendations to improve overall effectiveness and profitability. Unlike a financial audit that verifies past data, a management audit helps shape future strategies.
5. What key areas does a bank audit investigate?
A bank audit is a comprehensive examination that focuses on several key areas to ensure stability and compliance. These typically include:
- Credit Risk: Evaluating the quality of the loan portfolio and checking for potential bad debts.
- Compliance: Ensuring the bank follows all regulations set by the Reserve Bank of India (RBI).
- Internal Controls: Assessing the systems in place to prevent fraud and errors.
- IT and Cyber Security: Checking the security of the bank's information systems against hacking and data breaches.
- Financial Reporting: Verifying the accuracy of the balance sheet and profit and loss statements.
6. What triggers the need for a forensic audit?
A forensic audit is not a routine procedure; it is initiated when there is a suspicion or evidence of fraud, embezzlement, or other financial misconduct. It is essentially an investigation aimed at gathering evidence that can be used in a court of law. Common triggers include a whistleblower's complaint, significant unexplained financial losses, or irregularities detected during a regular statutory audit.
7. What is the importance of an Information System (IS) Audit in modern business?
In today's digital world, an Information System (IS) or IT audit is crucial for business survival and security. Its importance lies in its ability to:
- Protect Data: It verifies that robust security controls are in place to protect sensitive business and customer data from hackers and unauthorized access.
- Ensure System Integrity: It checks that IT systems are functioning correctly, processing data accurately, and are available when needed.
- Maintain Compliance: It ensures that the company's IT practices comply with data privacy laws and other regulations.
