Types of Audit and Their Advantages

Types of Audit and Their Advantages

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Jaya Sharma
Assistant Manager - Content
Updated on May 27, 2024 02:49 IST

An audit is the inspection of books of account by auditors which is followed by a physical assessment of inventory. This ensures that every department follows a documented system of recording transactions.


In this article, we will discuss the different types of audit and their advantages. 

Table of Contents

What is Audit?

Audit refers to the independent examination of the financial information of any entity. It ensures that books of accounts are properly maintained as required by the law. It provides third-party assurance to stakeholders that the subject matter is relieved from material misstatement. 

Through an audit, the stakeholders evaluate and improve the effectiveness of control, risk management, and governance over the subject matter. Companies go through three types of audits of financial statements in a year. This involves the audit of the balance sheet, income statements, and cash flow statements

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Advantages of Types of Audit

The following are the advantages of audit:

  • Through the process of audit, organizations can determine the financial health of their business. This helps the business gain insights into the different areas of business that need improvement. 
  • Organizations gain a better reputation through audits since they are considered to be transparent and reliable. Shareholders and investors have increased trust in your business. 
  • By undergoing audits, organizations prevent themselves from any legal issues. They can handle financial and legal situations beforehand as they can identify any fraud cases that may cause trouble. 

Types of Audit

Auditing varies from business to business to assess their spending on a particular project. It ensures that your business is smoothly operating.

1. Internal Audit

It is an independent and consulting activity that adds value and improves the operations of an organization. The organization accomplishes its objectives by bringing a systematic and disciplined approach for evaluating and improving the effectiveness of governance processes. It ensures that internal controls are in place to mitigate risk and that organizational goals are met. Internal audits are of the following types:

  • Performance audit: Through this type of internal audit, the auditor ensures that standards and core competencies are met efficiently. Management sets the standards and expects the team to strengthen its performance while being compliant with these regulations. 
  • Environmental audits: In such audits, it is determined whether the company abides by environment-friendly policies and if they are not violating any laws. 
  • Information Technology Audits: Such audits involve the assessment and evaluation of technical infrastructure. Checking of hardware and software equipment is conducted to ensure that they are working properly. Any cyber issues are also determined and decided whether they need immediate attention. 
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2. External audits

These are conducted by professionals that are not part of the internal team of the organization. This type of audit is useful in gaining an impartial opinion on the financial status of the company. External auditors work towards determining and identifying any material misstatements within financial statements. Based on this audit, companies can make wiser and more informed business decisions for the organizations. The following are different types of external audits:

  1. Financial statements audit: In this type of audit, external auditors assess the financial statements of the company. Through external audits, companies can ensure that financial statements are accurate, transparent, and devoid of any bias. The company can also understand the actual financial condition of its business. 
  2. Operational audit: These audits are concerned with the issues in the operational infrastructure of the company. Such audits efficiently check how a business works to achieve the targeted output. 
  3. Compliance audit: In this type of audit, internal auditors assess whether the company complies with the regulations, rules, and laws of the region in which it operates. 
  4. Forensic audit: These audits are conducted to identify any criminal financial activities in the system. Through these audits, organizations can stay legally secure against any possible fraud that has either occurred or may occur in the future.  

3. Government Audits

This is one of the types of audit through which the government can assess the financial records of any organization or individual. Through this type of audit, the government ensures that the financial records and tax-related information of the organization are correct or not. Such an audit is either via mail or in person. The entity that is being audited is notified via email. 

  • Internal Revenue Service (IRS) audits: It performs routine audits to verify the accuracy of the taxpayer’s returns. Based on the random statistical formula, the IRS conducts audits to analyze taxpayers’ returns. In case the company is found to have tax errors on its audit, then also it may be selected for an audit. 
  • Secretarial audits: It is an independent firm that helps clients in auditing secretarial and applicable law to ensure that the company’s secretarial records are free of material misstatements due to any fraud or error.  

4. Forensic Audit

Forensic audits are detailed investigations conducted to uncover fraud, embezzlement, or other financial misrepresentation. They are often required in anticipation of litigation.

  • Fraud Investigations: Focus on identifying and gathering evidence on fraud.
  • Insurance Claims: Examine the validity of insurance claims.
  • Dispute Resolution: Used in legal disputes over financial issues.
  • Bankruptcy Audits: Assess the reasons for bankruptcy and detect any fraudulent preferences or transactions.

5. Tax Audit

Tax audits are reviews of an individual's or corporation's tax returns by tax authorities to verify that income and deductions are accurate.

  • Desk Audits: Simple reviews conducted at the tax authority's office.
  • Field Audits: In-depth audits conducted at the taxpayer's office or home.
  • Correspondence Audits: Conducted by mail for minor issues.
  • Employer Audits: Focus on payroll taxes and employment-related tax issues.

6. Compliance Audit

Compliance audits assess whether a company is following external laws, regulations, and internal guidelines.

  • Healthcare Compliance: Ensures adherence to healthcare regulations.
  • Environmental Compliance: Checks compliance with environmental laws.
  • Safety Compliance: Reviews adherence to safety regulations.
  • Financial Compliance: Ensures compliance with financial regulations.

7. Information System Audit

Also known as IT audits, these assess the system controls of an organization's IT infrastructure.

  • Systems and Applications Audit: Assesses the systems and applications an organization uses.
  • Information Processing Facilities: Evaluate the setup of IT systems.
  • Systems Development: Ensures that systems under development meet the organization's objectives.
  • Management of IT and Enterprise Architecture: Reviews IT management structure.
  • Client/Server, Telecommunications, Intranets, and Extranets: Assesses network and communication systems.

8. Operational Audit

Operational audits are comprehensive reviews of the efficiency and effectiveness of an organization's operating procedures and methods.

  • Process Audits: Focus on specific processes within an organization.
  • Department Audits: Target a specific department's operations.
  • System Audits: Evaluate the effectiveness of a system in its entirety.

9. Financial Audit

Financial audits examine the fairness and accuracy of a business's financial statements.

  • Statutory Audit: Legally required review of the accuracy of a company's or government's financial records.
  • Voluntary Audit: Conducted without a legal requirement, often for internal purposes.

10. Performance Audit

Performance audits evaluate the efficiency, effectiveness, and economy of an organization's operations.

  • Economy Audit: Assesses whether resources are being obtained at the lowest possible cost.
  • Efficiency Audit: Examines whether resources are being utilized optimally for the desired output.
  • Effectiveness Audit: Evaluates whether objectives are being met.


Why is internal audit conducted?

Internal audit evaluates the effectiveness of an organization's internal controls, risk management, and governance processes. Internal auditors help improve operations and ensure compliance with policies and regulations.

What does a compliance audit involve?

A compliance audit assesses whether an organization is adhering to applicable laws, regulations, and internal policies. This type of audit ensures that the organization operates within the legal and regulatory framework.

What is an operational audit?

Such type of audit evaluates the efficiency and effectiveness of an organization's operations and processes. It aims to identify areas for improvement and enhance overall performance.

What is the focus of an information systems audit?

An information systems audit focuses on the controls and procedures related to an organization's IT infrastructure. It assesses the security, integrity, and reliability of information systems.

About the Author
Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio