Compliance Audit

Updated on April 19, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Compliance Audit?

Compliance Audit is detailed review of organization’s loyalty towards uphold of the rules and regulations which includes statutory and internal rules, regulations, policies and procedures framed by government, local authorities and organization’s management.

What Is Compliance Audit

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This is a type of audit service that focuses on whether the entity complying with statutory laws, local laws, internal rules, and decisions of the organization as applicable or not. It is done by evaluating compliance procedures, security policies, user access control, risk management procedure, and the entity’s policy, procedure, and processes. 

Key Takeaways

  1. A compliance audit thoroughly investigates how well a company complies with laws and regulations, including internal and statutory rules, regulations, policies, and procedures set up by the federal government, local governments, and the company’s management.
  2. One of the types of compliance audits is Sarbanes-Oxley. It applies to public firms that conduct initial public offerings (IPO) and are required to obtain compliance audits of laws about finance and IT.
  3. An independent assessment verifies that the organization complies with all applicable rules & regulations, laws, and internal policies.

Compliance Audit Explained

A compliance audit is conducted to assess whether the organization’s compliance program is effective or not and bring out the non-compliance in front of management and government/tax authorities.

An independent evaluation ensures that the organization is abiding by all of the compliance that includes rules and regulations, laws, or internal guidelines that apply to it. There are different types of compliance audits that apply to companies falling under the specified criteria. Such compliance is important as non-compliance would attract the penalty and sanctions.

American Institute of Certified Public Accountants that apply to service providers hold or process, prepare audit reports and submit to the appointing authority/ management. It ensures that all information is arranged in an easily understood manner.

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Objectives

  • To ensure a company meets the guidelines from Government regulatory agencies and its own internal policies.
  • To improve the organization’s efficiency in the business environment.
  • To uphold the faith of stakeholders.
  • To comply with the various other laws like Environmental laws, Consumer safety laws, etc.
  • To ensure standard operating procedure has been followed throughout the organization.

Types

The compliance audit meaning becomes clearer as the types of it are explored. Let us have a look at how it is classified:

Compliance Audit Types

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  1. SOC 2: This is defined by the data in the cloud.
  2. ISO 27001 (27000 Series): It applies to companies/ Organizations that manage the security of assets, such as employee or third-party data, financial information, and intellectual property.
  3. General Data Protection Regulation: It applies to companies/ organizations that process the data of European citizens.
  4. Sarbanes- Oxley: It applies to public companies which issue IPO is required to get compliance audit of financial and IT related laws.
  5. PCI Compliance Standards: It is applicable to credit card and payment industries like merchants, financial institutions, and payment solution providers.
  6. HIPAA Compliance Regulation: It applies to the health care industry, like hospitals and medical service providers.
  7. FINRA: It applies to the investment industry, specifically those who register as stockbroker or broker-dealer firms, protecting investors against potential fraud on U.S Securities and Exchange Commission.
  8. FISMA: It applies to US Governmental organizations.
  9. Obligatory Compliance Audit: Any Organization that wants to conduct an audit can do so by appointing any person who might be an internal auditor or any other person who meets the qualification criteria.

How To Conduct?

The compliance audit guidelines, steps, and process from the perspective of each of them are:m the perspective of each of them are:

#1 – For Organization

  • Identifying the need and extent of the audit.
  • Selecting the Auditor/ team to perform, verify the Auditor/Team meet the qualification criteria for conducting an audit.
  • Coordinating with the auditor with all requirements and information asked for.

#2 – For Auditor

  • Listing out the Statutory Laws applicable to the entity.
  • Obtaining a list of the company’s internal policies, procedures, and decisions for compliance.
  • Engaging the experienced team members for the CA assignment.
  • Segregating the different areas of the organization to audit. Prioritize the areas of examination.
  • Obtaining a list of laws applicable to the entity and their compliance status.
  • Planning the audit, nature, extent, timing, and procedures to be performed.
  • Preparing checklist.
  • Reviewing the procedure of the organization on compliance with laws and internal policies and communication processes regarding the same.
  • Reviewing the Internal Auditor Report, Tax/Statutory Audit reports, and previous year’s report of a compliance audit.
  • Conducting the audit to discuss non-compliance with the management of the organization.
  • Suggesting ways to improve.

Examples

The list of entities that require conducting and drafting compliance audit report have been cited as compliance audit examples:

  • The company’s internal auditor may conduct it.
  • Sometimes it could be performed by external auditors depends upon the choice of management.
  • Companies that require a compulsory compliance audit – this is conducted by the person mentioned in that law.
  • For firms that perform obligatorily, the person who meets the qualification criteria can perform the audit.

Importance

  • Identify weaknesses in the regulatory compliance process.
  • Help to reduce risk.
  • Keep the faith of stakeholders.
  • Ensures that all laws have been followed.
  • Non-compliance can be identified and corrected.
  • It ensures proper compliance with statutory regulations and laws.
  • It reduces the legal risk of the company.
  • With this position, the trust of the general public in the company increases.
  • Ensures Transparent Reporting;
  • It helps in avoiding the future cost of the company that may apply to it.
  • It ensures proper management.

Compliance Audit Vs Financial Audit

The difference between a compliance audit and a financial audit is as follows:

  • A financial audit is an examination of financial statements, and a compliance audit is the examination of laws and procedures complied with.
  • Chartered Accountant does financial Audit, and Compliance audit may or may not done by CA.
  • Financial audit deals with financial data, while compliance audit deals with statutory and regulatory compliance.
  • An Independent auditor does a financial audit while a compliance audit is done by any person who meets qualification criteria may or may not independent.

Frequently Asked Questions (FAQs)

Describe the compliance audit test.

An audit, a compliance test, is performed to see if a company is adhering to its rules and regulations in a certain area. An auditor performs compliance tests to ensure that the evidence being examined as part of an audit is reliable.

What is a compliance checklist?

A compliance checklist is a thorough, in-depth list to help someone complete a procedure or assignment. It serves as a manual to ensure that everything goes according to plan.

What are the main signs of compliance?

A metric or statistic that quantitatively represents an organization’s adherence to a specified compliance aim is known as a key compliance indicator. Key performance indicators (KPIs) are not necessary to comprehend KCIs, but those familiar with them could notice some similarities.

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