What is the 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 by evaluating compliance procedure, security policies, user access control, risk management procedure and entity’s policy, procedure and processes. 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 on it or not.
The purpose behind conducting a compliance audit is to assess the organization’s compliance program is effective or not and bringing out the non-compliance in front of management and Government/Tax authorities.
- To ensure a company meets the guidelines from Government regulatory agencies and it’s 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.
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Compliance Audit Process
The process from the perspective of each of them are:
#1 – For Organization
- Identify the need and extent of the audit.
- Select the AuditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws./ team to perform, verify the Auditor/Team meet the qualification criteria for conducting an audit.
- Co-ordinate with the auditor with all requirements and information asked for.
#2 – For Auditor
- List out the Statutory Laws applicable to the entity.
- Obtain a list of the company’s internal policies, procedures, and decisions for compliance.
- Engage the experienced team members for the CA assignment.
- Segregate the different areas of the organization to audit. Prioritize the areas of examination.
- Obtain a list of laws applicable to entity and their compliance status.
- Plan the audit, nature, extent, timing, and procedures to be performed. Prepare Checklist.
- Review the procedure of the organization on compliance with laws and internal policies and communication processes regarding the same.
- Review the Internal AuditorInternal AuditorInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit. Report, Tax/Statutory Audit reportsAudit ReportsAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements., and previous year’s report of a compliance audit.
- Conduct the audit to discuss non-compliance with the management of the organization.
- Suggest ways to improve.
- American Institute of Certified Public Accountants that apply to service providers that hold or process Prepare audit reports and submit to the appointing authority/ Management. Ensure that all information is arranged in an easily understood manner.
- SOC 2: This defined by the data in the cloud.
- ISO 27001 (27000 Series): It applies to companies/ Organizations that manage the security of assets, such as employee or third-party data, financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc., and intellectual property.
- General Data Protection Regulation: It applies to companies/ organizations that process the data of European citizens.
- Sarbanes- Oxley: It applies to public companiesPublic CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market. which issue IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes. is required to get compliance audit of financial and IT related laws.
- PCI Compliance Standards: It is applicable to credit card and payment industries like merchants, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. , and payment solution providers.
- HIPAA Compliance Regulation: It applies to the health care industry, like hospitals and medical service providers.
- 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.
- FISMA: It applies to US Governmental organizations.
- 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.
Who does the Compliance Audit Perform?
- The company’s internal auditor may conduct it.
- Sometimes it could be performed by external auditors depends upon the choice of management.
- For companies who require a compulsory compliance audit – this is conducted by the person mentioned in that law.
- For companies that perform obligatorily, the person who meets the qualification criteria can perform the audit.
- 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.
Difference Between Compliance Audit and Financial Audit
- A financial audit is an examination of financial statements, and a compliance audit is the examination of laws and procedures complied.
- 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.
- 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.
An independent evaluation ensures that the organization is abiding with all of the compliance that includes rules and regulations, laws, or internal guidelines that apply to it. There are different types of compliance audit that apply to the companies falling under the specified criteria. Such compliance is important as non-compliance would attract the penalty and sanctions.
This article has been a guide to What is Compliance Audit & its Meaning. Here we discuss the process of compliance audit, objectives, and purpose along with types and what does this perform. Also, discuss its importance and benefits. You can learn more about from the following articles –