written by | April 21, 2022

What are the Different Types of Audits and Levels of Assurance?

Different countries follow different business practices. The auditing process and the accounting standards are different across various countries as each country has its own set of business practices and laws. Though the different types of audits serve different purposes, auditing is mandatory for every business enterprise globally. The procedure of each audit varies depending on the understanding between the organisation's management and the organisation conducting the audit. There are various types of audit, but one of the key features of auditing is to scrutinise and affirm that the business accounts of the organisation have been prepared by the principles of accounting as laid down by law. 

The primary three types of audit are external, internal and Internal Revenue Service (IRS). Auditing presents every organisation with a detailed balance sheet, income statement and cash flow statement. Most organisations conduct audits in two ways, their internal auditors conduct one, and external auditors conduct the other.

Did you know?

Extremely rich folks implemented auditing and accounting procedures almost 5000 years ago to understand the details of the various assets in their possession.

What Are the Types of Audit?

The Different Types of Audit Conducted By Organisations

External Audit

A company can conduct this audit quarterly, bi-annual, or even annually. A qualified and practising chartered accountant conducts this. The board members often recommend, and the person is appointed accordingly. The Companies Act prescribes special formats for such audits, which must be adhered to by the person or persons conducting the audit. It is conducted impartially to understand whether the organisation maintains accurate and authentic accounting books. Financial lenders can always request an external audit as their money is at stake.

Internal Audit

The internal team of an organisation conducts an internal audit. This type of audit helps to understand whether the organisation's internal departments are functioning to the norms of the organisation. It also details whether the operations are in sync with all the industry's regulatory guidelines. Such an audit helps management understand existing irregularities in the processes and what corrective procedures should they implement to increase efficiency. It also detects fraudulent activities, such as the misuse of funds by employees or management.

Also read: GST audit- When Are You Likely To Be Audited By Tax Officers?

IRS Tax Audit

An IRS tax audit involves a reviewal of an organisation's accounts and the accounts of individuals. This is done to get an insight into the accuracy of the information stated in the respective accounts. There are three types of IRS audits. These include:

  • Correspondence – This is conducted via letters and indicates that your business owes money to the government.
  • Field – The IRS agent visits your business premises and reviews all necessary records and statements.
  • Office – The IRS agent interviews you and questions you on distinct details about your tax returns.

Financial Audit

This is one of the most common audits conducted by almost every organisation, big or small. External qualified individuals conduct these. All financial audits are concentrated on the financial bearings of an organisation. Financial institutions and other lenders finance businesses. These entities are always keen to understand whether the organisation is properly utilising their money lending or not. This type of audit is conducted on all the books of accounts that the organisation maintains. A financial audit reveals facts on the right methods being followed in maintaining accounts or whether some fraudulent practices are being followed. Such details are an eye-opener for the investors as well as the shareholders. Finance lenders and other investors can make future investment decisions based on the findings of this audit.

Operational Audit

An organisation's internal team or an external entity can conduct an operational audit. This type of audit is highly effective in detecting areas that are functioning inefficiently. They are conducted to make a detailed analysis of an organisation's various operations. This includes authentication of current assets, investments that have been made, prevailing expenses and accounts verification. The findings help the organisation understand which areas can function with fewer expenses. This audit makes the management understand how best to streamline their various processes to benefit from existing, unnecessary costs.

Compliance Audit

A compliance audit is conducted to understand if an organisation is compliant with state and central laws of the country. It also reveals if the organisation is compliant with external and internal regulations. Such audits have conducted the maintenance of safe work conditions for the employees so that they are subject to minimise risk conditions at work. This type of audit also helps to understand if an organisation is compliant with all the compensation rules for workers and payments towards shareholders.

Information System Audit

This audit focuses on Information Technology (IT) and software organisations. This type of auditing helps organisations understand whether they are implementing the best methods to 

ensure the security of the entire data or the organisation. This auditing can detect whether the organisation is vulnerable to hacking. The details of such an audit help organisations protect their servers better and make a good analysis of the technology used in the data processing. The organisation gets an insight into what new equipment and new software are required to ensure the smooth functioning of all operations.

Pay Audit

This audit plays a crucial role in every organisation as it can detect unfair practices in employee salaries and wages. Some organisations tend to practice wrong methods of employee payments based on age, gender, race and even religion. This audit helps in ensuring that such practices are eliminated, and all employees are paid based on their skills and competencies.

What are the Three Levels of Assurance?

Most accountants approve a business with three levels of assurance services:

  • Audits
  • Reviews
  • Compilations

Their key objective is to check the authenticity of the financial reports presented to them. They are vital in assuring investors that no irregularities have been detected in the reports and that the organisation and its departments do not have any fraudulent activities.

How Does an Accounting Software Help Businesses Get Ready for an Audit?

Every business works toward expansion and growth, which implies more data regarding finance. Accounting software is an effective tool that helps such enterprises realistically expand the scope of business. Some of the key advantages of using accounting software are given below:

Facilitates Billing and Invoicing

Paper invoices have become redundant. They are tedious and time-consuming. Accounting software eases the process of creating invoices consistently, and it makes the entire process of invoicing time-effective and extremely simple. You can automate payment reminders with an accounting app and monitor pending payments.

Digital Payments

Physical reminders and collection of payments are demanding tasks. If you integrate your accounting procedures with digital payment gateways, you can be assured of timely payments by your clients. In case you are involved in overseas transactions, digital payments also facilitate the acceptance of various currencies smoothly.

Bank Reconciliation

Accounting software helps you access all bank statements after connecting your bank accounts with it. This helps maintain all your transactions in an organised manner and be ready for an audit whenever required.

Also Read: Forms, Submission & Applicability under Section 44AB of Income Tax

Monitoring Expenses

You can monitor all the expenses being incurred with the help of accounting software. The software can showcase all receipts, which gives you clarity on all the cash flows. This software helps generate the various tax summary reports in an organised manner and access relevant reports whenever you need them.

Efficient Inventory Management

Accounting softwares help maintain products available, the requirement of new stocks, monitor stock movements and determine a re-ordering level. This assures that you always have ample stocks to cater to the timely demand of your various clients. You can also access special reports about a specific inventory. This software is very effective in recording stock-keeping items, uploading the appropriate images for various items, creating specific bundles and monitoring the movement of stocks based on details like serial numbers.


The details of this article give you an in-depth understanding of what an audit is and how auditing plays a crucial role in determining the functioning of an organisation.
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Q: Which are the primary three types of an audit?


These are internal, external and financial.

Q: What is an internal audit?


It is an audit conducted to analyse an organisation's internal operations and functioning. It helps to understand whether the organisation is functioning as per the rules and regulations of the Companies Act.

Q: How many types of audit risks are there?


There are three types of audit risks: detection, control and inherent.

Q: Explain the types of an audit?


The different types of an audit include internal, external, operational, payroll, compliance, internal revenue service and financial audits.

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